0:03

Bloomberg Audio Studios, podcasts,

0:06

radio news. John

0:09

Man, you know, we were chatting

0:12

before we started recording, and you said something I didn't

0:14

think i'd ever hear you say. You said just

0:17

a matter of seconds ago, so you can't deny it.

0:19

You said, you know, those charters

0:21

they're onto something. I think they're right.

0:25

I will, I will. I'm more than

0:27

happy to acknowledge that I

0:31

am proudly chartist.

0:32

Curious.

0:33

It's one of those it's

0:35

one of those great things where see

0:38

you, if you're talking to someone who's

0:40

a nervous financial journalist, one

0:42

of the first things they'll say is this

0:45

charting stuff's just a lot of hocus pocused

0:47

nonsense. But once you've been

0:49

kind of in the markets for wile, we realize that

0:51

it is as good a way to analyze

0:54

markets as anything else. And

0:56

if you are actually looking at markets on any

0:58

time horizon that is not amenable

1:01

to fundamentals, which is practically

1:03

everything from five years down, then

1:06

technicals are about the only thing you've got,

1:08

and that a really good reflection of behavior

1:12

and psychology in the market. So yes, I

1:14

say, I am. I have a

1:16

lot of time for technical analysis,

1:19

and you're.

1:21

Talking to someone who once wrote a column, admittedly

1:23

a couple of decades ago, about how the movements

1:26

of the moon could influence the stock markets.

1:29

I'm sure that, by the way, I still

1:31

have some sympathy for the idea. I still

1:33

have some sympathy the ideas. I'm definitely

1:36

chart is curious as well.

1:38

And of course, I mean this is really just about momentum.

1:41

And we started talking about charting before we started recording,

1:43

because I was telling you about a conversation I'd had with

1:45

a fund manager and we were talking about executive

1:48

pay and all this fuss around, you know, ocado

1:51

this week and stock exchange

1:53

last week, etc. About whether it's reasonable

1:56

for CEOs to be paid ten

1:58

to fifteen million pounds year, admittedly less

2:00

than they get at the top in the US, but nowethertheless, you know

2:02

a lot of money. Is it reasonable? Is there

2:04

a link between pay and performance? I mean, it's such a boring

2:07

conversation. We have it over and over and over and Overright,

2:09

you can find a study to back up either

2:11

side whenever you like. Anyway, having

2:14

this conversation and I said to him, well, you know, do you

2:16

is this the kind of thing that might be a catalyst

2:18

for the market what would make the UK market

2:20

go up properly? And he said,

2:22

well, what will make the market go up properly?

2:24

Is it going up? Because all fund managers,

2:27

all fund managers, whatever they tell

2:29

you in the end, are to a degree momentum

2:31

investors. And that's particularly the case with global

2:34

investors. They won't buy something because it's

2:36

cheap, they won't buy something because it's interesting. They won't

2:38

buy something because of some sort of macrofaf

2:41

They'll buy it because it's already going up.

2:43

That's it, That's all there is.

2:45

Yeah, and I mean benchmarking

2:48

leads to this. You know, it's like

2:51

if some's going up and

2:53

you're not in it, then chances

2:56

are you're going to be in trouble the next time

2:58

you see your investors. So

3:01

it does encourage it. And at the end of

3:03

the day, the foot SAE one hundred has now going

3:06

to a new high a while at the same

3:08

time, the S and P five hundred has come off

3:10

the boil, which I think is also important.

3:14

And you've also got like this massive merger

3:17

deal with BHP buying

3:19

Anglo or you know, trying to buy Anglo, so

3:21

that's suddenly drawing a load of attention to it, and I

3:24

mean, to be fair. What's his name, Nick?

3:27

Of course, sorry

3:29

Nick? Nick Train said that to you the

3:31

other day. You were mentioning that on

3:34

last week's podcast the

3:36

catalyst was going to be

3:38

a foot sae one hundred deal, and you know, I

3:40

think that's a reasonable point. So it's

3:42

in the news. It's going up.

3:44

Suddenly people are saying, wait a minute, maybe

3:47

maybe the UK is not a complete disaster

3:49

after all. So yeah,

3:52

I guess.

3:52

Yeah.

3:53

Charts reflect psychology, and the

3:55

psychology hopefully

3:58

possibly has changed. Goven that

4:00

the fundamentals are already there. No,

4:03

we've been saying for ages that is cheap. So

4:05

if it needs a catalyst, then a new high

4:07

and a big deal sort

4:09

of makes sense.

4:11

Is that what your chart tells you? John?

4:13

Yep, yep, New highs, beget

4:15

new highs. That's what they always say, until

4:18

you hit the next febnit tee number.

4:21

That's properly, that's properly getting the

4:23

right twisted.

4:24

Okay, So marcuts go up because they go

4:26

up. You heard it here. First, tell your friends.

4:30

I wanted to ask you another question, and I don't.

4:32

I don't know if you if you haven't looked at this, don't say

4:35

anything. But John,

4:37

a few weeks ago, maybe a few months ago, now, you

4:39

wrote about China and you said you

4:41

wouldn't buy it because it was uninvestable from

4:43

your point of view, but nonetheless you thought it would probably

4:45

go up and now would be a good time in the cycle

4:47

to start buying into China. And

4:50

that kind of looks right, doesn't it, because

4:52

China is at the very least stopped falling.

4:55

Yeah, and it did go up since then. I hate

4:57

them out. Haven't properly looked at the chart. It's

5:00

the exact team that I said, you should

5:02

buy it if you have

5:04

no models.

5:06

I only ask you, John, because I've been reading a little bit of

5:08

research from gav Cal Research where

5:10

they have this great little bit of research they put up every

5:12

now and then where they just ask questions and answer

5:14

the questions, and one of them is about China, and

5:16

they're pointing out that even a couple of

5:18

months ago, bad news would have pushed equities

5:21

down ten twenty percent drop of the hat

5:23

because everything was bad and everyone was pulling out.

5:25

But now lots of nasty macro developments

5:27

for the Chinese markets. So a strong US dollar,

5:30

rising treasury eels collapsing again, except when

5:32

these are the kinds of things that in the past would have made the Chinese

5:34

market go down, down, down, but now it's just kind

5:36

of fair going up, and so they see

5:38

a momentum driven shift there as well. So if

5:40

we would go back to your charts or the moon, we

5:45

may find that we're being told there that right now, while

5:47

we might continue to say that China

5:50

is uninvestable, its behavior is slightly

5:52

different.

5:53

Yeah, And I mean that's

5:55

kind of the piece at the start of the year saying

5:58

that it was the most obvious can trade

6:00

and trade for twenty twenty four and

6:03

that I still wouldn't put my money in it, but you

6:05

know, feel free, and yeah,

6:08

it looks if it's done, okay. I mean the other interesting

6:10

thing I noticed was that, and I haven't read the actual

6:12

piece behind this, but Goldman Sachs

6:14

were apparently saying expected rotation

6:16

now from unfortunately from Japanese

6:18

stocks into Hong Kong stocks, and

6:22

I thought that was an interest in coll because I also saw a

6:24

note from my chap that

6:26

we both knows friend lorenz On LinkedIn

6:28

the other day where he was saying he's

6:31

just current on a research trip in Hong Kong

6:33

and a guy he was speaking to there was saying that he's

6:36

had a lot more fund managers

6:38

coming to see him asking about Hong Kong

6:40

stocks. Then, you know, I think the same

6:42

number in the quarter as he normally

6:44

sees in the whole year. So I

6:47

think there's definitely a sense of chasing around

6:49

for things that haven't gone up,

6:53

because beyond that, it's hard to see the

6:58

micro story hasn't really changed

7:00

that much. Is more just at the point where people

7:02

are thinking.

7:05

Why not.

7:05

And I guess also with the S and P getting

7:08

a little bit, I don't know, it

7:11

feels as if the mootor has changed slightly and

7:13

maybe they kind of lagguards,

7:16

which is basically the rest of the world are

7:18

going to start having the time in a sign I don't

7:20

know.

7:21

And you know you need in this kind of environment, John, what's

7:25

that?

7:25

Sorry?

7:26

You know what you need?

7:27

And what do we need?

7:29

What do you need? You need an active fund manager?

7:32

Ah, that's a good

7:34

transition out like that one, Thank you, thank.

