00:00:00:00 - 00:00:21:11
Ben Gutteridge
Hello, everyone, and thanks for joining us for This Time in the market series at Invesco Podcast with UK investment professionals. Our purpose is to share investment insights from some of the most prominent names within asset management, and to do so with a conversation that's clear and easy to follow, and also with a sprinkling of humor along the way.
00:00:21:14 - 00:00:41:09
Ben Gutteridge
Before we move on, though, we want to stress this interview should not be considered as investment advice and remind you that any capital invested is always capital at risk. Finally, do hang on after the conversation's finished to listen to some additional important disclaimers. Thank you. I do hope you enjoy the episode, and please subscribe and review as you consider appropriate.
00:00:41:11 - 00:01:03:06
Ben Gutteridge
Warm welcome to the latest time in the Market podcast, an episode that will focus on the opportunities and risks within global equities. And there really is no one else on this whole entire Earth planet that I'd like to be doing this with. Then our guest today, he's a he's a star fund manager of international acclaim. He's absolutely all over his stocks.
00:01:03:06 - 00:01:23:03
Ben Gutteridge
He also loves a bit of macro team player, a delightful communicator. And he's got an absolute rocket of a single backhand. It's Invesco's head of global equities Stephen Anness. Stephen, thank you so much for joining us. How are you.
Stephen Anness
And I'm very well. Thank you for that introduction. I must have had one lucky backhand pass to you or something.
00:01:23:03 - 00:01:38:12
Stephen Anness
I'm not sure, but, very kind.
Ben Gutteridge
Well, I was thinking of mixing the intro up a bit, but in the end, I thought it's sort of safest just to read out, word for word what you sent me. So? So I hope you're happy with that. I mean, I got it, right. Well, this exchange, your feeling about what a good sport you are.
00:01:38:12 - 00:02:00:14
Ben Gutteridge
But look, before we get going, also worth adding a big thank you to Stephen for appearing on our very first time in the market episode, time on the market podcast episode way back in April 2023. Remarkable, remarkable amount of time ago. Hopefully you'll join us in two years. Time for a follow up. But, you know, you've propelled us into this sort of quite popular category, where we've remained ever since.
00:02:00:14 - 00:02:18:08
Ben Gutteridge
So thank you, Stephen, for your support early on. Now, in terms of getting to our main event, investment discussion, we'll have some macro flavor to it, but also lots of sort of stock specific elements as well. You know, try and fuze the two where we can. But as something of a tease, no doubt will touch on us.
00:02:18:08 - 00:02:44:11
Ben Gutteridge
Exceptionalism. The European rotation, you know, trade I the financial sector healthcare and then the other areas that really Stephen's keen to to discuss. But I don't think there's anywhere else to start other than with US trade policy, the dominant theme of the year, I would say. And look, Stephen, I guess from a sort of a macro commentator sort of, perspective, it's been sort of quite clear to macro commentators.
00:02:44:11 - 00:03:11:01
Ben Gutteridge
You know, the US has executed sort of a series of policy, certainly as it relates to trade, that could be considered sort of quite self-harming. While she sort of combine that with other regions doing something, I guess, a little more fiscally expansive. And so we've seen this, you know, quite stark rotation within markets of US assets struggling, US equity markets struggling, but other regions, particularly Europe, performing quite well, you know, as a global equity fund manager at all, does this resonate with you.
00:03:11:01 - 00:03:35:03
Ben Gutteridge
Do you think about things at all from this sort of challenge to US exceptionalism perspective? And is it encouraging you to to take any action? In, to capture those trends?
Stephen Anness
Well, look, Ben, I, I yes, it does, of course, that we, we are very much bottom up stock pickers. But of course, the macro matters to us.
00:03:35:03 - 00:03:55:11
Stephen Anness
And you know what the US, sort of trade policy situation caused was, was a huge amount of volatility within markets, very significant rotation. And as you say then that sort of saw the longer standing question of, well, you know, will U.S assets continue to outperform in the way that they have done for, for for many, many years now?
00:03:55:11 - 00:04:15:11
Stephen Anness
And of course, you know, we've seen recently that you know when you actually when you adjust for the, for the FX currency that the, you know, European, UK and other parts of the world have outperformed the US quite, quite significantly. So I think in many ways that, you know, the US was sort of due a bit of a pullback relative.
00:04:15:11 - 00:04:36:08
Stephen Anness
I mean, the US market markets had performed incredibly if to those parts of the world now that was for good reason. They delivered much faster earnings growth. And so like we do we do think about these things. But I think, you know, we also have to respect the fact that, you know, these big macro sort of bets and trades.
00:04:36:09 - 00:05:00:06
Stephen Anness
It's pretty hard to predict, those things. And when we're focused on the companies, you know, we tend to, you know, hopefully have a sort of high probability of success. And, you know, remember the of course, the companies that we're investing in, many of them are global businesses that in this know not just about the US. I would say, like in aggregate, the US tends to have companies that are delivering higher ROE return on equity.
00:05:00:07 - 00:05:21:11
Stephen Anness
They tend to grow faster and they have more aligned management teams on average. And so it's a pretty big bet to just want to bet against them if they're if that makes sense. And so we've been underweight the US. But with this sort of period of relative performance then we're finding some, some ideas in the US actually, funny enough that that more intriguing to us.
00:05:21:12 - 00:05:41:09
Ben Gutteridge
Well, that's fascinating, isn't it? It's you. I guess you were sort of already there waiting to sort of capture some of this rotation that gives you the opportunity to start looking at maybe, quote unquote, beaten down US stocks. Not necessarily. They've been beaten down relative to market average, but relative to their own average. Perhaps they're looking sort of a little more interesting.
