Investment Letters

Investment Letter September 2017

By |2017-09-15T14:57:13+00:00September 15th, 2017|Investment Letters|

Over the past 10 years - in the liberal parts of the world at least - political and financial economies have forked apart. The large scale corporate world has become stronger as government authority has paled. Doubtless, on the government side of the ledger, this is partly due to an erosion of faith in governments following their interventions to save banks and shore up the indebted after the Global Financial Crisis. Large companies which are not banks have been able to take a free ride on a progressively cheaper cost of capital and load up on cost-saving technologies. With freely available capital and cheap debt, companies have variously invested, bought out competitors, lifted their dividends and bought back their own shares. In the US, buy-backs have become a mania. Strong companies have become stronger and companies of all types have become greatly better at marshalling technologies. Technology, often spoken of as a disrupter and a general threat, has in fact facilitated a multitude of improvements in the way in which business is conducted: benefits that accrue to the adopting company if not always their customers who rightly sense they are being kept at bay. For example, by computer driven enquiry [...]

Investment Letter June 2017

By |2017-06-11T14:46:44+00:00June 11th, 2017|Investment Letters|

On the last page of his book, Homo Deus, Yuval Noah Harari poses the questions: “What’s more valuable – intelligence or consciousness? Intelligence is decoupling from consciousness. What will happen to society, politics, [investment] and daily life when nonconscious but highly intelligent algorithms know us better than we know ourselves?” I have added the word investment. This book certainly sets the mind noodling. We are often being told – mainly by academics and parts of the FT – that there is little point in active asset management. Their conclusions, often as not, are based on the average performance of the average manager. We think not and wish to rebutt such a reductive line in reasoning. Who would ever be interested in the average outcome from an unsampled universe? In football, there is little point in supporting an average team – unless you happened to come from the town itself. That’s why people all over the UK (and wider) support Liverpool, Manchester United and Arsenal and why Mansfield Town – who finshed exactly half way down League Two last season – has an average home gate of 3,774. To our minds, the universe of – equity managers in this case – [...]

Investment Letter from Hong Kong March 2017

By |2017-03-26T14:12:54+00:00March 26th, 2017|Investment Letters|

The stimulating free port of Hong Kong remains a compelling eye glass through which to comprehend China, its politics and economy. All its 5.5 million adult inhabitants are China watchers, by inclination or necessity. Their world view was formed, to some extent, by the Cultural Revolution. The most recent arrivals in Hong Kong are investors from China and increasing numbers of economic migrants from Europe, most notably France. The latter’s response to the despoir of home is to find hope in Hong Kong. "Try Hong Kong" they used to say, not always in kindness. Like London, Hong Kong operates as a safe-haven from volatile regimes: a portal through which Chinese capital passes, sufficiently easily to slay the notion that China’s capital account has effectively closed. Somewhere in the past two years - and its is difficult to say precisely when – the authorities in Beijing ceded their former near total authority on its currency policy with respect to the renminbi (RMB). The secondary effects of running so much capital through a thin spigot into Hong Kong are increasingly bad for the bulk of the population. Property prices there are debilitating to those without established ownership, small businesses struggle and young [...]

Investment Letter January 2017

By |2017-01-31T10:05:19+00:00January 31st, 2017|Investment Letters|

The election of Donald Trump has caused perturbation from Baltimore to Beijing: a rude volte face to the graceful Obama years, a reversal of international liberal orthodoxy, a rebuttal of globalisation, an aggressive restatement of weaponised American hegemony, and on. Those that voted for him love it, much of the rest of the world is aghast. While many are offended, some are amused. In politics, the next few years will be a wild thrash. This may not last long and hopefully no warheads are loosened off. Part of the emerging mash of policy – on energy most notably – look like bizarre refutations of global trends that will not brook reversal. Others - resisting China’s claims over the Western Pacific - maybe overdue. There is more to come. Trump did not find time in the first week of his Presidency to fall out with Janet Yellen and the Federal Reserve. As sure as apples is apples, that will happen. It is not a great time to be an agency wonk in America. Under the last administration, even the hunting down of Osama Bin Laden was a meditative affair, a point captured in the line from Zero Dark Thirty where a [...]

Investment Letter December 2016

By |2016-12-22T15:46:46+00:00December 22nd, 2016|Investment Letters|

The election of Donald Trump has caused perturbation from Baltimore to Beijing: a rude volte face to the graceful Obama years, a reversal of international liberal orthodoxy, a rebuttal of globalisation, an aggressive restatement of weaponised American hegemony, and on. Those that voted for him love it, much of the rest of the world is aghast. While many are offended, some are amused. In politics, the next few years will be a wild thrash. This may not last long and hopefully no warheads are loosened off. Part of the emerging mash of policy – on energy most notably – look like bizarre refutations of global trends that will not brook reversal. Others - resisting China’s claims over the Western Pacific - maybe overdue. There is more to come. Trump did not find time in the first week of his Presidency to fall out with Janet Yellen and the Federal Reserve. As sure as apples is apples, that will happen. It is not a great time to be an agency wonk in America. Under the last administration, even the hunting down of Osama Bin Laden was a meditative affair, a point captured in the line from Zero Dark Thirty where a [...]

