Speaker 0:
Sam European funds have been out of favour in recent times. Why should investors take another look now? Well,

Speaker 1:
I think expectations in the region are low, and that is reflected in very attractive valuations. And actually, you've seen what that can mean for investment returns relatively recently. If you looked at the fourth quarter of 2022 Europe led the way up up in the markets, uh, in the global markets. And

Speaker 1:
the year started very strongly for Europe until we saw the, uh the recent volatility following the, uh, Silicon Valley bank, uh, bankruptcy in the US. But we think, um, if we looked at the last market cycle, Europe struggled. I think because

Speaker 1:
the makeup of the index perhaps wasn't what investors wanted, which was, uh, more predominantly a market cycle led by tech, for example. But we think actually Europe is the the next market cycle may well be different, and Europe has stands a very good chance of doing well in that. I would say though, that you know, we invest in European small caps and the returns from European small caps since 2009 have compared very, very favourably with their global counterparts. And we think that's because

Speaker 1:
you can buy great, uh, niche businesses, market leaders at a European discount in European small caps. And that can lead to great long term performance. And we expect that to happen in future. You know, Europe is attractively valued, and it contains some great businesses, particularly below the say, the 10 billion market cap level.

Speaker 0:
Sure, but it has been such a turbulent time. How are you? How are you navigating that?

Speaker 1:
Yes, so the I mean, the last month has been really interesting. The failure of Silicon Valley Bank, the bailout of Credit Suisse by U B SI mean it brought back memories of, uh, the the financial crisis in 2009. But we we we don't think that's the case. We think, uh,

Speaker 1:
regulation is much stricter. Banks balance sheets are much stronger, and particularly in Europe, the deposit bases are much stickier. So we don't think there's going to be a recurrence to that. Nonetheless, at the outset of the crisis, we did reduce some exposure to our financials. Um, but overall, the trust has navigated that last month. Very well, actually. I think the NAV was po positive against the market that fell so relatively we did well, um, I would also say that

Speaker 1:
while volatility can be unsettling, actually, we like to embrace it because it gives you the chance to buy some or add to great businesses at great prices. So as the market fell during the month, we looked at some of our relatively new positions. Some of our businesses that maybe got caught up in that sell off, um, and used the opportunity to add to them

Speaker 1:
and in fact, add a bit of gearing during the month. So volatile, Yes, but volatility provides opportunity

Speaker 0:
interesting and and happily, that headline yield is is very attractive. But how is it achieved? What is the split between capital and

Speaker 1:
income? Yeah. Um, so we pay out 6% of the year end N e v to shareholders in four tranches through the year. Yes, and you're right. It's, um, a combination of capital and income,

Speaker 1:
I think. I think since I've managed it, it's been about a third, uh, income from capital returns in the portfolio and two thirds capital. Um,

Speaker 1:
and I think it's important to say, you know, the reason why we do it is because we think we can grow the market, grow the NAV through the market cycle while paying out the, uh, that dividend. So you get a good long term growth and attractive dividend yield.

Speaker 0:
Interesting. Thank you. Um, tell me a bit about your investment style.

Speaker 1:
OK, so we like growth quality companies. Um, and these were very clear on what that means. They have to be cash generators that generate a return on capital above the cost of capital on an enduring basis and be supported by a strong business model. The wide moat that protect, um, those returns from competition, uh, competing away the profits.

Speaker 1:
Um, we'd like them to be run by managers with, uh who have strong track record of capital allocation are incentivized properly. I think in small caps, it's particularly important because the capital allocation decisions of managers, uh, will have a relatively quick payback, unlike large companies, But we're also very clear that,

Speaker 1:
um, we want to have valuation discipline. You know, we think value the the price you pay for an asset is an important part component of the returns. Um, so we have a you know we like quality growth businesses, but we have a valuation discipline as

Speaker 0:
well. And And what about the themes that the investors are exposed to with this trust?

Speaker 1:
So we like we've got some long term growth themes, as you would expect so health and wellness, um, sustainability,

Speaker 1:
uh, emerging, uh, growth and digital transformation. They've been long standing themes in the portfolio,

Speaker 1:
but we've also augmented that with emerging themes because,

Speaker 1:
you know, each market cycle is different, and we see, uh, different themes emerging through this market cycle. So the obvious one is, uh, energy security, where we've added a couple of stocks. But also

Speaker 1:
another theme is, uh, automation, which is becoming more pressing because of the labour market shortage and more near shoring of supply chains following the sort of supply chain crisis we've had in recent years. So long term themes augmented with themes we think are going to work in this market cycle.

Speaker 0:
Absolutely So the role of B, the the Investment Trust Board, has obviously been very much a theme this year,

Speaker 0:
Um, which is no bad thing at all. But from your perspective, in terms of managing a closed end fund What do you think the main advantages are?