00:05:41:09 - 00:06:00:04
Ben Gutteridge
Let's say you were that that there to capture it. But okay look I know I sort of dominated sort of lean into this sort of too heavily, but it could also be said these, these macro points too heavily, but it could also be said that maybe we're past past peak trade anxiety now, and it looks like he's a maverick character and could be can be quite unpredictable.
00:06:00:07 - 00:06:34:13
Ben Gutteridge
Looks as though he wants to get deals done. So I don't know. Again in in all the work that you do is sort of and yeah. Stock stock analyst, stock pickers. Are you starting to play down the trade threat in that analysis now?
Stephen Anness
Yes. Is the short answer. Look, I think, I mean, if you if you win the clock back to sort of, November, back end of last year, there was a lot of enthusiasm for all things us, positivity around Trump and deregulation, tax cuts and all the positive stuff that was sort of expected to come from his presidency.
00:06:34:14 - 00:07:03:06
Stephen Anness
And look, I think we'll get much of that, but I think what people with the market forgot was sort of, you know, the the lessons from Trump 1.0, which was that volatility was sort of the, pretty consistent theme through that period. And so, look, I think we've, you know, we had that very significant shake in markets, on, on Liberation Day, but I think since then when you really look at what's happened, we've seen very significant rollbacks.
00:07:03:07 - 00:07:22:00
Stephen Anness
And there's some quite entertaining memes on Twitter, for instance, about, you know, trade deals, you know, versus frameworks and that sort of thing. And I think it's clear the administration has moved back a long way from where they were. And, in most of the companies that we are talking to now seem, a bit more relaxed there.
00:07:22:01 - 00:07:45:12
Stephen Anness
They've done quite a lot of work on their own supply chains. But I think, I think most companies that we have met expect the, the ultimate, tariff framework here to be manageable for them. You know, albeit as you alluded to in your question, I think we we could experience sort of further volatility around this. You know, we know that that Trump can be quite aggressive as deals are getting to the sort of final furlong.
00:07:45:13 - 00:08:17:03
Stephen Anness
And he might well sort of, you know, yank the chain back and push for a little bit more, which might, spook markets. That wouldn't surprise me at all. So I do expect more volatility. But yes, we we all sorts of playing down the the risk of, of, of tariffs within there's a portfolio broadly, you know, albeit and we have gone through the portfolio, as you can imagine, with a fine tooth comb and tried to figure out where the risks really are, where those risks are potentially overpriced in the market size and, and in many cases added to some of those positions.
00:08:17:04 - 00:08:53:05
Ben Gutteridge
Well, I mean, that's I mean, you sort of touched on a point there that, I've been reading I do read from time to time is that, analysts are perhaps in a bit aggressive, in revising earnings expectations for these businesses, an underappreciated how that the quality of management and their experience to be able to deal with like, the challenge of trade policy and managing their sort of supply chains, you sort of touched on it on your answer then, but presumably you can you can support that idea that actually management done a very good job of managing these risks and therefore gives you more confidence to continue to sort of own them.
00:08:53:07 - 00:09:12:10
Stephen Anness
Yeah, yeah. Look, I mean, you know, when we think about the, you know, the companies in the portfolio, there were, you know, there were a number of companies that actually, weren't really impacted by tariffs at all. There were, there's 1 or 2 that were actually potentially positively impacted them, backed by them because they should have had some, interesting sort of geographic competitive advantages.
00:09:12:11 - 00:09:31:04
Stephen Anness
And then finally, you know, companies where, as you say things are sort of perhaps overpriced and people were way too aggressive. I mean, yeah, there were there were companies that were down 20, 25%, around that sort of tariff announcement day. And actually when you work through the numbers and, you know, maybe talk to the management teams in terms of how they might restructure the supply chains.
00:09:31:04 - 00:09:50:05
Stephen Anness
And, the impact was, was, was, was quite significantly less. And, but, you know, you've seen that very sharp snapback, I think, I think the market was mostly worried about the second derivative of the trade policy. If I, if I'm honest, which is the, you know, this was a macro recessionary impact from this sort of stop in global trade.
00:09:50:05 - 00:10:10:11
Stephen Anness
But, you know, again, even anecdotally, you can see, you know, transport companies, rail, rail companies, for instance, the US saying, look, yes, car loads and shipping volumes coming from the, you know, from, from Asia into US West Coast ports were down significantly in the in the few weeks following the policy, but actually since then have rebounded quite sharply.
00:10:10:11 - 00:10:31:00
Stephen Anness
And things feel a little bit more normal right now. Yeah. That might be a risk that the market's being a bit complacent. But I think I think at the moment the reaction the same sensible that, you know, this isn't going to be as bad as is that that was anticipated in early April.
Ben Gutteridge
So this sort of leads me on to a question about like how volatile the market has been.
00:10:31:00 - 00:10:46:01
Ben Gutteridge
And and the whether you're drawing on experience. You know, I know we both sort of look in our mid 20s, but there is like meaningful experience of occurring. In fact, how long have you been in in the industry. Haven't you been a fund manager in the investment industry?
Stephen Anness
As well. I've so I've, I've only ever worked here.
00:10:46:01 - 00:11:08:10
Stephen Anness
I've been here 23 years this summer and I've been running money for, 21 of those 23 years.
Ben Gutteridge
Yeah. So it's like, I'd say that qualifies as a meaningful amount of experience putting money. And I'm just sort of thinking about how now, with that experience and, how that sort of influenced your management to this crisis, if you can call it a crisis.
00:11:08:10 - 00:11:37:06
Ben Gutteridge
I mean, I guess, you know, it felt like a crisis in the depths of it. And, whether you're observing that there's something to be taken advantage of in the marketplace or whether, like, each event is unique and therefore, you know, you have to treat it on its own merits or whether there is a pattern that you're seeing is a given the experience you're or pattern building that you think you can exploit on the part of clients or you're way off track there.