Investment Letter November 2016

By |2016-11-03T17:22:18+00:00November 3rd, 2016|Investment Letters|

We draw close to the end of the Obama presidency. The very fact of it was remarkable even if the substance of it disappointed almost everybody. What comes next? The world, bar Vladimir Putin and those in America who will vote for Trump, would undoubtedly prefer Hillary Clinton to win the US election but it is hard to construct the case for much of a relief rally on the back of this. Trump gives the jeepers but Clinton commutes other risks, notably a perilous engagement with Syria and by proxy Russia. America is the land of second chances but it is also the place where the majority have had enough of the Clintons. New leaders are apt to express frustration with touchy technocrats at their monetary authorities, as Mrs May has just done. Carney bristled in a manner that betrayed an insecurity. There are genuine risks and undesirable side effects of QE that properly form part of the national debate and are not beyond the purview of this or any other Prime Minister. Politics certainly catches the eye. Last year David Cameron was Parliamentarian of the year at the Spectator awards. This year, he is in a garden somewhere in [...]

Investment Letter September 2016

By |2016-09-14T08:20:48+00:00September 14th, 2016|Investment Letters|

The outperformance of high quality equities has been one of the most distinguishing factors of the post global crisis period. “Quality” is loose moniker and there are disparate characteristics that can be construed as quality. More often than not it is associated with higher margin companies with solid balance sheets and well established and well defended business franchises. These types of companies are sometimes called defensive growth stocks. Investors who closely follow our work on equities will know that we sip from the same font as Michael Porter and his ilk of Harvard. Porter promulgated the Five Forces and attached them to his surname. He wrote his first paper on the subject in 1979 “How Competitive Forces Shape Strategy” and morphed that into the 1980 book “Competitive Strategy” rounding off his ideas with “Competitive Advantage” in 1985. https://www.amazon.co.uk/s/ref=nb_sb_noss_2?url=search-alias%3Dstripbooks&field-keywords=michael+porter A stream of other publications followed, as he noodled away on the same basic tune. His contention was that great companies stay great because they build, or happen upon, some advantage which they prosecute and defend mercilessly. He also argued that high market share was a defining characteristic of such companies and lent them the power and wherewithal to shape their industries [...]

Investment Letter July 2016

By |2016-07-01T12:31:54+00:00July 1st, 2016|Investment Letters|

In the historical context, the landscape of modern investment has been defined by the relatively free movement of ideas, capital and increasingly, people. Through the eyes of most urban folk and the majority of the political elite, these are generally taken to be unalloyed gains, uncontroversial goods. That a larger number have voted for a distinctly different set of arrangements has delivered a shock. Far from being a “Lehman moment”, as some have termed it, last week’s vote has longer drawn out and more pernicious effects. With respect to the UK, we should expect a recession as investment decisions are reversed, cancelled or delayed. The principal manner in which these events connect into our clients’ portfolios is through currency. With pounds Sterling as a reporting currency, a natural level of protection can be achieved by buffering the falling pound with assets in other currencies. As a global investor, with no natural UK bias, this is more of a default than an option. It has not required, therefore, conscious risk taking outside of our normal range of operations to achieve a high measure of short term protection. We were able to make plausible assumptions about the impact of either possible result [...]

Investment Letter May 2016

By |2016-05-09T10:17:11+00:00May 9th, 2016|Investment Letters|

There have been a fair number of reversals already this year: a retracement in oil prices, the cooling of the dollar, the rise of gold, recovery in commodity currencies… the list continues. The great immovable force is the backdrop of high indebtedness, now a pervasive global phenomenon. The Debt Supercycle describes the defining economic development of this and the previous generation during which general indebtedness, measured as a percentage of economic output, has increased by a quantum degree. Debt accelerated markedly in the 1990s with a great explosion of US debt and then further in the noughties and this decade in both direct and indirect consequence of QE policies. During the QE years, the Emerging Markets finally lost the great thing that stood them apart from Developed Markets: their relative low leverage at the state, company and consumer levels. The latest augment to the trend has emanated from China whose leaders have plainly decided to throw bad money after bad in their latest efforts to reflate aggregate growth back to the desired mark. The present economic cycle’s distinguishing factors reside in its very length and lowish growth, commensurate with what one might expect when debt begins to constrain growth rather [...]

Investment Letter March 2016

By |2016-03-30T16:13:53+00:00March 30th, 2016|Investment Letters|

The particular combination of a supported Chinese currency, stronger oil prices and dovish Central Banks has been helpful to markets, at least in the near term, with benchmark equity indices striving to erase January’s precipitous falls. We have also seen a counter-trend recovery, although uneven, in Emerging Markets, part helped by a recovery in the value of their currencies against the dollar. This reversal in fortunes has posed more than a few difficulties for some managers who have explored the wilder shores of bear territory. No love has been shown to those shorting commodity currencies or taking bets against mining companies as both these asset groups have recovered strongly. Does it make us killjoys that we do not welcome the cloying attentions of the BoJ, ECB and the Fed? Each has offered highly market sensitive prognoses and policy tilts in the past month but, in our minds, their actions may add to the risk of larger reversals at some stage in the future. For, when the post Financial Crisis landscape is assessed from a greater distance by financial market historians, their conclusions will be highly bifurcated. They will, we think, offer plenty of support for the initial policy responses, as [...]