Speaker 0:
Hello and welcome to Asset T V's Masterclass with me, Mark Colga. Today we are looking at the outlook for European equities. It's a market in the round that hasn't been favoured by investors. They preferred the US as a centre of growth and innovation. But is that really fair to discuss that? I'm joined here in the studio by Gareth Rudd, he's co manager of L European Select, and by Oliver Collin, co head of European equities at Investor

Speaker 0:
Oliver. Let's start with you tell us a little bit about the fund that you're responsible for, uh at and and how do you go about running that Europe UK mandate?

Speaker 1:
So in terms of the onshore products that I run, the the key one is a European equity income strategy. It's around about 350 U. M. At the moment and around about a 50 stock portfolio, I think if you were to look at the fund from a a style perspective, it it screens looks like a value fund,

Speaker 1:
but I don't think we really identify with value, so to speak. What we're doing is trying to identify a mispricing, a fundamental mispricing in the marketplace, which we see as simply put transition.

Speaker 1:
The market doesn't transition change particularly effectively. And that means great businesses are assumed to be perfect forever. And likewise, businesses that are maybe challenged in some way in the short term are presumed to stay challenged, and we want to exploit that opportunity in the marketplace that leads to a value outcome.

Speaker 0:
Um, thank you, Gareth. How how are you running the money? So, um,

Speaker 0:
Charlton Europe UK. Um, it's an all cap strategy, but it has, um, a small cap bias. We've got around 75% of the portfolio in small and mid. Um, it's a very cash flow analysis driven process. Um, we think the biggest inefficiencies in European markets are at the smaller end.

Speaker 0:
We think two has removed a lot of coverage. Um, and we think that, um, just a preponderance of large quality growth for the last decade in Europe with, you know, cheap money and low inflation, um, has led to a lot of the, um, larger kind of names performing extremely well, and this has left a real opportunity to be invested in smaller companies. Um, we have just under 200 million EU m and, uh, around 70 Portfolio

Speaker 0:
and, uh, just you both have touched on the fact that the world feels like it's really changed from, uh, you know, with with with what's been going on with interest rates and this sort of flick away from, perhaps growth back to value. So just just picking up on that, um, Oliver, are you? I take your point valuations that the thing rather than being a purist about a value player. But are you beginning to find some of those what would have been seen as growth stocks two or three years ago? Are they beginning to,

Speaker 0:
uh, appear on your valuation screens now, or are they still expensive?

Speaker 1:
Uh, that there's horses for courses to a point. There are. There are there are stocks that I would suggest are still priced to remain, and they will excellent for a long time. And I would argue that they're still caught up in relatively expensive valuations and possibly haven't reacted to the change in macro policy. The fact that interest rates can rise rather than just

Speaker 1:
um, as Gareth said, be on a singular sort of downward trend, which is obviously positive for asset prices.

Speaker 1:
I would agree with you, though, that in terms of how we think about stocks, people often ask and say, Would you ever own, for example, a luxury goods stock? Or would could you ever see myself owning a business like S M L, which is a great global monopolist? The simple answer is yes, but it's about the transition. So if there is a structural change, that means that those businesses are not on a singular path and are not priced for that to continue. Then we would look at those

Speaker 1:
as things stand. We're not finding the opportunity in those spaces at the moment.

Speaker 0:
And Gareth, I mean, you talk about the import cash flow, and I I want to get from both of you. If times are a little bit

Speaker 0:
bump here at the moment, can you give us a bit of a sense of on your portfolio of of what the balance sheet strength is of of, of companies? How cash generative are they? How How reliant on debt? Um, you know, as we said, it's a very cash flow, um, driven process. Uh, the other. The other point to make is, um you know, we we're very averse to debt. Um, we think as as public equity

Speaker 0:
investors, and you don't want to be the kind of lowest ranking stakeholder. And we don't think crucially that you need to have a lot of debt on your balance sheet in order to perform. Um, so for our portfolio at the at the aggregate level, we have we have a hard rule that it must have materially lower net debt to you but, uh, than the market. And at the moment, the portfolio has zero debt at the aggregate level, and and I think this is going to be increasingly important.