Stephen Anness
No, I think look, I think you're right.
00:11:37:06 - 00:12:03:00
Stepen Anness
I think that pattern recognition is a big part of this job. And I think, you know, one of the things I've observed over time is that volatility always creates opportunity for us as active managers, albeit that you can't you can't know when, when, when pricing anomalies will. We'll sort of revert. But I think and certainly that I think happened much faster this time, which is an interesting point.
00:12:03:00 - 00:12:22:08
Stephen Anness
Maybe I'll come back to you, but it what, what we observe was, you know, in the there was a lot of panic. There was a lot of uncertainty because understand how tariffs would feed through to different companies was challenging to work out. You know, quickly you know, and the market grappled with that. So you hit I think the VIX hit north of 50 or 1 of the days in early April.
00:12:22:08 - 00:12:47:05
Stephen Anness
And that's yeah that's a pretty significant sort of volatility reading. And so what we did is we sold many of the defensive companies that we owned just to sort of, you know, aggregate some of the trades and won't go into them. But we sold some of the defensive positions, such as Coca-Cola for and the reason for that was that the shares had done very well in a market that was falling very significant in.
00:12:47:05 - 00:13:08:14
Stephen Anness
So the relative performance, was was pretty stark in a short period of time. And so that, you know, when we when we weighed that song in a sort of relative sense to the rest of the portfolio, we felt that it was hard for us to make good returns for clients in that equity over the next sort of 3 to 5 years.
00:13:08:14 - 00:13:40:08
Stephen Anness
And so broadly, what we did is we sold around 10 to 12% of the portfolio. And, and I'd say all of those things were generally defensives, some in Europe, some in the US. And we, we, we, we bought pretty heavily into some technology businesses, and some cyclicals as well. So we, we added a little bit more to some of the sort of growth the businesses that we own particularly and I, because some of that was such a market theme, although not necessarily impacted by tariffs.
00:13:40:08 - 00:14:03:15
Stephen Anness
It got pretty hard, hit pretty hard because it was so popular, but that in some of those companies were down 40%. So we're able to buy, decent chunks of those. And then, you know, we added to some areas such as banks and building products as well, companies that are maybe a little bit more cyclical, but, you know, I think it's you question the the sort of pattern recognition or volatility uncertainty fear.
00:14:04:00 - 00:14:22:14
Stephen Anness
Yeah. Those are things to be taken advantage of. When you have a, a decent sort of time horizon, which we do. And we were looking at 1 to 3 years and, and I know this might sound a tough thing to say, but yeah, at the time you're buying companies maybe that have a price earnings ratio of 15.
00:14:22:14 - 00:14:40:02
Stephen Anness
And therefore you're taking a view on a multi year period of earnings for that company. And there's no way that Trump could be in power for more than three and a half of those years. So you do you have to extend your time frame. And whilst the short term was very scary, there was a lot of stuff, to be to be taken advantage of.
00:14:40:02 - 00:15:03:00
Stephen Anness
And yeah, as an aside, I do think, though, that the way the market is reacting to things seems to have become more aggressive over time. You know, you mentioned experience and I'd say, yeah, over my 20 odd years that something that feels different now you that the relative moves between companies and sectors and sort of factors as it were, that tends to move faster.
00:15:03:00 - 00:15:40:11
Stephen Anness
And I think it's because the participation of the market players has changed.
Ben Gutteridge
But do you think I mean, it's always sort of been the case that taking advantage of volatility is something that active managers express. They do. But do you think there is it's, it's just that much easier to do and therefore is done more keenly from those managers that are, enjoying a period of or in a confident mood and that the team is settled versus periods of performance anxiety for actually for the, for the fund itself.
00:15:40:12 - 00:16:02:05
Stephen Anness
Yeah. Look, I mean, obviously we all know that we should sort of. Behave in a very consistent fashion, whether performance is good or bad. But I think you're right when you when you have some defensives, for instance, that have outperformed in a period such as that. Yeah, it does feel a bit easier perhaps to, you know, trim those and buy into things which have underperformed.
00:16:02:06 - 00:16:25:06
Stephen Anness
Sort of feels more logical, I think, rather than, sort of chasing you tell if you've had a tougher time, but but I think, yeah, that's why, you know, being a bit maybe contrarian in advance of these situations is helpful. So, you know, at the end of November when everyone was very bullish, just taking a bit of money off the table, being a little bit more cautious, and just understanding that there might be some volatility ahead.
00:16:25:06 - 00:16:55:14
Stephen Anness
That was that was kind of a helpful thing to do. And not sort of chasing performance. But I think, I think maybe I think the reality has been, you know, some of the participants in the market now aren't necessarily people like you and I making decisions on individual securities that it's it's often, you know, quant funds, for instance, or algorithmic trading, where, where price action, as an example, is a much larger part of their sort of investment process, as it were.
00:16:55:14 - 00:17:13:15
Stephen Anness
So if something falls 5%, there might be a stop loss and they're forced to sell and and that sort of makes things worse. And so this, this statement or question that, that people used to use in the early phase of my career, such as, you know, what's the market telling us? And maybe that's a slightly redundant question these days.
00:17:13:15 - 00:17:31:15
Stephen Anness
I don't know if the market is telling us as much. And I think in those kinds of environments, having that, you know, a team that's been around a while and, you know, having, having genuinely, you know, sort of management team that will back us to take multi year views. I think that that really helps us, take advantage of those things.
00:17:31:15 - 00:17:51:11
Stephen Anness
And look, if relative performance gaps between securities are as stark as they were in early April, it's incumbent on us to take advantage of that for our clients and to do something about it, not just to sort of sit on our hands and say, well, you know, I like these companies for the next ten years. You know, our job is to try and, you know, generate the best risk adjusted returns.