Speaker 1:
Well, I think I think the the main advantages are are really sort of perfect for smaller companies where

Speaker 1:
liquidity is, perhaps not quite as, um, easy. Well, certainly not as easy to get as large companies and with with with a closed end vehicle. You don't have the daily flows of, uh, redemptions or inflows that you might struggle with with a open ended fund so you don't have the daily liquid

Speaker 1:
concerns, which means you can really back small businesses for the long term. So it's a perfect vehicle for smaller, slightly less liquid companies. The other attraction is, um, well, another attraction is the, um, ability to gear the portfolio and gearing through a market cycle will add value.

Speaker 1:
And then finally, I think the corporate governance is is really important. You mentioned the board. You know, an independent board that that that that keeps us honest, is absolutely key and looks after the shareholder is absolutely key. So those are 33 advantages off the top of top of my head. So it's

Speaker 0:
a structure that keeps you on your toes, basically exactly, um, for all the right reasons. Um,

Speaker 0:
so going back to your style as an investor, in terms of recent purchase, you've been talking about gearing, which is really interesting and another huge advantage of a structure. But could you give us an example of a recent purchase That kind of encapsulates your style and what you're trying to do with the

Speaker 1:
trust? Yeah, So we want to have great long term growth businesses and

Speaker 1:
market leaders as well. And and despite operating in the smaller companies field, you know, you there are many many of these companies. So a good example is a, um, Swedish business called, which makes something called a tilt rotator, which is really the, um, the wrist that goes on the end of an excavator arm before the digger bucket. And it allows the digger to,

Speaker 1:
uh, turn that 360 degrees and tilt at 45 degrees. Um, now, why is that important? Well, it's because it improves the productivity of an excavator or a digger. You need less fuel, less diggers and less, uh, less, uh, workers to, um

Speaker 1:
uh to do the same job with one of these, Uh, if you if you integrate a tilt rotator. Now in Sweden, 90% of excavators use one of these, but outside of Sweden it's between two and 5%. But the penetration is growing, and Scot has 45% global market share in this. In this product,

Speaker 1:
they're the technology leader. So we think if I mean we don't think necessarily that the world's going to move to the Swedish model. But if it gets anywhere close, the revenues on this business are going to go up multiple times over the next 10 years. And and we think that's just a great example of a European business that is a global leader in a product that is going to grow very strongly over a long time frame.

Speaker 0:
It's also a really good

Speaker 0:
example of active management, isn't it? And and purposeful active management as well. It's It's a super tangible, albeit niche theme, isn't

Speaker 1:
it? Yeah, absolutely. I mean, that also plays into the, you know, the automation theme, you know, sustainability. Um, getting more out of the assets that you have to to improve your environmental footprint, Um and yeah. I mean, it's just a good example of European smaller companies where

Speaker 1:
you the perception on Europe is sometimes different from actually when you you look below that into the individual businesses and I. We've got many examples of great businesses in smaller companies that are global recognised brands. For example, earlier on in this year, because they fell into our market cap level, we were able to buy to contro and kaa, both

Speaker 1:
global brand with fantastic long term heritage. But sit within European smaller companies. Yeah,

Speaker 0:
it's interesting. Do you think now is a good time for active managers?

Speaker 1:
Yeah, I think

Speaker 1:
I think hopefully we because clearly the last market side, we had a interest rates, played a massive role, liquidity and played a massive role. And maybe there wasn't as much differentiation within that between the the good businesses and not so good businesses it floated. You know that that that liquidity floated all boats. We've clearly been through a year where liquidity has been taken out of the market and who knows where interest rates are going to go. But but, um

Speaker 1:
maybe more destructive capital. Um, well, capital creative capital destruction is is going to happen. And maybe the winners and losers, um, become more apparent. So within that environment. Hopefully, stock picking will will be more important.

Speaker 0:
He said. He knows where interest rates are going to go. But But come on, get get your crystal ball out for me. And in terms of the the equity outlook, how's it looking?

Speaker 1:
Well, I mean, the starting point is, valuations look very, very attractive still, you know, relative to history, within Europe, they're attractive, but certainly relative to the world. And the US in particular Europe looks very attractive. Um, you've recently also had sort of the European Central Bank reducing their interest rate expectations and increasing their economic expectations, which has been supportive. Uh, supportive backdrop. Um,

Speaker 1:
and you you you don't You don't quite have the tight labour markets that you have in the US. So maybe interest rate rises aren't going to be, um, AAA as big an issue. Um, so look, the starting point is good, but look, I'm not a macro econ economist. I'm not a strategist. We

Speaker 1:
we go out and find great businesses and invest in them in for the long term with the belief that that will deliver good returns for shareholders. And you know, the volatility over the last year has created a great opportunity, and and that should lay the foundation for,

Speaker 1:
um, good long term returns. You know, the companies I've talked about are great examples which should deliver some really strong capital growth over the next few years.