7:36

You, so moving on, So my guest

7:39

this week John is Simon Evan Cook,

7:41

who I've known for a long time now. I've been reading his research

7:43

for fifteen years or so, and here's

7:45

someone who really really knows about

7:48

active fund management and how to pick

7:50

a good active manager. Which is why I

7:52

wanted to have him on at this point in

7:55

the cycle, because it definitely feels

7:57

to me like all change

7:59

in the mind is everything widening out, everything

8:01

moving around, magnificent seven in

8:03

the US losing momentum. It looks

8:06

like it might be if you're interested in this kind of thing,

8:08

time to think about moving away from

8:11

passive investments into something a little bit more active.

8:13

It's very good at it, so that's why I

8:15

asked him on.

8:17

Well, I mean, I'm looking forward to here in this

8:19

one because it is probably the

8:21

single most controversial topic in investing

8:25

active versus passive.

8:27

It's emperting, isn't it? Because you and I we got you know,

8:29

years ago as soon as that when passive

8:32

really began to take off. We were so pro

8:34

passive because we were so thrilled to see something

8:36

that there was cheap and that would drive

8:38

down fees across the industry. And

8:40

it did exactly that. It's been

8:42

a brilliant product for millions of millions

8:45

of invested, Absolutely fantastic. But

8:47

there comes a point, doesn't that, and

8:50

I'm obviously two ear leagues that have been with everything for

8:52

the last three or four years, I've going, oh, I don't know, that's

8:54

a bit much passive. Maybe it's time for a shift.

8:56

Maybe it's the age of the stock picker is back

8:58

with us. Time to go back to active. One

9:00

of the reasons why it's safe to go back to well say

9:02

further than it used to be because fees have come down

9:05

so much. And when you look at the fund when you're

9:07

looking to invest, you look at the vehicle. The

9:09

only thing you can know in advance is the

9:11

compt You can't know anything else. So in

9:13

the old days, when you look at a fund and you're like, wow,

9:16

one and a half percent really And then of course in the old days

9:18

there with that to you know, you had to pay that drag

9:20

to your IFA for decades and all that kind of thing.

9:22

It was super expensive. So the only thing you

9:24

when you looked at it was wow, this is going

9:27

to be a real drag on my performance, whereas you

9:29

looked at passive, you know, not going to be such a drag

9:31

on my performance. So the choice was kind of easy.

9:33

Yeah, And I think it's interesting that the debate

9:37

has become so polarized because

9:39

passive took off to such an extent.

9:42

But since those days when we were

9:44

talking about it, the course on

9:46

the active said half come down substantially.

9:49

I mean, so you know we're talking maybe like twenty

9:51

years ago. This was when I

9:54

fees, as you said, well, basically getting

9:56

paid commission from find managers for selling

9:58

the products in their behalf. That will win

10:00

out the window. Thankfully, the

10:03

act of funds one more expensive and once

10:05

ther came along and the passive competition

10:08

that started to drive down the course of the active

10:10

funds. So a lot of the arguments that were extremely

10:13

cut and dried back then are

10:16

not as cut and dried now. And yet the argument

10:18

I would say has become far more will

10:21

polarized. Basically, there's almost a kind of passive,

10:25

kind of puritanical

10:28

streak. In fact, I think we'll get

10:30

more hate mail about this than we do when we see

10:33

nasty stuff about MMT or bitcoin.

10:35

And that is saying, some.

10:38

Gosh say something. They

10:40

say something nasty about Scottish politics, if

10:42

that gets us more hate mail. But

10:45

no, you're right, it has become a bizarrely

10:47

polarized conversation

10:49

and a conversation that is less about, you know, if

10:51

there's a good way to combine the two, or a

10:53

good way to use one in fun parts of the cycle

10:56

and one another parts of the cycle, etcetera, to

10:58

a complete division between only or

11:00

only active. You're interesting anyway.

11:03

Simon knows all this stuff, So we're going to move

11:05

on to talk to the expert. Welcome

11:11

to Maren Dogs Money, the podcast in which people who know

11:13

the markets explain the markets. I'm there in Sunset

11:16

weeb Here's my conversation with Simon Evan Cook,

11:18

fund manager at Downing. Simon has more than

11:20

twenty five years experience in the investment industry.

11:22

Career started a long time ago at Fidelity

11:25

before joining Rothschild Asset Management and then

11:27

gartmore on to Premier Asset Management in

11:29

two thousand and six. And this is where I

11:31

first came across Simon and where he built his reputation

11:34

as a member of an award winning multi asset

11:36

team there and also wrote the fascinating research

11:39

that we refer to pretty much all the way through our

11:41

conversation. In twenty twenty two, he joined

11:43

Downing to set up a manager Downing Fox range

11:46

of funds, Simon,

11:49

Thank you so much for joining us today.

11:51

Hi, Maren, glad to be here.

11:52

Now we have got a lot to get through, but I want to

11:54

set us up by asking

11:57

you to talk a little bit about you're in active manager.

11:59

I think maybe clear now you're an active manager.

12:01

I want to shut us up by asking you to talk

12:03

a little bit about the rise of passive and

12:06

what it's meant for the investment community

12:08

as a whole.

12:09

Yes, absolutely so. It's something I've come to

12:11

peace with. If you've ever read any of my stuff, you know

12:14

that I'm a massive advocate of

12:16

active investing. I'm not an apologist

12:18

for all active investors. I'm only an apologist for

12:20

the great ones. So I think that's all we should be concerning

12:23

ourselves with. But when you look at passive

12:25

and the rise of it, it's something I've

12:27

come to peace with recently. I used to almost

12:29

attack anything passive just in the name of

12:32

active, but I can now see that

12:34

if Jack Bogel, the founder

12:36

of Vanguard and basically the kind of father of

12:39

passive investing, was a brit I

12:41

fully concede that he should have been knighted,

12:43

because he's probably done more for private

12:46

or small individual

12:48

wealth than anybody in history, because that

12:50

product is a great thing, and it originally

12:53

came about to solve a problem, which was that

12:55

go back to the sixties and you

12:58

had a lot of brokers and wealth who

13:00

were picking I don't know, let's say twenty

13:03

stocks, and those stocks

13:05

would go up a lot, and then they would claim that

13:07

was down to their skill. Now, of course, all

13:09

stocks basically go up nearly all the

13:11

time, so you could have bought anything and

13:14

it would have gone up. So how do you know if that person was

13:16

actually conning you or any good at their

13:18

job at all? You didn't basically, whereas

13:20

obviously the rise of benchmarks and then

13:22

passive with that gave people an option to say,

13:24

well, hang on a minute, mate, you're not actually picking

13:27

good companies, so you're just buying any companies and then

13:29

just conning them onto me. So

13:31

the launch of that was a great thing. It's

13:34

clearly gone from being a kind of disruptive

13:37

small product in the seventies

13:40

all the way through to where it is today,

13:42

where it is he behemoth. It's

13:44

a juggernault. It's various reports

13:46

have the passive part of the market

13:49

being more than fifty percent now

13:52

so on that level, it's been an incredible success.

13:55

But along the way you've had bumps in

13:57

what it's done and how it's been perceived. But

14:00

you're also now getting to the point where it's so huge

14:03

that it's becoming potentially

14:05

big enough to have its own impact on

14:07

the market. And that to me is it's

14:09

certainly raising a lot of concerns.

14:11

Yeah, but let's stick with the core

14:13

success before we beginning. And one of the things that's happened

14:16

here is is enabled a lot of people to come into

14:18

the market cheaply and easily

14:21

track a benchmark, feel like they're doing everything.

14:23

It feels low risk, it feels comprehensive,

14:26

it is cheap. And I went on a

14:29

podcast the other day which is aimed at beginner

14:31

investors and people just beginning to get to start in

14:33

the markets, et cetera. And their default

14:36

advice to all investors is just to

14:38

buy a global index man

14:40

and be done with the whole thing. And that has

14:43

been excellent advice for quite

14:45

a long time now. You couldn't really go wrong

14:47

with that, given that the US market just goes up

14:49

and up, and then a global index treker is what

14:51

about seventy percent the US, So

14:54

you've got a lot of exposure in there, to the Magnificent

14:57

Seven, to the big tech socks in the US, you've got

14:59

a lot of exposure to the rest of the US market and

15:01

very little exposure to the areas and the rest

15:03

of the world that have been languishing around the place. So you've

15:06

made good money, you haven't paid very much for it. That's

15:08

been great. And at the same time that passive

15:10

industry has put a lot of pressure on

15:12

the rubbish parts of the active market, right,

15:14

So Yes, work to bring

15:17

down fees across the board because if you can get

15:19

if you can get a good etf for

15:21

a couple of basis points, why would you want to pay one

15:23

and a half percent for allows the active manager,

15:26

Alice, put pressure on that part of the market that you and

15:28

I have often talked about before, the sort of the closet

15:30

tracker, the active managers who are to actually activity

15:33

all Yes, the tracker and they've paid, and they charge

15:35

you more. So there've been great successes

15:38

from passive before we look at the overall

15:41

impact on that it might now have on the market

15:43

for the individual inveasta. So

15:45

far, the rise of the passive industry

15:48

has been and I feel like you conflicted about this, but it's

15:50

been a very good thing.