00:17:51:11 - 00:18:16:07
Stephen Anness
And maybe by turning that capital over a little bit more aggressively than we otherwise might have done, is a is a return additive thing for clients. And if we can do that, then all the better.
Ben Gutteridge
Yeah. So it's like yeah, it's it's sort of quant quant funds giving active managers some gifts here from time to time. But you need the management team in its process itself to be sort of confident enough to take it.
00:18:16:07 - 00:18:30:10
Ben Gutteridge
And you and the fund management team needs its backers by its clients or its own sort of management, to give them the grace to go ahead and and take those opportunities. If you think it's sort of a more of a more of a not a reckless feature, but you could see sort of turnover picking up if you like.
00:18:30:14 - 00:18:47:15
Ben Gutteridge
Yeah. Based on the sort of the participants in the market. Yeah, I think so.
Stephen Anness
I think so that's what I sort of sort of wandered into a topic that I'm currently doing some work on. Maybe, maybe something else to get some early thoughts on it in less than two years time. But look, I, yes, I believe so.
00:18:47:15 - 00:19:15:09
Stephen Anness
It might not always be the case, but I guess it what it does do is make me think, well, you know what? As describing myself as an active fund manager. Yeah. Yes, that could mean high active share. I, I'm very different to the benchmark, but it could also mean maybe I have a slightly higher, sort of turnover rate than I used to do because maybe I had three years for investment theses to pay out previously, and maybe they pay out a little bit faster these days.
00:19:15:09 - 00:19:30:12
Stephen Anness
And as I say, that's the maybe I should just be kind of agnostic to that and accept that the thesis has played out. You know, hopefully we've made our money for clients and move on a bit faster than we used to. And it's just, you know, is the nature of the, the playing field different to what it used to be?
00:19:30:12 - 00:19:50:02
Stephen Anness
And I think the playing field is probably always evolved over time. And maybe this is just the next evolution of it, but as I say, we're trying to do more work on it because I, as you said, is the. Yeah. Or are there some market participants that are maybe offering up. Or creating opportunities for us to take advantage of them?
00:19:50:02 - 00:20:05:03
Stephen Anness
Maybe. But I, you know, I think we need to think through that a little bit more fully than I've articulated today.
Ben Gutteridge
No, I think you've done a very good job at that. Stephen. But I think we should probably we we move on. Fascinating stuff. But let's. I wanted to talk about stocks. Let's let's, throw a couple of final macro things at you.
00:20:05:05 - 00:20:27:09
Ben Gutteridge
Are you worried about US recession at all? And I guess you worried about it, but you think it's sort of a probable thing. And again, do your team think about it in terms of like where you should be moving client assets?
Stephen Anness
Look, I think, as discussed, we don't tend to anchor too much to our macro views because I think we're sort of humble enough to know that we will not necessarily get that right much of the time.
00:20:27:10 - 00:20:44:14
Stephen Anness
Look, I think the evidence at the moment is, is frankly, the US macro consumer in particular, has been pretty resilient in the face of what have been pretty some strong. Yeah, substantial shocks in terms of the tariff announcements, obviously there's a lot going on geopolitically at the moment as well. We probably haven't quite seen that feed through yet.
00:20:44:14 - 00:21:04:09
Stephen Anness
But yeah, that uncertainty has not led to massive drops in in consumer sentiment yet. I think, you know, the recent, prints from the sort of the Atlanta GDP now, now call surveys and stuff still look pretty robust. And so, yeah, our view is the US may well slow a little bit in the last part of the year into next year.
00:21:04:09 - 00:21:28:11
Stephen Anness
But that slower growth shouldn't necessarily be recessionary. I'm not convinced tariffs are actually as inflationary as everyone thinks. So I think they may add to some prices. But of course. Yeah, that just has a sort of displacement effect rather than increasing the overall level of of of of spend. And you're seeing pretty substantial falls in shelter which is going to bring down inflation.
00:21:28:11 - 00:21:50:11
Stephen Anness
So I look we we remain cautiously optimistic. I think that the US can skirt a recession, but growth will probably be a bit slow.
Ben Gutteridge
And sort of maneuvering more into, well, nicely perch maneuvering into more sort of sector specific stuff here. But the big macro theme has been like the rotation into Europe, particularly on the back of sort of fiscal expansion and defense spending.
00:21:50:11 - 00:22:11:00
Ben Gutteridge
I see, you know, Rose Rolls Royce is sort of participated in that sort of cohort, but other very good things happening there. But, you know, is the European Defense Infrastructure Program something that I guess sort of more focused on Germany, something that you're thinking about or presented opportunities or as I say, if you're already been there to sort of capture some of that with the stocks you own already.
00:22:11:01 - 00:22:32:02
Stephen Anness
Well, the Rolls has certainly been a beneficiary, as you highlighted. So, you know, one part of Roll's defense business, so one part of the overall Roll's business is defense. And they, they provide sort of power for, you know, various jet, jet engine aircraft such as the F-35, some Navy ships as well, and also power number of submarines.
00:22:32:02 - 00:22:53:11
Stephen Anness
So yes, that's helpful. Look, if I'm honest, I think we've, we've we've somewhat missed, some of this thing, which is a mistake on our part. I think, you know, the sort of rearmament of Europe and spending more as a percent of GDP on defense, is a theme that we should have, had greater exposure to.
00:22:53:11 - 00:23:12:06
Stephen Anness
But, you know, Rolls has definitely participated along. Yeah. But the the reason that, you know, Rolls performed well is not just defense, but also to do with the recovery and the civil aviation business. You know, the fact that they're also exposed in their power systems business to, providing generators for data centers, which obviously been a huge source of growth.