Speaker 0:
Um, you know, after we've had this period of low interest rates really cheap money, Um, I don't think we've seen, you know, the real knock on effects of that, particularly in smaller companies. I think the balance sheet is really, really important. Um, and our smaller companies at the aggregate level sub two billion have actually got net cash, But I don't I think that a lot of businesses have turned out their debt like people have taken cheap mortgages.

Speaker 0:
When that rolls off, the debt financing costs are going to be much higher, and I don't think we've really seen the start of the issues there yet, so I think that's that's going to be a really important factor. Do you have a year where you think this the cheap, the cheap debt becoming expensive debt starts to hit? Is it a 2024? 25? It's too. It's too difficult to kind of see specifically. Well, I think 24 is going to be a really bad year.

Speaker 0:
25 is going to be a really bad year. Um, I think you've got to look at the individual companies. You've got to see where they're turned out to, and you know where the big where the big pinch points are. But for sure, you know, banks are tightening their credit terms, you know, the the whole, you know, our central banks squeezing too hard. And now now the issue with the kind of banking crisis wobble that we had in March and again, you know, like

Speaker 0:
at the start of this week, the first republic, um, being rescued. Banks are definitely tightening up their their credit, and, uh, that will be an issue, you know, they're they're arguably going to be doing the central bank's jobs for them. Thank you,

Speaker 1:
I was going to say, in terms of small midcap investing where the balance sheet is incredibly important and the cash flow is incredibly important. The way I've always sort of thought about smaller midcaps is that the the their speed boats, things can happen very quickly and and exciting things can happen, which is the opportunity

Speaker 1:
in income investing. I would argue that exactly the same principle applies for the same reason we as income investors need those companies to be supporting those dividends, those coupons to pay us the income. And if they're masters to their balance sheets, masters to their creditors,

Speaker 1:
that stops their ability to be able to guarantee payment to me or to us the the income shareholders. So actually, I think an income strategy and a small midcap strategy, or with with a bias towards them

Speaker 1:
has has the similar default, which is the balance sheet. Strength is absolutely crucial because you can have the best free cash flow companies in the world. But if your balance sheet is your master, that doesn't come to us either. In terms of the ability to reinvest and grow and or the ability to pay dividends or even buy backs to their shareholders.

Speaker 0:
Yeah, it's a it's. As I said earlier on You are the lowest ranking, basically as an equity holder, so you know policies will be dictated by your higher ranking stakeholders. So if it's debt, yeah, you won't be paying your

Speaker 1:
dividend and mark. I think it's to your earlier point about the valuation of the marketplace, because we we've been in a world where there has been asset growth. It it it, frankly, didn't matter whether you own bonds, equities, wine, fine art, classic cars own something,

Speaker 1:
and it's gone up as a consequence of the rate cycle

Speaker 1:
that's led income strategies, for example, to become accumulation strategies where obviously they're getting the asset growth and they're funding their dividend by selling units by by asset growth and performance.

Speaker 1:
I'm not convinced and we, as a team at investor in the European team, aren't convinced that that that transition is fully appreciated yet by the market, that we are genuinely and and unequivocally we believe in a in A in a world of new policy and change of policy to what we've become used to for more than since the G f C. But more like 20 years or frankly, our careers.

Speaker 0:
No, you're both stock pickers. I'm not going to ask you to sort of make massive macro predictions. But equally when you're testing the thesis you have on stocks, you must philtre through sometimes better case scenarios, sometimes worst case scenarios. So when you you know we've talked, we've sort of implying tougher economic times. More of the money that you make as a company will be going on debt repayment. If you've got debt,

Speaker 0:
what sort of length of period do you see it staying bumpy for Do do you factor in six months and the world's better two years? What? I mean, what what's your sort of gut feel as to as to how stressed your stress test should be on? I think you know, it's easy to hide behind. I'm a salt picker, So I I don't I don't do any macro. I don't do anything. You you absolutely have to marry top down with bottom up. Um, I I think, you know, I think you prepare for

Speaker 0:
tough times. I think you you prepare for tough times being spread out. You know everyone. Everyone's suddenly an interest rate cycle expert, and they're saying we're going to get a pivot very soon. Well, it might be next might be next time it might be by Christmas. It might be by next year. We don't tend to get too wound up about that.