15:52

Absolutely absolutely Now argument for me, it's

15:54

just it's a simple, reliable product

15:57

in a world that is endlessly complicated and

15:59

for but a certain type of person. I

16:02

always compare it to if I was ever asked

16:04

God forbid to go on strictly come dancing.

16:07

I have two left feet. If someone said at the start,

16:09

you don't have to do the dancing, and we'll bring you in

16:12

seventh out of twelve, I'm taking

16:14

that all day long because I'm not a dancer.

16:16

So for anyone who's not interested in investing,

16:18

hasn't the time, expertise knowledge, it's

16:20

been great. But it's where I've had

16:23

taken issues with sometimes suggesting that everybody

16:25

should go passive, and that's where my back

16:28

starts to get up.

16:29

So I talk me through a little bit. When you say reliable

16:32

or what do you mean? You mean you always know what's in

16:34

it?

16:35

Yeah, you know what it's going to do. So I

16:37

always talk about the two degrees of separation,

16:39

and what I mean by that is how do you separate

16:41

someone from their own money

16:44

to being invested. Now, if you invest in

16:47

just a passive fun I think you've got one degree

16:49

of separation, which is that you have

16:51

personally bought the market, so

16:53

you only really need to consider whether it was the right

16:56

thing to have bought the market. So there's

16:58

only one kind of area where you could have it

17:00

made a mistake, which is you bought it or you didn't.

17:03

If you then bring in an active fund manager,

17:05

you've got the second degree of separation, which

17:07

is where you've got that market decision. But

17:10

then you can also blame yourself for having

17:12

picked the wrong active fund manager. So you've

17:15

got two areas where you've got room for self

17:17

doubt, and that, to me is the

17:19

big difference, and that's where a lot of people can fall down,

17:21

is that you've end up a

17:24

lot of cases buying a very good active fund manager,

17:26

but you just buy them at the wrong time, And

17:29

that to me is the problem a lot of people have with

17:31

active fund managers. They're very good at picking good fund

17:33

managers, they are just appalling

17:36

at timing it because they will buy them after

17:38

the fund manager has done five years of good performance,

17:41

and that invariably heralds

17:43

two or three years of poor performance. That's

17:45

a feature of a great fund manager. It's not a flaw,

17:48

and so you end up just experiencing the downside

17:50

of these fund managers, the bits where they underperform. And you

17:53

do that once with a growth fund, you do it twice

17:55

with a value fund, and then the third time you think it's all

17:57

a giant con I can't be bothered anymore.

18:00

Are just go passive. So there's

18:02

more to understand if you're buying an active fund,

18:04

which makes it more complicated. But that doesn't

18:06

mean you don't need to understand what's

18:08

in a passive fund, because yeah,

18:11

for most part it makes

18:13

sense and it's been a great investment. But there are certain

18:15

times, and there have been certain times in

18:18

history where what is contained within that

18:20

benchmark can become dangerous

18:22

and make the whole thing more dangerous

18:24

than maybe you imagined it would be.

18:26

We're going to come back to that bit, but I just want to ask

18:29

you something. I have memories

18:32

of a piece of research that you wrote

18:34

a while, a long while that probably about

18:37

how we always say that active funds

18:40

on average underperform the market, But

18:43

it may be that investors

18:46

in active funds on average do not

18:48

underperform the market because

18:50

they're better at picking active funds

18:52

than you might think. And if there are more of

18:54

them in the big successful ones, then there might

18:56

be in the others. Then it's entirely

18:58

possible. And I remember you doing some

19:01

researcher back this up. It's entirely possible that the

19:03

individual retail investor on average

19:05

does not underperform.

19:07

It is, Yes, I do remember doing that. Yeah,

19:09

I went deep geek for a number of months

19:11

and recreated my own sector averages.

19:14

Because when you look at when you see a lot of stats,

19:16

the commonly used stats of the industry about

19:19

active funds or funds in general, it

19:21

doesn't apply any effect of the size

19:23

of those funds are on performance,

19:26

and so that can change the picture massively. I remember

19:28

at the time, so we're going back ten years now,

19:31

and I think I've just done it after a period when there'd

19:33

been quite a bit of turbulence in emerging markets

19:35

in Asia, and at that time you

19:37

saw that actually the average

19:39

Asian equity fund had done pretty

19:42

badly, had underperformed the markets most people would

19:44

have expected it would have done. But

19:46

when you look within that and you looked at

19:48

who the big funds were, and

19:50

at the time, this was when firms like

19:52

Steward Investors or even Aberdeen were

19:56

the kind of fan favorites, the

19:58

ones that were widely held. They were amazing funds,

20:00

particularly the Stuart Investor funds run by

20:02

Angus Tulko. I know you're aware of a

20:05

lot of people back him. There was a lot of

20:07

money invested in those and that meant that actually

20:10

more people in that sector were benefiting.

20:12

And actually you saw that active management was doing an

20:15

amazing job for investors in that part of the

20:17

market because everyone to have picked the great fund manager.

20:19

Yeah, so that makes all the difference, or could

20:21

make all the difference. Yeah, Okay, let's go back

20:23

to then what you were just talking about times.

20:26

And obviously this is the first time in the history

20:28

of markets where we've reached any point with this percentage

20:30

of assets under management inside passive,

20:32

So we haven't got that much history to work

20:35

with here. But there may

20:37

be times, and possibly this might be one

20:39

of those times where passive isn't the best

20:41

place to be. Is that a fair reflection of what

20:43

you're thinking?

20:44

It is, absolutely, Yeah, it's something

20:47

that would worry me about

20:49

holding a pure global equity track,

20:52

or particularly a US equitary tracker currently.

20:55

Is that level of exposure to

20:57

a handful of companies like The great advantage

20:59

of or one of the great advantages

21:01

of passive funds, is that they are supposedly

21:04

diversified investments. You should have a lot of stocks,

21:07

and you shouldn't have too much invested in any particular

21:09

one stock. But every now and again, certain

21:12

indices become very heavily concentrated

21:15

in certain stocks. So go back to twenty

21:17

ten, if you happen to be tracking a Latin America

21:19

index, you were basically twenty

21:22

thirty percent of your money in two or three oil

21:25

companies or natural resource companies. Today

21:27

we face a situation where the

21:30

concentration in the S and P five hundred

21:32

in am using turn of the year statistics.

21:35

This has changed a bit since then, but in

21:37

those Magnificent seven is twenty

21:40

nine percent. So you got twenty nine percent

21:42

invested in seven companies that

21:44

are, to all extents and purposes

21:47

variations on tech. Now you compare

21:49

that to two thousand, which

21:51

was the last time I think risks are built

21:54

up to this any kind of this type

21:56

of level that is more concentrated.

21:58

So twenty nine percent today it was about twenty

22:00

one percent in two

22:03

thousand, and also in two

22:05

thousand you had companies like Exon or Walmart which

22:07

were in that top seven as well, which were diversified

22:10

at least they weren't just tech companies.

22:12

And I think that is a really instructive

22:15

period, that two thousand because in the

22:17

long march of passive from

22:19

the nineteen seventies through today, that it's tempting

22:21

to think of the whole thing as just a straight line where everyone

22:24

has just been consistently buying passive. But

22:27

it went into recession from about two

22:29

thousand to two thousand and seven. Actually people were

22:31

net selling Vanguard's biggest s and P

22:33

five hundred tracker after two

22:35

thousand. That was because

22:38

of how badly it had done versus

22:41

most active fund managers. And the

22:43

reason for that was because it's

22:45

concentration in megacaps, how

22:48

expensive those megacaps had become, and

22:50

then what happened in two thousand

22:53

when all of that turned. It's quite

22:55

a sort of instructive lesson for

22:57

those of us who are interested in history.

23:00

So could we say that over that period in general

23:02

active outperformed.