00:23:12:06 - 00:23:28:06
Stephen Anness
And then the sort of, you know, optionality on the, on the small, the small modular reactors. So there's a lot going on there. But yes, I do wish we'd had more defense, frankly.
Ben Gutteridge
Well, yeah, I'm not sure. I'm sure I have I wish I'd had more. I mean, they happened pretty quickly, but, that you're there to capture, capture.
00:23:28:06 - 00:23:52:04
Ben Gutteridge
Some of it is, I'm sure reassuring. Now, I guess more and more explicitly focusing on sectors now and talk about financials, which is, again, has been a sector that's performed really smartly, although I guess I recall from April to 2023 conversation I've gone through with a fine tooth comb that you were, more of an insurance support, than a, than a banks support.
00:23:52:07 - 00:24:18:13
Ben Gutteridge
I wonder, is that sort of still the case at the moment? How are you weighing up the two?
Stephen Anness
Now, as we look, banks are significantly larger now as a as a proportion of the portfolio. So, I mean, maybe just to so for now, but so some of the insurance companies, we sold down those positions reasonably significantly, just I think, yeah, there had been a following, sort of inflation that we saw in 2022.
00:24:18:13 - 00:24:52:15
Stephen Anness
Yeah, they've been pretty substantial price increases for many of the insurance companies. And we felt that, you know, profitability within that sector was sort of broadly peaked. And so we trimmed those down quite aggressively and exited one of them entirely. On the banking side that we own, we understand that chartered which is a UK listed business, but for anyone that knows it, obviously, you know, the, the vast majority of that company is, is based, sort of in the Asia-Pacific region and the Middle East.
00:24:53:00 - 00:25:16:05
Stephen Anness
And, you know, that's a business that has been on, on a long and frankly, at times painful, recovery. But now, you know, under the new management team is doing really well, and is now sort of recovering what appears to be slightly more sensible valuation, having been very distressed. So that's, that's a reasonable position to pull for about 3% of the fund.
00:25:16:06 - 00:25:49:06
Stephen Anness
And then, towards the back end of last year, early this year, we, initiated a position in a company called East West Bancorp. Which is a, a US sort of regional bank, principally, banking, Chinese and Asian consumers in the US, has some very strong competitive advantages as a, as an owner who owns, I think, around $100 million worth of, of, of the equity himself, so very well aligned with us.
00:25:49:06 - 00:26:11:13
Stephen Anness
And yeah, has consistently delivered, I think around 12 to 13% earnings and tangible book value per share growth over time and delivers us around a 2.5% dividend yield, which is kind of growing in line with that, that book value and earnings per share growth. So that yeah, that was something that we added to very substantially in the tariff.
00:26:11:14 - 00:26:29:03
Stephen Anness
So as you can imagine, it was a bank and B it was sort of, you know, banking, you know, Chinese and Asian, consumers in the US. And so we're sort of hit pretty hard in that selloff. And that gave us an opportunity. So, those two positions now are substantially bigger than, our insurance holdings.
00:26:29:04 - 00:26:48:09
Stephen Anness
And then the other financials I would categorize more as sort of other financials. And frankly, in the case of something like three I, which is listed as a financial, I would say that sort of misrepresenting what the business does given most of the business as a, as a discount retailer.
Ben Gutteridge
I mean, you can't have a conversation with your team without talking about three.
00:26:48:09 - 00:27:06:08
Ben Gutteridge
I like, I you know, it seems to be the answer to everything. And so let, let's let's get to it to it now. I mean, congratulations obviously been long long term supporters. I mean, yeah, I guess worth touching on reminding for those that don't know, you have a lot to do. Why? Why you shouldn't or why you don't believe it's cats should be categorized as financials.
00:27:06:11 - 00:27:26:15
Ben Gutteridge
But, thinking about that, what are the what are the risks? Is there any route to you not loving this stock three years from now?
Stephen Anness
You know, there's no I, I guess over time, I've learned to not love stocks at all. And my wife would probably accuse me of being emotionally stunted at times, but, No.
00:27:26:15 - 00:27:55:06
Stephen Anness
Look, I mean, yeah, this is a brief recap, and sorry, I didn't mean to get into three. I from from a question on banks, so on. So I feel sorry for standards that we did anyway. But, so one of the I like Action, which is a discount retailer in Europe has been, you know, the growth engine for that business been a phenomenal investment for three I and think Action and then how you got this, let's just say broadly accounts for 70% of the Nav of the business.
00:27:55:06 - 00:28:25:08
Stephen Anness
So I think I the time the market has come to view, the three equity areas as being all about Action. And Action has a very long runway for growth in terms of new stores. You know, we think they can probably do up to 10,000 and around 2009 hundred at the moment. And, you know, they get incredible store economics unit economics on and so when they open a store, they're able to get cash pay back within, within a year, which is pretty remarkable.
00:28:25:09 - 00:28:46:14
Stephen Anness
And I think when we talk about EWBC a minute ago, I mentioned that they had, a CEO with about $100 million worth of stock, and he was very aligned. And in three I's case, the CEO has around 700 million. So, you know, incredibly well aligned to that. Yeah, there's plenty of reasons why, you know, we wouldn't love it in a few years.
00:28:46:14 - 00:29:06:13
Stephen Anness
One would be if we fill the valuations up with events, two something changes in the thesis. You know, we will we'll we'll sort of set it and move on. Yeah. Let the research we find other ideas.
Ben Gutteridge
I mean, like the risks in that sort of aggressive store opening, plan, you know, but I guess you saying they get they get paid back, pay back pretty, pretty quickly.
00:29:06:13 - 00:29:30:12
Ben Gutteridge
But yeah, it's quite intimidating level of growth. You're sort of they're they're looking to achieve.