Speaker 0:
We tend to look more at the absolute levels and say it is going to be higher for longer. I I don't know what the actual rate is going to be, but it's going to be higher for longer. And you you've got to factor that in and we absolutely do. We do scenario modelling with every company that we look at, we try to do, you know, we we're kind of

Speaker 0:
real sceptics in single point forecasting. We don't we don't think it's We don't think the market is very good at it. Um, has ever been very good at it.

Speaker 0:
Um, So what we try to do is we try to get the direction of travel right by using, you know, best case Central case, worst case scenarios with everything and and that's where you factor in the macro. That's when you factor in higher costs. That's where you factor in margins being compressed for long periods of time for short periods of time. So, yeah, what? What are your thoughts again? If you're stress testing a business model in this environment?

Speaker 1:
Well, I I think there's, um,

Speaker 1:
there are two parts to stress testing a business 11 is business analysis. And if you go back to what I said about, look, we're looking for a transition, and if I think about, you know, a a crass example. But you, If you come out of your home on a sunny day and you have nothing to do that day and you see your car needs its tyre changing, it's relatively stress free. You can change that tyre now. Imagine it's pouring with rain. It's a busy motorway. Your family are in the car, the boots packed and you get a puncture on the side of the road.

Speaker 1:
Well, that's a very stressful situation. You've just got to do the same job. You've got to change your tyre. That's transition.

Speaker 1:
So putting the macro into the model

Speaker 1:
gives a huge indication of whether or not that company is going to be successful in terms of transitioning. So to gas point, it's absolutely vital to put that into the model and have a difference of opinion in terms of the success rate or not of transition. And if the successful transition happens, we will make money. Our unit holders will make money,

Speaker 1:
but there's another part to this as well. That's the valuation,

Speaker 1:
because

Speaker 1:
everybody rightly is concerned about the economic outlook, the credit cycle, credit tightening and and whether or not we go into a global European US, whichever recession that's important, because that affects the P N. L. That affects the ability to generate cash and and those transition stories. But there's another part to it as well, which is the multiple that the businesses are on. And we shouldn't forget. We own companies

Speaker 1:
because we want to make money from owning those equities and the price that you pay relative to the price that you exit. I know it sounds ridiculously simple, but it is how one makes money

Speaker 1:
if you get those multiples wrong in terms of the assumption you're making at day one, because you make a modelling assumption wrong or because you make the modelling assumption perfectly right for your exit. Multiple wrong. You can still lose money on a great investment in reverted Commons

Speaker 1:
and that macro plugging that in and making sure that the exit multiples that you're assuming 23 years out, which is our investment horizon, are the right sort of multiples for the economic conditions that we're dealing with, including policy is absolutely vital. And it's that price discovery point. I think that is the biggest misprice risk. Of course, there's a cyclical risk to it

Speaker 1:
to to factor in. But markets are typically quite good at that. It tends to be the multiple they get wrong, not the earnings number. Well,

Speaker 0:
on that point you have mentioned valuation. So could you get just your thoughts around where you see value in the market? And as I said at the introduction, you know, the US market has roared away over over the last decade. I think it's fair to say in the round compared to Europe, which has been rather left behind, what's the sort of valuation gap that's opening up between those two markets

Speaker 0:
and within Europe? Where are you seeing the value in particular at the moment? Yeah, I mean, we we We talk about value and valuation in terms of free cash flow yield. That's how we articulate it. And and we see, um, the whole the whole valuation of of a stock of a market of you know what whatever level you're at as a trade off between that valuation and the growth that you're getting and we think