23:04

Ah, yeah, absolutely you can. I mean it was the time

23:06

of when a lot of legends made

23:08

the names in the UK. Anthony

23:10

Bolton was the one that came forward. Already mentioned

23:12

Angus Tullock. I'm not sure if I should mention

23:15

his name, but Lord Voldeford became

23:17

of age at that time. He was did an amazing job

23:19

for investors at that point. Obviously we know how that ended

23:22

in due course, but it was a period when those investors

23:24

had been brave enough and stuck to their guns and believed

23:27

in fundamentals and value and all that stuff,

23:29

and had therefore avoided those

23:32

megacap growth stocks that

23:34

were too expensive just shot

23:36

the lights out over the bear market that followed.

23:38

You had Anthony Bolton in his UK

23:41

fund actually made money over that

23:43

three year bear mark. It wasn't just that he fell by

23:45

less than the mega caps did. He

23:47

actually made money. And then obviously in the ballmarket

23:49

it followed, they absolutely went to the moon

23:52

that the returns you got from the likes of a

23:54

Fidelity UK special situations were

23:57

orders of one hundreds of percent better than you were getting

23:59

from a Gloebil equity tracker at that time.

24:01

So it really was the last real golden

24:04

age of active fund managers, and conditions for

24:06

me look very similar

24:08

to how they looked in two thousand.

24:11

So I suppose to be clear, we should say that if you

24:13

stay impassive right now, you're

24:16

going to have a very

24:18

big exposure to these giant companies.

24:21

If they turn you're going to lose a lot

24:23

of money. And at the same time, maybe

24:25

that active funds that have the freedom to go

24:28

wherever they want find the best opportunities

24:30

are not in those giant

24:32

dogs, and you may find that you perform a long letter,

24:34

I'm just trying to be simplistic about

24:36

this.

24:36

Yeah, there's a case study that I always use,

24:39

which is and I remember this. So I started

24:41

in the city in ninety six, ninety

24:43

seven around then, and I remember at the time

24:45

seeing buses advertising what was

24:47

called the Mercury Global Titans

24:49

Fund. I mean, amazing name for a fund. It

24:52

was basically it was a bit of a closet

24:54

tracker, but it was tracking the dal Jones

24:56

Titans fifty index, which had performed

24:58

amazingly coming into two thousand. The marketing

25:01

people loved it, so they launched this fund

25:03

and to a great fanfare, and the message was

25:06

you'd be stupid to buy anything other than

25:08

the world's biggest and most powerful

25:10

companies. Why would you do that if

25:12

you were buying anything that was domestic, or that was small,

25:15

or it was UK or that was value. You're a bit

25:17

of a square and you've missed the plot, and all

25:19

that stuff is risky, and the big stuff

25:21

is very safe and it's going to make you a ton of money.

25:24

Mercury, who were later bought by black Rock,

25:26

launched that fund. I think it was in March two

25:29

thousand. It wasn't a badly run fund,

25:32

but it lost you fifty percent of your money

25:34

over the next three years and it

25:37

didn't even break even. Seven years

25:39

later, it was still underwater. And because

25:41

of the weight of those fifty companies, the

25:43

Global Tracker did a similar thing, lost you

25:46

best part of fifty percent, and then it took

25:48

you seven years from the turn

25:50

of two thousand to two thousand and seven to

25:53

break even again. And that is a

25:55

long time to have made no money

25:58

whatsoever.

25:59

But when fund was launched, it must have felt

26:01

like it's felt over the last year or so, that

26:03

there really isn't any choice but to hold these very

26:05

big companies because if you don't, you're going to underperform.

26:08

Sleep everyone in a track of any kind is holding

26:10

them but active funds as well, if they're not

26:13

holding them at least at the benchmark level,

26:15

they're going to underperform almost by default.

26:17

So if you're an active fund manager, if

26:19

you're an active fun raannger and you've been sitting there for the last

26:21

three or four years, going that stuff's too expensive,

26:23

I can see the concentration. I'm worried

26:25

about this. Valuations are too high. It's

26:29

been a disaster for you.

26:30

It has been a disaster to the point where you've either given

26:33

up or you've been sacked, or you're

26:35

one of the very few who've managed to sit it out.

26:38

And those are basically the fund managers them after because

26:40

they're very conviction driven. They believe in

26:42

what they do. They know that you should value

26:44

a company, that you shouldn't get carried away, that you shouldn't

26:46

just copy what everyone else is doing. But they

26:48

become a vanishing breed as time

26:51

passes by. And again, yeah, to

26:53

take it back to the Anthony Bolton thing, that's what he was.

26:55

It's one of the few who managed to survive with his job

26:57

intact and allowed to continue doing what

26:59

he did. And then you just saw the

27:01

dividends afterwards when the world

27:03

turned as it always does, and

27:06

then he had.

27:06

That disaster, didn't he It's not for today. But when

27:08

he launched the China Special Situations

27:11

Fund and everyone thought he was a god and then oh

27:13

yeah, wrong, didn't it round and around? It

27:16

goes in active fund?

27:17

It does to say it, But he was I would defend him

27:19

on that. He actually, contrary to popular

27:21

belief, actually beat his benchmark over

27:23

his tenure on that fund. He just didn't

27:25

do anywhere near as well as he'd done in UK Special

27:27

sit So he's got a bit of a bad rep for that. But yeah,

27:29

compared to what he'd done on the UK side of him,

27:31

it was a pale limitation for sure.

27:33

I just remember being cross about the charging structure.

27:36

Anyway, a different story.

27:38

Well, he won't go back to that now. So let's

27:40

talk about the survivors, right, Let's

27:42

talk about this premise that that you have

27:44

and that I have huge sympathy with, and I think you're absolutely

27:47

right that we're coming to the end of this great

27:49

run for these huge companies and and for the modern

27:51

titans, and a shift in

27:53

the assumption that passive is always the place to

27:56

be. So who are the

27:58

fund managers what is the fund managing companies

28:00

and the managers who have survived this period

28:03

and you think are going to come out the next

28:05

decade and give us another mini Golden Age

28:07

or maybe mega Golden Age for active fund

28:09

management.

28:10

You could find them in any market. They are

28:13

still around. A lot did fall by the wayside,

28:15

but a lot have carried on. You can

28:17

find them in big houses. They're likes,

28:19

you know, the Schroder Value team, a very good team because

28:21

they've got a support network there and they've got

28:24

a good story about it. So that's a good place to look

28:26

if there's a big list of them. If you go

28:28

on our website and look at our funds and our holders,

28:30

we're very open about funds that

28:32

we own because we like the fund managers. We invest

28:35

with them, we want them to do well and we want them to raise assets.

28:37

If you were to look through the UK, you're going to see names

28:39

like Castle Bay in there, like

28:42

Gresham House, like Cape Wrath. You're

28:44

going to see very sooner fun from Tyndall.

28:47

You're going to see I'm going to feel bad now because I'm

28:49

going to leave someone out and they're going to be quite cross with me.

28:52

But yeah, there are these

28:54

are basically if they've got anything in common, they are

28:57

obsessives. They're people who loving

28:59

them testing and would be horrified

29:02

to think that they are going to end up just

29:04

copying the market.

29:05

Well, and some of those ones you mentioned are very

29:08

small. I mean Kate Rath for example. That's a tiny

29:10

fund, doesn't it It is?

29:12

Yeah, very small. I think there's a big misunderstanding

29:14

in the industry that a small fund equals

29:17

a risky fund. To give you an example of a fund

29:19

we held in the past, which is tv

29:22

IT. It's Edinburgh based Smaller

29:24

Companies fund. We don't currently hold it because it's had

29:26

manager changes, so it's just watching that as it

29:28

beds down. But when

29:30

in my previous job, I was in a company called Premier

29:33

Might and we had a lot more assets under management. When

29:35

we first bought that fund, it was about five or six

29:37

million pounds in size. Tiny,

29:39

yeah, but all of that money was the fund manager's

29:42

money. We put forty five million

29:44

pounds in it and a lot of people gasp begin

29:47

to take a breath when they hear that amount. What

29:49

you held forty five million of a fifty million

29:51

pound fund. But it's like

29:53

the old adage about banks. If you owe the bank

29:55

a million pounds, they own you. If you own the bank

29:58

ten billion pounds, you own them. If

30:00

we're the owner of a smaller fund and we

30:03

know that we're not about to sell because we're not flaky

30:05

investors who are going to run for the hills at the

30:07

first sign of underperformance, and we know that

30:09

the other money is the fund manager, then

30:11

there's no liquidity risk like there was with the

30:13

Woodford thing. The Woodford thing was because

30:15

there were bigger holders who are perhaps

30:18

didn't understand the way the fun worked, the way it

30:20

was supposed to work, and they all

30:22

ran for the exits at the same time. It's

30:25

not about the size of the fund. It's the important

30:27

things about what is held within the

30:29

fund. You need to make sure that the stocks

30:32

that are held a liquid and an appropriate

30:34

for the size of that fund. For example, a five million

30:36

pound fund that owns megacaps.