Stephen Anness
It is and that is that is fair I think though what gives us, comfort is that they're not trying to grow really anywhere they have and they're trying to grow in Europe. And they, they've got at least footprint in most European nations.
00:29:30:13 - 00:29:49:14
Stephen Anness
The economics of the stores have got better over time in terms of. Yeah. Because actually, yeah, that, that the sort of recognition of the brand and what an Action can do, to, you know, for consumers, helps you and, you know, open a store and, and also, frankly, they get better times from landlords because they're a good, you know, really good footfall driver.
00:29:49:15 - 00:30:10:03
Stephen Anness
So look, I, I don't think the pace of growth is necessarily any different to that. The Chiefs in the past, in fact, it's a bit slower as a sort of percentage. Agree there. Yeah. The sort of logistics of opening that many stores. Yeah. It's it's probably quite challenging, but they seem to have managed it well. And what they're not doing is a sort of a huge the public.
00:30:10:03 - 00:30:30:10
Stephen Anness
I think one question mark would be, you know, if they open in the US, you know, the US market has been a bit of a graveyard frankly. The UK retailers over time trying to open. And so, you know, I think it's fair to say, you know, despite what is an incredible management team, it's really you know, is that something that we would be.
00:30:30:11 - 00:30:47:08
Stephen Anness
Slightly you know nervous conscious of. Yeah I think that's fair. But I think, you know, we have to trust the management team to do the work and see if that's something that they want to do. It's only yeah, it's a discussion points at the moment rather than a firm plan. But yeah, I think that's, that's definitely something to worry about.
00:30:47:08 - 00:31:13:05
Stephen Anness
But the the European rollout. No, it's not something I worry about to be honest. I think they've got they've obviously got a process and it works super well.
Ben Gutteridge
Well another stock that I wanted to talk to you about. Love the long term holding Broadcom. But we can come back to that a little while I just want to cover off a couple of other sectors health care and energy healthcare like not as a game from a macro perspective sort of been notably weak I guess some big stocks in amongst it, driving that sector underperformance.
00:31:13:05 - 00:31:29:05
Ben Gutteridge
You know, the sort of the GLP one sort of, I guess, sort of disappointments of Novo. I mean, I what is what are you seeing in health care and how are you feeling about Novo at the moment?
Stephen Anness
Yeah, I think health care broadly, I mean, there's a lot going on here, as you say. Yeah, I think a few things.
00:31:29:05 - 00:31:54:02
Stephen Anness
Firstly, you know, health spend in the US as a percent of GDP, which probably went up for 40 years, is sort of stagnated for the last bit of time. There's pretty consistent price pressure on on drugs now. And I think yeah, then the market has realized that actually many of these pharma companies on defensive growth as sort of defensive growth for a period of time, and then they lose exclusivity, profitability evaporates.
00:31:54:02 - 00:32:20:01
Stephen Anness
And and actually, it's a really hard business to reinvent yourself every ten years or so, depending on your life cycle. I think, of course, you know, we've seen with the, the new administration in the US to focus on on potential most favored nation clauses. And if anybody doesn't know that, that would mean you should rebase price in the US to basically the lowest price that you charge customers anywhere else in the world, which which would be an enormous hit to profitability.
00:32:20:02 - 00:32:45:00
Stephen Anness
So there's a lot of risk and a lot of uncertainty out there in the pharma sector at the moment. But yeah, look, that that probably makes it potentially an interesting hunting ground. So we're dedicating a little bit more time, on novos which is pretty much the only healthcare stock in the portfolio. And we bought into that at the back end of last year.
00:32:45:02 - 00:33:14:00
Stephen Anness
And I would say that mixed so far. I think the data has been okay on the pipeline. I'd say the market overreacted to the category seven data in December. You know, there are some other assets coming through the pipeline, but it's it's it's a it's a tough, period for novos, I think they have lost some ground to, to Eli Lilly in terms of the sort of ongoing commercial ization.
00:33:14:02 - 00:33:35:04
Stephen Anness
But then Lilly trades on around 40 times earnings and novos trades at about 16. And, you know, novos is still a very significant player in waters at the moment really a global duopoly and a highly profitable one. So my my suspicion is over time there will be they'll, you know, they'll sort of leapfrog each other a bit in terms of new products.
00:33:35:05 - 00:33:53:05
Stephen Anness
But, you know, I think the market is doing what the market often does in focus on the very short term rather than the longer term outlook for, you know, growth in this industry and growth in this business. But I do understand at the moment there's quite a lot of uncertainty. And that's why I think novos is underperformed.
00:33:53:07 - 00:34:20:13
Ben Gutteridge
So what what was what is the market focused on. What are the what is sorry. Because the results did seem to provoke quite a negative reaction. And, what do you think that was sort of unfair or, or were the results not as negative as they sort of were interpreted to be?
Stephen Anness
Well, I think I know I, I can't remember the exact numbers, so I will just generalize to like Yelp ones were like, yeah, the problem there it was the calculation of data that came out in in December.
00:34:20:13 - 00:34:44:06
Stephen Anness
I you know, I can't remember exactly now, but I think the market was hoping for, let's call it 25% weight loss. And I think they came in at 23. And you know, this was off a baseline I think of people who want average. Wait, I think it was 112 kilos or something like that. Now I, I'm just not sure that the difference between 23 and 25 in that scenario is, is that important?
00:34:44:07 - 00:35:15:05
Stephen Anness
You know, people were still successfully losing weight. The health outcomes were good. The side effects were very tolerable. And, and so I think to assume or to sort of put the multiple and the valuation of, of Lilly relative to novos. Yeah. Yeah, yeah. To, to to stand where we are today to me seems very significant when you know, as I say, know versus all the other other products in the back pocket as well.