Speaker 0:
And your shareholders have been lucky to have a long serving manager. You've managed this trust for for a long time, over a decade, I think, by my reckoning.

Speaker 0:
So what have been your your your highlights and your low lights over that day?

Speaker 1:
I guess we've had some great years and some not so great years. So, you know, I think clearly it's challenging when you don't have a great year like last year. You know, our our style was out of favour. So we underperformed versus the market. Although this year we have,

Speaker 1:
uh, you know, we we're clawing that back and having a better year year this year. So I think, but the key is during those difficult periods is just to, you know, rely on the process, rely on the fundamentals of and the philosophy and the process and and not get, um,

Speaker 1:
despondent at at at at difficult times. But they also don't get too euphoric at good times. Go back to the process. If you stick to that, then the long term to return should look after themselves. And, you know, so buying great businesses at at fair prices will deliver good good returns over long term.

Speaker 0:
Absolutely. It's It's still quite a small sector, isn't it? European sectors? Does that surprise you?

Speaker 1:
Um, well, in terms of Europe, smaller companies in the sectors Um, well, I think, as you've alluded to Europe hasn't exactly certainly, in the previous market cycle been the sort of flavour of the month. Um and, you know, I think that's probably a reflection of of what you say. It hasn't necessarily been the easiest environment, I think, for new companies to to, uh, to raise capital either. So no, it doesn't surprise me, you know,

Speaker 1:
in the next market cycle, let's see what happens. Let's see how how, uh um you know, popular Europe becomes, and maybe that changes. But we're we're very happy sitting in a a small sector, um, of very, very interesting businesses.

Speaker 0:
And what's the ratio of private investors to institutions in terms of your shareholder base? What? What does it look like

Speaker 1:
that's a good

Speaker 1:
Unfortunately, I'm gonna have to pass on. I think

Speaker 0:
it tends to be sort of 50 50

Speaker 1:
I think investor base and institutional.

Speaker 0:
And at the a g M. Do you tend to get many private investors coming to say hi? Yes,

Speaker 1:
we I mean, I guess it's part of the the fun of managing a investment. Trust is seeing the same faces year after year.

Speaker 1:
Um, long term long term supporters, always with, uh, interesting questions coming from far and wide. Um, And what is the current gearing? So the current gearing? We're about 2% at the moment, so it's not significant. But I mean, we we started the year flat, and we slowly built up as

Speaker 1:
the market has been through its wobble. And we're looking to looking to build that up further. Um, if any more volatility comes through, But, um, but we you know, we

Speaker 1:
we we think, given what's happened over the last year to to markets, um, that there there is opportunities out there and we're looking hard at our watch list, you know? So,

Speaker 1:
for example, during covid was another good example where the portfolio turnover increased quite markedly. But that was because we felt we got this great opportunity to buy some great businesses at really, really attractive prices. Because the volatility, because of liquidity made it sort of pushed some shares to really attractive levels and took advantage of that and that delivered some good performance over the ensuing

Speaker 1:
a couple of years. And then, you know, this this year and over the last year, we've also taken advantage of volatility to add some great businesses. So we would say that the portfolio sits in in a good position in terms of the composition of companies. Um, but the our watch list is very active, and, uh,

Speaker 1:
and we will We will look for any sort of weakness there to add add those companies to our portfolio.

Speaker 0:
So we've got a couple of minutes left. So, um, how high would you go with gear in? Where's the hard stop?

Speaker 1:
Um, that's a good question. I think we, you know, get to 10% and then then reassess. Um

Speaker 1:
um, But, uh, you know, we we could go to 20%.

Speaker 1:
Um, but I think I think to get to those levels, we'd have to see some serious volatility in the market to sort of

Speaker 1:
because it's it's gearing is not necessarily a,

Speaker 1:
um, a reflection on our view on market direction because you actually trying to predict market direction is not easy for us. It's more a reflection on

Speaker 1:
individual stock opportunities. And if we get lots of opportunities, we want to Hoover those opportunities up and we don't, you know, going back to your the Gearing point. An open ended fund might have to make a decision to sell some companies to fund those new ideas. But with with a closed ended ended company an investment trust, you can fund those ideas by increasing gearing. So

Speaker 1:
if we got lots of opportunities, great businesses at great prices, we would, uh, you know, use that to add to gearing. And that's how we see, uh, see, gearing, uh, the use of gearing in the trust

Speaker 0:
Absolutely. Thanks so much. Thank

Speaker 1:
you.