30:39

That's a good thing because if the fund

30:42

needs to close down, they can sell it within the next

30:44

seven minutes. It's not an issue. The

30:46

problem and why people are paranoid about

30:49

small funds, ironically is

30:51

again because of the Woodford scandal, which is

30:53

weird because it wasn't a small fund. It was

30:56

ten billion pounds. But again it wasn't

30:58

necessarily the size of the fund so much. Has the

31:00

stuff that he was holding unlisted massive

31:03

stakes in tiny companies. That's

31:05

where the liquidity problem came from. It wasn't

31:07

because the fund was small, because it

31:10

wasn't a small fund.

31:11

Have you signed up for Woodford Views?

31:14

I saw that came out. Yeah, that's gonna yeah.

31:16

Fun enough. Our firewall at work is blocking

31:18

that, which may be a bit of satire or commentary.

31:21

I don't know, but I haven't been able to see it yet. I'm

31:23

intrigued.

31:24

There's nothing to see it. Don't worry that your

31:26

firewall hasn't punished you in any way it

31:28

normally does. The first few hasn't come out. There's

31:31

still time, all right, Let's go back to small funds because

31:33

I've written quite a lot in the past, and I think that you've had input

31:35

into these columns. I've written in the past about how to find

31:37

a good fund manager, what's what of the

31:39

parameters to look for in the fund, And one of the

31:42

things that often pops up is that actually

31:44

funds run by excellent managers tend

31:47

to do particularly well in their first four

31:49

or five years. So when there's small, when

31:51

they're new, when the fund manager has

31:53

their best ideas, A good manager is

31:55

going to launch a new fund when they see a great opportunity,

31:57

right, They're not going to just do it randomly into an average

32:00

market. They're going to say, there's a reason for this, and I can

32:02

see it. And so those first four

32:04

or five years when the fund is small may actually

32:06

be the best ones to be invested.

32:08

Absolutely, there's reasons for that

32:11

in terms of motivation. Maybe

32:13

the age of the fund manager. I think there's a kind of mistake

32:15

and belief that you want an old fund manager. There's

32:17

nothing against old fund managers, but actually

32:20

I think there's a sweet spot for fund managers

32:22

where they've got enough experience and maybe

32:24

they're into their thirties or the forties, but they've

32:26

still got the enthusias and they're still building their track

32:28

record. They've still got a point to prove, and to me, that

32:31

is the real point to own a fund manager. And quite

32:33

often that's the time they're running

32:35

their first fund, or it's the first opportunity to

32:37

go outside of a big company that we're at and begin

32:40

something that is truly represents the way

32:42

they think that it should have be done. So there is a human element

32:44

to it, but there's also a fund size element

32:47

to it as well. Now we've talked about the benefits

32:49

of big great funds, but

32:51

the only thing that's better than a big great fund is a

32:53

small great fund because as

32:56

a fund manager, it's so much easier to run

32:58

a smaller fund finding better ideas

33:01

and small caps and typically that's

33:03

where you're going to find better ideas, less efficient

33:05

part of the market, more room for

33:07

growth for smaller companies to become bigger

33:10

companies. Then having more

33:12

access to that and the ability to come into and

33:14

out of stocks without moving their price

33:17

too much is a massive advantage.

33:19

So absolutely all of the experience

33:21

I've had in the past of when we've outperformed

33:24

as a fund of funds has come from

33:26

finding fund managers who are at the start of that

33:28

journey rather than at the

33:30

end, because all of the advantages are stacked

33:32

in their favor. And the real benefit

33:35

currently is that because the rest

33:37

of the market, the UK fun buying

33:39

market because of consolidation, because of a whole

33:41

load of other stuff that's going on, career

33:44

risk herding sheep like behavior.

33:46

No one is prepared to buy these smaller

33:49

boutiques because I don't know, they're all afraid of

33:51

getting egg on their face because they're back to a

33:53

fund that was operating out of the barn in Oxford,

33:56

or they were.

33:56

It wasn't something You've got to let this go, simon,

33:59

I know you gotta let it go.

34:01

No, I don't. I never have to let it go, absolutely,

34:03

But the point of being that now

34:05

these funds are offering much better

34:08

fees. So the classic fee for a

34:10

boutique fund going back fifteen years is one

34:12

and a half percent. We're typically

34:14

now paying half a percent as an early

34:16

investor in these funds, which we're obviously

34:19

passing back onto our clients as well. So I

34:21

don't need to let it go now. I can just benefit

34:23

from the great performance and have less of

34:25

it eaten away by our fees.

34:28

As tough for a new fund manager to survive

34:30

on fees that low, I mean, I'm very pro fees

34:32

as low as possible, But if you're launching a new funded

34:34

you've only got or you mentioned TV eight earlier,

34:37

starting with five six million, surviving

34:39

on fifty basis points, and I'm.

34:41

Unbelievable well, it's tough, right, It's tough.

34:43

It's and it's wrong as well, because I think a

34:45

thriving market, any market, it doesn't matter

34:48

whether it's a financial market or a product or

34:50

whatever it is, you need a lot of entrance into

34:52

that market to give you choice. But we are now

34:54

in the unfortunate situation where because of regulatory

34:56

costs and the pressure of people not being prepared

34:59

to kind of risk reputation and back a new

35:01

fun it means that you are only getting

35:03

funds who have got tremendous backing

35:05

behind them. So they've either got personal wealth

35:07

for they know a lot of rich people, or they're

35:10

having to go to a company and if effectually give

35:12

away their own kind of IP and skills. So

35:14

it's unbelievably tough and it's not healthy for

35:16

the funds market for sure.

35:18

Okay, let's talk a bit about the other

35:21

things to look for when you're looking for a good

35:23

fund. Let's start by saying that there

35:25

is this idea that a smaller fund is better.

35:28

So let's say we're an ordinary retail versitor.

35:30

We're out there thinking I'm going to go a bit active. Now

35:32

I get this, I understand what Simon's saying, so

35:34

I'm going to shift some of my money away from passive

35:37

into actor. I like this idea of looking

35:39

for a small fund. I get that. What are the other

35:41

parameters that people might take into

35:44

account?

35:45

Well, I mean there's technical parameters, but then there's obviously

35:47

human parameters. And so to

35:49

give you a good example and to keep it relevant

35:51

to what we're doing today, I know

35:53

you spoke with Jonathan Asante

35:56

a few months back, and I suspect if you

35:58

scroll up you'll see his podcast.

36:01

Basically have a listen to that. We don't

36:03

back Jonathan Asante's fund yet, it's

36:05

a relatively new one. We're looking at it, but he is exactly

36:08

the type of fund manager that we like

36:11

because he's entirely trustworthy. He's entirely

36:13

focused on a particular way of investing that

36:15

we know works in the past. And

36:18

so if you can get access to hearing

36:20

that fund manager talk and hear it or reading about

36:22

their philosophy, and we've all read the

36:24

letters of Warren Buffett or a Jeremy

36:26

Grantham, and what comes across is the consistency

36:30

their trustworthiness, their

36:32

kind of focus on what they do. So

36:35

those human factors. If you find a fund manager who

36:37

fulfills all of those and has done it for a while

36:39

and you just have a good feeling about don't

36:42

dismiss that just because there's not a kind of mathematical

36:45

factor behind it. Absolutely,

36:47

that's important, and it's the biggest part of what I

36:49

do. I'm lucky enough to be able

36:51

to meet all these fund managers and see the whites of the eyes

36:53

if you like, but that's essentially what I'm

36:55

doing. Can I establish trust

36:58

with this far manager? Do I believe that they're sort of and

37:00

won't turn the heads and give up and invest

37:03

in the global titans when they should be buying Japanese

37:06

small caps.

37:07

Yeah, because that's where a fum manager can

37:09

become unreliable. Right when you talk about

37:11

the reliability of the passive, you know what they're

37:13

going to keep doing. Whereas you can choose a

37:15

fund manager and he can effectively be unreliable.

37:17

You buy the fund because you think he's a solid value

37:20

investor, and next thing you know, he's chucked in

37:22

the towel and brought in video.

37:23

Yeah, exactly. That's the thing to watch out for. Aubert's

37:25

warning signs that if you've bought a UK small

37:27

cup fund and you see in video on the top list,

37:30

then it's not a UK small cup

37:32

value fund anymore. So it's yeah, there are little

37:34

bits and pieces like that, but by and large, I

37:36

think people's instincts about

37:38

what is a good fund and what is a bad funder, right,

37:41

it's just the timing that they foul

37:43

up too often.