00:35:15:05 - 00:35:37:13
Stephen Anness
This isn't as if, you know, this is this is it for them. Yeah. There are other products and they have proven in some ways over time to, to be able to generate new, new, more efficacious and more tolerable products in this broader area. So, yeah, and there are some potential sort of right tailed options in terms of, you know, other health benefits from some of these drugs as well.
00:35:37:13 - 00:35:56:10
Stephen Anness
So, like, I think I think the jury's out when, you know, we, we, we, we, we very much believe in the company. And we believe in the valuation, but we have to be blinded to the fact that, you know, this may evolve in a way that we hadn't hoped it it might. So I'd say, yeah. Okay.
00:35:56:10 - 00:36:24:12
Ben Gutteridge
Well, let's move on to, energy stocks, a source of, a a popular source of income for global equity income fund managers. Not obviously for you, however. And of course, we talk about this during a period of great unease in the Middle East and building, risk premia or, in the oil price, you know, prices starting to move a little more aggressively, although we note, actually, the time recording on, what are we?
00:36:24:12 - 00:36:42:04
Ben Gutteridge
Monday, 23rd of June actually has come off the top a little bit. Nevertheless, the news is still troubling. But I mean, how are you? I mean, sorry, this is sort of anecdotal rather than supported by any data. I would always sort of suggest, like building portfolios or investment strategy around geopolitical risks would have been like a poor approach in the past.
00:36:42:05 - 00:36:58:10
Ben Gutteridge
I would, I would suggest, but to what extent are you thinking about these things not only as a rich source of income, but as sort of a hedge against some of these geopolitical challenges? The present law?
Stephen Anness
I think you've described it well, look, we have a position in the energy sector. We've thought a lot about that.
00:36:58:10 - 00:37:23:06
Stephen Anness
So we have a low cost provider in a geopolitically, safe region, shall we call it? Yeah. The yield on that equity is about 9%. So it does provide us, you know, some very nice, income. And, you know, it does provide us a hedge, you know, for for rising oil prices. I think.
00:37:23:07 - 00:37:55:09
Stephen Anness
Going beyond that, though, is hard. You know, the issue is, you know, most of these companies don't grow very significantly. And I'm not just talking about the longer term threats to the industry. I'm sort of, you know, in terms of actual production growth. Yeah. Compound that over time is hard for these companies. And of course, their price takers of the oil price, which is dependent on, on, on, on OPEC and, you know, on US production and, and so we've never really wanted that much exposure to, to the industry on the basis that it's not really in control of its own destiny.
00:37:55:09 - 00:38:27:11
Stephen Anness
But, you know, in certain circumstances, I think having some makes makes some sense. And, and that's what we've done. So actually, in the last couple of weeks, you know, as you mentioned, you know, we're talking at a time of very heightened geopolitical risk. You know, that's been really helpful to the portfolio to have some. But I think, you know, with the oil price, you know, as it is today and and the shares having outperformed, you know, handily over a couple of weeks, you know, going back to what we talked about earlier in terms of potential turnover rates for the fund, you know, might that be a source of of of capital to reinvest elsewhere
00:38:27:11 - 00:38:49:13
Stephen Anness
in the portfolio? You know, given the given the relative strength between oil, you know, energy related equities and others, it's been quite stark. Yeah, that might might be the case. But I think, yeah, as a, as an income providing hedge, it's it's been a good place to be.
Ben Gutteridge
I love not not necessarily doing it aggressively, but it's interesting that you're in a position where you're thinking about that maybe or have done that.
00:38:49:13 - 00:39:06:12
Ben Gutteridge
Buying US stocks on weakness and selling energy at this, this moment where lots of people would be sort of looking the other way, almost sort of in a, in more of a herd like mentality. Right. One off, close out because conscious of your time crunch your audience time on Broadcom which has been another long term favorite of yours.
00:39:06:12 - 00:39:24:05
Ben Gutteridge
And again you know congratulations I'm not just bringing it up because you've done so well out of it. But obviously it's one of the key actors in this AI theme that lots of people are positive on, lots of people worried about. I mean, I, I don't know what you want to say, say on this what, what you might want to say about this stock.
00:39:24:05 - 00:39:50:10
Ben Gutteridge
But from, from my perspective, you know, you just sort of look at the ferocious pace of CapEx that's being applied in this area and the repeated calls from analysts that, oh, this is the year of monetization. And obviously that that's, actually does need to be this year or indeed next year. But ultimately, the businesses who are buying all of these AI services infrastructure would need to make start making material money out of it, given the amount that's being invested in this space.
00:39:50:10 - 00:40:14:00
Ben Gutteridge
And so you sort of worried about like that not happening soon enough and sort of some CapEx cliff materializing, all very high level, no specific companies I've referenced there. Maybe I'm way off, but, I mean, is that something that you you worry about?
Stephen Anness
Yes. Look, we worry about you being polite. Oh, no no no no no no, it is a worry for sure.
00:40:14:03 - 00:40:37:05
Stephen Anness
I would say though, things probably are evolving quite quickly in this area. And I would say if you and I had had this conversation, maybe towards the back end of last year, I would say, look, it feels like there's pretty scant evidence of of enterprise adoption. So I think there were lots of a lot of consumer adoption and lots of people using chancy things.
00:40:37:05 - 00:41:00:02
Stephen Anness
But I think, you know, you really need enterprises to sort of really pick it up and run with it. And I think that's one of the things I have to say that has changed a lot this year. Yeah. Anecdotally, when we meet companies, they're talking about it more, some of the surveys that we, we see and these are from, interviews with, with, with CIO is not, not chief investment officer, but information officers.