37:44

What about the extent which a fund is

37:46

active? How active does an active fund

37:48

have to be to be considered active?

37:50

Right? So you get a lot of funds out there that call themselves active

37:53

but relative for the benchmark, but'll maybe

37:55

a bit closer than you might expect. I think when we've

37:57

discussed this in the past, you've talked about

37:59

it being reasonable for a fund that called

38:02

itself active to have what they call an

38:04

active share a difference relative

38:06

for the market of something in the region of seventy

38:08

eighty maybe higher, whereas if you're

38:11

down at say fifty or sixty, whereas

38:13

it where you're pretty close to

38:15

the market as a whole. So maybe you're not a fully

38:17

active fund exactly.

38:19

We look at a kind of cut off probably

38:21

at about eighty percent. We might have one or two that have DipEd

38:24

slightly below that, but not a lot. We're

38:26

only interested in finding the active fund managers, and

38:28

active share is a really good way of doing it. Basically

38:31

measures What that eighty percent refers to

38:33

is that if you look at you compared the fund

38:36

to the market, eighty percent of it is different,

38:38

twenty percent of it is the same, so they've got

38:40

stock overlap with a few stocks, and so it's

38:43

different enough. Our average active share of

38:45

the funds we pick is ninety three percent, So

38:47

we really do go for it in terms

38:50

of we want active fund managers in

38:52

terms of the theory why that works. Basically,

38:54

what you want is someone who is just

38:56

trying to find good ideas. And again

38:58

we've mentioned nagus Tell a couple of times. I always

39:01

remember one of his rules was

39:03

in the past that if any of his team actually even

39:05

mentioned the benchmark, who said, oh, hang on a minute,

39:07

we've only got four percent in this and it's six percent

39:09

of the benchmark, he sent them out of the room.

39:12

And that, to me, I can imagine

39:15

as doing.

39:15

That exactly, and that's the perfect way to

39:17

do it. It should be. You should just pick those

39:20

companies that you like for whatever reason you like

39:22

them, and invest more in the companies

39:24

that you like more because they're cheaper, or you

39:26

think they're going to grow more, whatever it might be, and

39:29

ignore what everyone else is doing. That is

39:31

what you want from your active fund managers.

39:33

You want the ones who don't care about

39:35

the benchmark. But obviously the quid pro quo

39:38

of that is that those fund managers will

39:40

look different from the benchmark, and that is not always

39:42

going to be in a good way.

39:45

And does a high active share automatically

39:48

mean that you've got a relatively small concentrated

39:50

portfolio you had one hundred, If you

39:52

had one hundred and fifty holdings, your active

39:54

share would automatically go up, wouldn't it, By

39:57

and.

39:57

Large, Yeah, the more holdings you've got, it should

39:59

do. But if you had if you were a USA sorry go down,

40:02

yes, down, I see what you mean. But if

40:04

you're a US equity holder and you held one

40:07

hundred and fifty small caps and your benchmark

40:09

was the S and P five hundred, you could

40:11

still have a very high active share because you're not holding

40:14

in videos and the microsofts and the

40:16

Google. Yeah, it's not as simple as as

40:18

that. It tends to be what you're doing

40:20

at the top end of what's in your market

40:23

quite often. So if you take Microsoft

40:25

as being I don't know, seven percent of its

40:27

market currently, you can if

40:30

you just buy Microsoft at four percent, you've

40:32

reduced your active share by four percent

40:35

against yesterday when you didn't hold it at all.

40:37

So there's a bit of nuance to it, but it

40:39

does. It's the best rule of thumb, or the best

40:41

kind of rough guide that we have for sure.

40:43

Yeah. Okay, so we've got us more fund we've

40:46

got a manager we trust, we've

40:49

got a high active share. Have we got

40:51

anything else?

40:52

Well, what else have you got for me? One

40:55

of the things we rule out is people doing things

40:57

that don't work.

40:58

Sounds obvious, right, yeah, agaven,

41:00

but tell us about it.

41:02

Yeah, we don't back macro investors. So

41:04

if the first thing you hear coming out of a fund

41:06

manager's mouth is we're pulling

41:08

out the market because we think it's going to go down,

41:10

or we're going to go overweight to us

41:13

because we're worried about the war in Europe, trying to guess

41:15

what's going to happen in the US election. If

41:17

they're positioning into industries

41:20

because of their top down view,

41:22

it sounds like the sort of thing that should make you a

41:24

lot of money if you can get it right,

41:26

but in practice, no one's ever really

41:29

been able to get it right. So when

41:31

you think of the greats, the Warren Buffets, the Peter

41:33

Lynch's, the Anthony Bolt, what they did was to

41:36

pick stocks and had different ways of doing it, but

41:38

ultimately what they weren't doing is trying to guess

41:41

the direction of economies or of

41:43

politics or elections, or trying

41:45

to spot a war coming, which

41:47

nobody's ever been able to do really successful

41:50

if they have for a very limited amount

41:52

of time. So, yeah, you want stock because

41:54

absolutely people are just assessing companies, sticking

41:57

to their small part of the world that they're good at.

41:59

Okay, when I look at what you've been

42:01

saying about the last time, that track

42:03

has turned out to be a problem, and what turned

42:05

out to be the anti tracker effectively

42:08

in the following period. So domestic stocks,

42:10

value stocks, small cap stocks, and

42:13

we can expect that to happen again this time around.

42:16

Obstuly, nothing is identical, but it seems likely

42:19

that if there was going to be a rotation, it would be into

42:21

those underperforming areas. So

42:23

if that were the case, which fund managers. Would

42:25

you think would be interesting for ordinary investors

42:28

to look at the moment?

42:29

H yeah, it would be remissing me not to

42:31

bang my own drum here?

42:32

Could you go for it?

42:33

Diamon?

42:34

So the reason I set up down in Fox is

42:36

exactly this problem, because you've

42:38

probably had the same issue. So if someone asks you, Mary,

42:41

can you recommend an investment for me? I

42:43

know you're a big investment trust fan, so you might

42:45

say, I don't know, Scottish mortgage. That

42:48

might be a one you'd pick, but

42:50

you.

42:50

Would not right now, not right right now?

42:52

Yeah, okay, not right now, Okay, So pick a trust

42:54

for you, recommend a trust for me now, Marin, No,

42:57

I can't do that.

42:57

Because I'm not an investment professional. I'm merely Ah.

43:00

You're, on the other hand, Simon, you're, on the other

43:02

hand, are an investment professor.

43:04

I haven't noticed that shyness of opinion in the

43:06

past, Merrion. But okay, I'll take it now. But let's

43:08

say it was Scottish mortgage. The trouble

43:10

is, whenever you make a recommendation like that me

43:12

as a professional investor, and people do ask me for fun

43:15

picks all the time. I think that could

43:17

be a great fund over ten years, but

43:19

it's going to be a nightmare to hold it almost

43:22

It definitely will be because the greatest fund

43:24

managers are so focused on their little thing they

43:26

do growth value. It'll

43:29

look it'll look amazing

43:31

for five years, and it'll look god awful

43:33

for three years, and for two years it might be

43:35

somewhere about average. Over ten years, that'll

43:38

make you a ton of money. But in that two

43:40

to three year period when it looks awful, people

43:43

are going to hate me. They're going to think, what Simon

43:45

done here? Why has he told me this? Particularly

43:47

if it kicks off into that period

43:49

straight away.

43:50

Yea.

43:51

So the reason for me to launch

43:53

down in Fox was basically to find all these active

43:55

fund managers and then just to put them

43:58

all in the same portfolio so that you're not just

44:00

in value managers, you're not just in growth fund

44:02

managers. They take the edges off each

44:04

other. So in twenty twenty two,

44:07

for example, we held growth fund managers and they were

44:09

having a really tough time of it. We

44:11

also held value managers who

44:13

actually made money in that year. So

44:16

we call it the heroic Journey. All

44:18

of our fund managers are on the heroic journey. We can get

44:20

peaks and troughs and triumphs and slayings of

44:22

dragons and near death experiences,

44:26

but the average investor cannot handle

44:28

that. Bailey Gifford have been an amazing fundhouse.

44:30

I think they're very good investors, yes, but

44:33

holding a Bailey gift of fund is a very hard thing

44:35

to do unless you are a professional fund

44:37

manager and you've been trained for it. You know that there

44:39

are cycles that funds will go up and they'll

44:41

go down, and you'll be in favor and you'll be out of favor.