00:41:00:03 - 00:41:32:04
Stephen Anness
And, you know, you can see that a lot of those companies are talking about AI now getting adults into the business, writing reports, helping to the bottom, deep was one episode of manufacturing, you know, an increased levels of automation, I'm sure you've seen. And our listeners, would have seen the, the news from Microsoft even, you know, talking about taking out a number of software developers because I sort of writing its own code now, if they're doing video localization, for, for adverts, for instance.
00:41:32:04 - 00:41:55:00
Stephen Anness
And of course, you know, the advent now of, of, of a greater level of sort of customer service, reps, you know, being, being, you know, fully utilizing AI, for instance. And I think so I think that's the reason I think there's been a big change actually, in the last six months. And like in Broadcom's case, for anyone else and I Broadcom makes, what I call custom sector application specific chips basically.
00:41:55:00 - 00:42:20:13
Stephen Anness
And so if they are a cheaper version of of chips. So rather than a GPU which can do everything a custom, it has a relatively narrow set of things it can do. But it does that super efficiently and very well. And so I think over time what we'll what we'll see is, is, is, is a greater proportion of the spend moving to custom A6 away from, away from GPU.
00:42:20:14 - 00:42:41:07
Stephen Anness
That's not to say all spend will reduce. I'm just saying the proportion of it and I think know Broadcom is is very much at the sort of at the head of that as, as an industry leader. And so we would expect them to benefit. And I think the other point is, you know, from Broadcom perspective, around 50% of the businesses is, is some sort of critical software that they do 30% sort of AI.
00:42:41:07 - 00:43:06:01
Stephen Anness
And the new custom A6 than 20% broadly is sort of legacy semi. So it's not just an AI theme thing. There's other things going on. There's also a fabulous CEO who's used to the lower value over time. So sorry, slightly sort of longer broader answer. But I do think to a question things have changed actually, and I think there is a greater level of enterprise adoption, which should drive, monetization.
00:43:06:01 - 00:43:28:04
Stephen Anness
Now, you know, whether industry CapEx levels can keep growing at the rate they have. I don't know, I think there's evidence definitely from from some of the major hyperscalers and spenders that they are trying to sort of, you know, slow the trajectory of that spend for sure.
Ben Gutteridge
Okay. Well, brilliant. Stephen, I if we if I may just to round out then just with I said I'll give you a sort of last question.
00:43:28:07 - 00:43:49:09
Ben Gutteridge
Here comes another maybe it's a two parter. I'm just sort of want to know whether that's being sort of careful how we articulate this. But if you're feeling in a bullish mood and then other than, you know, your volleys, what are the greatest risks, on the horizon?
Stephen Anness
Look, I think, I'm certainly less bullish than we were in April.
00:43:49:10 - 00:44:10:11
Stephen Anness
Let the markets bounce back very strongly. We have a number of things that we used to what I would say take the temperature of the market. So just looking at valuations, credit spreads, sentiment, valuation spreads within sectors. Look, it's super dope. I'd say all of those at the moment. Almost as flat to neutral as I can remember.
00:44:10:14 - 00:44:30:13
Stephen Anness
The market is not really offering up. Maybe other than health care, which we which we touched on. That's the obvious sector where there's a lot more contention at the moment. I would say generally beyond that, there isn't that much contention at a sector level. So, look, you know, we're only trying to find 40 companies globally that we really like, and we're still very happy with what we can do that.
00:44:30:13 - 00:44:57:07
Stephen Anness
But I would say it's a really interesting time in the market that. Yeah, look, it is not yeah. The market's not pushing you to do anything, particularly from a sort of, a sector or factor standpoint. As I say, it's pretty neutral out there. So we're really just focusing on the company fundamentals and trying to identify which companies we think are likely to outperform expectations over the next couple of years and really sort of, bulk up the capital behind those.
00:44:57:08 - 00:45:18:04
Ben Gutteridge
Okay. Well, Stephen, I will let you go. Now. I really enjoy these conversations. Always very insightful. Some novel angles as well, touching upon market structure and such. And, yeah, a nice summary to to finish sort of suggests, there's not many gimmes and it's all sort of down to a bit of bit of hard graft in the process that's going to add the value from here.
00:45:18:04 - 00:45:36:03
Ben Gutteridge
So thanks very much. Stephen. And of course, conscious of our listeners, time to thank you so much for spending the time with Stephen and I today. I hope you've enjoyed it sufficiently that you'll be back again, in August for our follow up. Time in the market to podcast. Maybe you'll even leave a review. Post this, post this interview.
00:45:36:03 - 00:45:55:04
Ben Gutteridge
Those do be kind. In relation to any comments. And Steve, we just have a very fragile, self esteem issue. But, to our listeners, thanks very much for joining us. If you have any follow up questions, please out to your, reach out to you, investigate relationship manager or myself on LinkedIn. Other than that, I hope you can join us again next month for a follow up time in the market podcast.
00:45:55:04 - 00:45:57:13
Ben Gutteridge
But other than that, from Saving and Goodbye.
00:46:00:14 - 00:46:27:09
Ben Gutteridge
Listeners should be aware of the following investment risks. The value of investments and any income will fluctuate. This may partly be the result of exchange rate fluctuations, and investors may not get back the full amount invested. Other important information for listeners. This podcast is intended for UK professional clients only and is not for consumer use. Views and opinions are based on current market conditions and are subject to change.
00:46:27:10 - 00:46:56:02
Ben Gutteridge
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset, class, security or strategy. Regulatory requirements that require impartiality of investment or investment strategy recommendations are therefore not applicable, nor are any prohibitions to trade before publication. Issued by Invesco Asset Management Limited. Perpetual Park Perpetual Park Drive, Henley on Thames, Oxfordshire.
00:46:56:03 - 00:47:08:03
Ben Gutteridge
RG 91HH UK. Authorized and regulated by the Financial Conduct Authority.