44:44

Most people aren't trained for that. They're not ready for that,

44:46

so.

44:47

It's been very uncomfortable for a lot of people.

44:49

It has been. Yeah, and you always do the worst

44:51

thing. You always end up selling. You say no, lost, I've

44:53

had enough of this fund. It's a give up on

44:55

it and Sod's law. That's always the moment

44:58

that it does really well. That

45:00

is the whole point of downing Fox is for us

45:02

to find these amazing fund managers, but

45:04

to blend them together into such a way that actually

45:06

you still get the advantages over ten years. If

45:08

we hold thirty amazing

45:10

fun managers, you're going to get the average of their returns,

45:13

which if we do our job properly, is going

45:15

to be amazing, but it's not going to be

45:17

as intense as just holding one of them. There's almost

45:19

a magic effect that when you put these

45:22

funds together in a portfolio,

45:24

they cancel each other out in terms of the wild

45:27

swings, but you get left with the good

45:29

stuff at the end of it. And so that recommendation

45:32

having me trying to avoid giving people recommendations

45:35

exactly why I launched the Downing Fox

45:37

funds because it's a relatively easy thing

45:39

for people to hold. It's all about the kind of user

45:42

experience of holding it, which the industry, but

45:44

the active industry hasn't been perhaps

45:47

good enough at managing for people in the

45:49

past.

45:50

So people can just go and hang around on your

45:52

website and see if they can find the names of funds

45:54

and have a look at how your business. That

45:56

would be great.

45:57

Yeah, for sure, there are amazing

45:59

funds in there. There's all sorts, and I'll

46:01

get in trouble for mentioning one or two of them. I

46:03

know you're a Japan fund, so I'll give

46:05

you a Japan tip zena Japan. It's

46:07

one fund we've held for a couple of

46:09

years now. Again all that stuff about it being

46:12

a small fund, intense managers,

46:14

but they launched that particularly to capture

46:17

that corporate governance change that's

46:19

happening there.

46:20

We've had them on the podcast. Is there anyone

46:22

who wants to hear more from them? Can just go back and find

46:24

that episode.

46:25

What's another example of a great fund manager? Yeah, so

46:27

you listen to that, listen to the Jonathan santi

46:29

one and you'll get examples of the kind

46:32

of managers that we think where you should

46:34

have your money.

46:35

Brilliant Simon. Let me finish by taking you

46:37

well outside your comfort zone. We always

46:39

ask at the end of this podcast, and I can't drop it

46:41

now. It's going to go on forever, however boring it gets.

46:44

Weather. Okay, you've got ten years.

46:46

I'm going to take away all your funds. You can't

46:48

have any of your lovely active funds at

46:51

all. You're only allowed to have either

46:54

gold or bitcoin, and you've

46:56

got to hold whichever one you choose, and you

46:59

can only choose one for ten years. What's

47:01

it going to be.

47:02

It's absolutely going to be gold.

47:04

I do own some gold outside of my funds.

47:07

We don't hold gold in the fund because it's a lump

47:09

of metal and you shouldn't be paying me a management fee

47:12

to hold it in a fund. You can do that yourself. The reason

47:14

why I like gold is it's pretty good against light

47:16

monetary debasement. It's going to be pretty good against

47:19

heavy monitord's debasement, and unlike

47:21

cryptocurrency, in the event of the

47:23

zombie apocalypse, you're still going to be able

47:25

to buy stuff with little lumps of metal that you

47:27

won't be able to log onto your laptop

47:30

and use cryptocurrency to buy the last

47:32

bag of grain in the village. So absolutely

47:35

gold.

47:36

So if you're hedging against a genuine

47:38

and the world meltdown, it's got to be gold.

47:40

Cryptocurrency is zero use in that scenario.

47:43

Brilliant Simon, Thank you so much.

47:45

Pleasure, Thank you.

47:52

So John. As interesting as you hope we just

47:54

get a little bored in that one.

47:56

I thought I was great. I do

47:58

think to be over passive

48:00

and active really interesting

48:03

because good because that's a job

48:06

exactly. But also you

48:08

know, I agree with I

48:11

think passive is like a great thing and it

48:13

makes a lot of sense. I mean, I thought

48:15

the distinction there that you both made

48:17

about active basically requiring

48:20

another step of removal from

48:22

the process was actually

48:24

spot on. It's like, I wouldn't

48:27

recommend any of our listeners be

48:30

individual stock pickups unless that's

48:33

something they want to do, and I've prepared to do a lot

48:35

of work. And similarly, I

48:38

probably wouldn't recommend that, you

48:41

know, every listener go and

48:44

try and pick an active fund over a passive

48:46

fund, because that also requires a bit more work.

48:49

And I think that's an interesting distinction

48:52

that is maybe not well.

48:55

Partly lies it the part of the polarization.

49:00

So it does make a lot of sense for most

49:03

people, especially if they're already

49:05

not really doing anything with

49:07

the money.

49:10

Easy, simple, straightforward, cheap

49:12

and as he says, reliable continues

49:14

he said it was going to do. I

49:16

mean, it's the try that mars get

49:19

what you pay for, You get what you pay for. But the

49:23

you know, we took a lot in this, in this conversation

49:26

about active or passitive, about

49:28

how they both work, et cetera. But one of the things

49:30

that I find most interesting in

49:32

it is the conversation about how to actually

49:35

pick a reasonably good fund

49:37

manager. You know, when we ten

49:39

fifteen years ago when we were writing about fund managers,

49:42

you could accuse them of all sorts of terrible things,

49:44

you know, greed, complacency, index are

49:46

getting overcharging, whatever, all sorts

49:48

of things. You can still accuse

49:50

a lot of the active management industry of

49:52

those things, particularly of being obsessed

49:54

with their benchmarks rather than with the absolute returns

49:57

that like siph you and I might prefer them to be obsessed

49:59

with. We're not really interested in whether a fund

50:01

manager is lost less than somebody else were, instant

50:04

whether they actually managed to make us more

50:06

money than we had in the first place. There's sort of thing. There's lots

50:08

of places where you can dive into the active

50:11

sector and say, god, this is awful, But

50:14

in fact there are also a lot

50:16

of really great managers in the sector,

50:18

and several ways,

50:21

as Simon was saying, to try and figure

50:24

out which ones might do well from

50:26

here, because they are always going to be obviously piles

50:28

underperform the index. And of course if

50:31

you want to do better than a passive fund,

50:34

you have to do fairly significantly better

50:36

than them before charges, before you even get to what happens

50:38

after charges. So there are a lot of good fund managers

50:41

out there, And what I'm really interested

50:43

in is the part of the conversation with Simon where we talk

50:45

about how to find them.

50:48

Yeah, and I mean quotes

50:50

a lot of the things that I would have.

50:54

Assumed, so.

50:57

Like the kind of the boutique kind of manager,

51:01

the kind of manager that's will and they go off way,

51:04

you know, a couple of million under

51:06

their belt and therefore essentially not really earning

51:08

a salary at all for

51:12

investing, which which also

51:14

I always find, I mean, I supposed to tell

51:16

a frustrating thing because the smaller the fund,

51:19

the harder it is to get into, particular

51:21

as a retail investor, because you know,

51:24

you look at all these reinvestment trusts are still

51:26

in the stock exchange, and then you look at the spreads

51:29

in terms of what you're you know, the gap between

51:31

the buying and the selling price, and some

51:33

of them are just awful. You know, you're effectively

51:36

paying ten percent to get into the

51:38

fund in the first place. So doing scale,

51:42

ironically is a

51:45

big issue there.

51:46

Well, I think the problem with new smaller

51:49

funds I'm I'm interested saying. I don't know if

51:51

you've noticed, but there have been a couple of shifts

51:53

away from big companies recently well nowfore managers

51:55

leaving and talking about setting up their own businesses.

51:58

There was Ben is It More

52:00

at Jupiter, and then yesterday today

52:02

we heard about Peter Rutter leaving Royal London.

52:04

And these are both very well established,

52:06

well known fund managers saying Okay, I'm going to go

52:08

set up on my own now. And when you

52:10

look at that, you think, well, this is brave. This is brave

52:13

because maybe they already have large amounts

52:16

of committed funds behind them, but setting

52:18

up, think of the regulation, think of the compliance

52:21

alone. And you can't go out there

52:23

charging two percent anymore if you're if you're

52:25

charging over one percent, no one's going to look at

52:27

you when it comes to giving you seed capital. So it's

52:29

got to be a low price. Everything is expensive,

52:32

and so it's a really risky thing

52:34

to do, but I think it's an interesting

52:37

time to do it, because

52:39

I mean, Simon and I have talked about this a lot in the Partner,

52:41

I've written about it a bit. When you look at the

52:43

types of funds that tend to perform

52:45

well, they're very often smaller

52:48

funds set up by people who have successful

52:51

careers behind them and they tend to

52:53

do well in the first four or five years before

52:55

they get particularly big.

52:57

Yeah, and I suppose there are things you've you've

53:00

got that ability to be like

53:03

properly active. And I guess this is

53:05

the other thing that gives the selling point. I mean, one

53:07

of the things that certainly to my mind has driven

53:10

the private equity and private

53:12

assets business in general. It's not just

53:15

low interest rates a lot obviously, I think

53:18

that's pushed a lot of it. There is also

53:20

the rise of passive in the kind of you

53:22

know, the move by the kind of asset

53:24

management industry to try and differentiate itself.

53:28

And so you get more of these funds that

53:30

are going into these companies and then

53:33

actually say taking big stakes in them

53:35

and then saying, actually, we want you

53:37

to do this or we want you to get better at

53:39

that. And I think that's that's

53:43

that's a proper differentiator from the

53:45

passive funds, because you're never going to get a passive

53:47

fund doing that. You might find

53:49

a passive fund that can loosely give you a

53:52

value strategy alow even then, I

53:54

mean, one of the other main reasons

53:56

I would go for active funds is simply because it's

53:58

very hard to fit and nuanced

54:03

strategies, you know. So like, if I want about UK value

54:05

stocks, I'm probably not going to go for

54:07

some kind of passive fund that pretends that that's

54:09

when it does. I'd rather find a decent

54:12

fund manager who knows how to tell the difference

54:14

between what's actually a value stock

54:16

and what's just got a low priced book ratio.

54:18

Yes, and and as soon to go bust

54:21

I exactly, rather than be taken over at

54:23

a huge premium by a private equity company.

54:26

Yes, so I do, I think

54:28

only I think this is where you get down to

54:30

the kind of brass tas of what

54:33

a decent active investor does

54:35

that pass It's not even so much the comparison

54:37

between active versus passive. It's this

54:40

is what active can do that passive just

54:42

can't.

54:43

Mm hmm. That's interesting. And it

54:45

is it's this this number that I think we talk

54:47

about in the in the conversation active

54:50

share. Every time you look at buying an active

54:52

fund, go and look at the active share and

54:54

if it's I can't remember what number Simon used,

54:57

but I think he's me is he said

54:59

ninety or but a lot of people

55:01

will say eighty. But you know, if it's anywhere

55:03

below seventy, this is just not worth

55:06

the bother. It's too close to the benchmark

55:08

to be genuinely an active fund. You

55:10

know, there used to be millions of these, the closet trackers. We

55:12

used to go on them, and everyone feels like they're basically

55:14

gone now, but there's still out there. And even

55:17

if they're not proper closet trackers

55:19

as we used to describe them in the all days, they are, there's

55:21

still a little too close to the benchmark for comfort.

55:23

So if you're going active, just go really

55:26

active.

55:27

Yeah, and then we look at the top ten Holden's

55:30

and then look at the top ten holdings and the you

55:32

know whatever bench market is that they fallow, and

55:35

that will give you a good sense immediately

55:38

it's just how active it actually is.

55:41

Yeah. Did he convince you, John you're going out to

55:43

change from passive to active any of your investments?

55:46

I mean, I hate it.

55:46

I'm not that.

55:51

I didn't really need to convince it. I

55:55

mean, I like, you know, I think, like I said,

55:57

I've got all the time in the water pats of and I think that

55:59

there's lots good uses for it. And

56:02

obviously the other issue that I

56:06

would probably manage more in investments much more actively

56:08

if it wasn't for the job that we do, which makes

56:10

it trickier to be

56:13

a active minature of your

56:15

own investments. But

56:17

yeah, I think I think active

56:19

is definitely worth way, and I think if you want to get exposure

56:22

to stuff that isn't the S and P five hundred, then

56:24

often active points will give you a

56:27

more tailogged version of what you want than

56:29

a passive fund.

56:32

Before we end, I just want to point out

56:34

one more thing that Simon said at the very

56:36

very end when we were talking about gold and bitcoin,

56:39

and that you know, when we talk about this, everyone most

56:41

people go for gold, and they say it's because they understand

56:43

gold, because it's got a long history, et cetera.

56:46

But Simon actually went right to

56:48

the cructer of the matter and said that in the end,

56:50

in the event of a zombie apocalypse,

56:53

you're still going to be able to use your gold. You're

56:55

not going to be able to use your laptop or your

56:57

cryptocurrency. So you

56:59

know, he's right if you if you're thinking

57:02

about something that is there to hedge

57:04

everything else, should it be something

57:06

that is also as value

57:09

in the event of there being no such thing as the Internet.

57:13

Yeah, I thought it was really interesting that Simon

57:16

went to that so coinfidentally because

57:18

he's clearly thought about gold,

57:20

Because I kin I thought he's

57:23

a he's a financial as it's guy, he's not

57:25

going to have thought about gold. Might but he

57:28

clearly actually knows his stuff about

57:30

about it. So I thought that was quite

57:32

interesting.

57:33

Yeah, although anyone with a zombie apocalypse on their

57:35

mind, I think it might be a prepper. I'm going to call Simon

57:38

and find out if he's a prepper, and if he is, I'm going to put

57:40

it in the notes. I'm also going to put in the notes

57:42

various links to some of the things that John and I

57:44

have written on the passive Active debate over the

57:46

years, as so you can have a look and have a

57:48

think about it all. And one thing that we have written

57:51

about recently I think is quite important at the moment

57:53

as the US, in particular loser's

57:55

momentum at the top and as the

57:58

rally broadens out. Important

58:00

possibly to be in an equal weight ETF,

58:02

not a market cap weighted ETF if

58:05

you're investing in the US.

58:06

Is that fair, John, I think that's fair

58:08

But the one thing I would say is that is

58:11

then that's an active choice.

58:13

Everything is an active choice.

58:15

That's what I mean. I mean, that's that's quite a substantial

58:18

departure from the benchmark. So you're

58:21

actually you get away from the transparency

58:23

passive I mean, you know what it's aiming

58:25

for, but you don't actually know what you're then going to get

58:28

this and p FI fund could go up twenty percent,

58:30

but it was all Apple on the video. I

58:32

don't I actually agree that Timing

58:35

wise, I would prefer an equal weight ETF,

58:37

but I don't think it's that definite to go in for an active

58:39

fund.

58:40

Well, I would say, if you're going to go down that road,

58:43

that there literally is no such thing as

58:45

a passive fun I'd like to take out the fact that I said

58:47

literally because I am not a teenager. But there is

58:50

no such thing as a passive fun. Do you make

58:52

an active choice whatever you buy? I mean,

58:54

even if you go and buy

58:57

a global passive fund,

58:59

you've made an active choice to own

59:01

an awful lot of American technology.

59:04

Absolutely, And then that boils, don't Everyone

59:06

has to be an active investorm when it comes to that

59:09

asset allocation. And then it's

59:11

about knowing what you want and then

59:14

finding the best ways to execute

59:16

on that investment. But

59:19

that is then, yes,

59:26

I saider, Well this is it. It's like, how do you actually

59:28

debate the semantics of this? Passive is just a

59:30

cheap way to get exposure to an

59:32

asset class that you want exposure

59:35

to.

59:35

Yes, so it's not passive. It's not passive.

59:37

Yeah, it is mis name.

59:39

Really, we're going to stop bickering.

59:41

We have to stop this. Thanks

59:46

for listening to this week's Merit Chalks Money.

59:48

We'll be back next week in the meantime. If you like our show,

59:50

rate review, and subscribe wherever you listen to podcasts

59:53

and keep sending questions or comment. It's a Merit and Money

59:55

at Bloomberg dot net. We read all the emails, we really

59:57

do, and we're working through some of the ideas for futures,

1:00:00

but will also start answering some of the questions in the

1:00:02

Friday edition of John's newsletter Money

1:00:04

to Stelt, which by the way, is ex Clinton if you haven't signed

1:00:06

up to what you really really should. This episode

1:00:09

was hosted by me Maren Sumset Web was produced

1:00:11

by some Sosiety. Additional editing by Blake Maples.

1:00:14

Special thanks to Simon, Evan Cook and John

1:00:16

Stepfork