Speaker 0:
you know, funnily enough, Warren Buffett got it right when he he basically said, You know, value and growth are inextricably linked. You cannot calculate the value of a business without inputting its growth rate. So we always tend to sort of try to, um, articulate our investments and and where you know where we are in the market. On that fee,

Speaker 0:
cash for yield and growth trade off and to to put some numbers, we think that the European market is on around a 55% free cast for yield for about 5% growth, and the free castel we use two years historic and two years forecast because we actually want to be invested in companies which are profitable and generating cash at the moment.

Speaker 0:
Um, and where that's where that is, versus where it's been for the last five years, which is how long we've been running the fund. It it's about middle. It, you know, the market has been more expensive. Um, it has also been cheaper. Obviously, it's had a higher free cash for yield. But I do think, um, that getting that balance right between growth and value is is is really, really important. I mean, Europe has definitely suffered,

Speaker 0:
um, by having, you know, it's seen certainly externally as having a lot of traditional value sectors. Um, where you've got high levels of regulation, high levels of debt, no growth, and and that has certainly led to you know, this this move away from performance in terms of, you know, versus areas like the US, which have got a lot of high growth companies. But, you know, it's back to Allie's point it. It's really, really important to input

Speaker 0:
the valuation. You know, if you if you pay the wrong price for a really good company, you won't make money. You know, if you if you pay too much for if you if you spend too much time looking at the growth prospects without the valuation without having that valuation discipline, then then, you know, our view is you won't make money and you've been allowed to make a lot of money over the last decade because the conditions have been such that, you know, everything's been going up.

Speaker 0:
OK, get your thoughts on that. I mean, just looking at valuations. I don't know whether you want to tackle it in the round where the market is or you've got some examples of

Speaker 1:
transition and you talk about the free class for multiple. You can. You can, you know, simplify it even more. And and look at the the PE multiple. And I think that, you know,

Speaker 1:
again, you know, over over a 20 odd year career, I think it's been It's not been unusual for the US to be on a significantly higher multiple than Europe, and and I wonder if that end there ends the argument. I do think there are interesting points about growth, though, And what is Growth? Um, and I think it's important to look at the breadth of the market as well, and we we've gone through a period of real concentration in the North American market in terms of the leadership

Speaker 1:
and and the size of stocks drive, driving that performance and that aggregate multiple. Then we normalised, and I think we got some more dispersion, and I think we've ended up. You know, in the last few months of this year, we've ended up concentrating again, and at the same time volatility has come down. So those are the signs, I think, beyond just the valuation of the overall market that that we are concerned about.

Speaker 1:
We don't typically use peg multiples, but I've seen some analysis shown that the peg multiple for the US versus Europe is now virtually aligned, which is very unusual, Um, and and as a consequence of slowing growth in the US at some of those larger companies that I mentioned and and then also a recovery of growth in Europe

Speaker 1:
and we can talk about what, that what that looks like and the secular trends, maybe that are coming through.

Speaker 1:
But Europe, we talk about it in terms of it lacks growth versus the US, and and that's because there has not been a domestic growth story in Europe since the G F C

Speaker 1:
European story has been about exporting industrial capital equipment into, For example, China as they went on a Capex cycle, a fixed asset Capex cycle

Speaker 1:
that I don't believe will be the same driver of European earnings going forward.

Speaker 1:
I think there's a much stronger case today and it is a case rather than a fact, to talk about the European consumer being in a in a different place. We've got wage inflation and we've got job creation

Speaker 1:
and that job creation is a function of the recovery post, covid and and and the the great resignation. Perhaps, But it's also about what's coming down the road in terms of fixed capital investment, a need for retooling the economy, a need to retrofit houses and and refurbish towards the lower C 02 emissions. And those are hands on jobs. You can't import those or rather export the jobs

Speaker 1:
to the Far East

Speaker 0:
and and there are also there are some fantastic just just to kind of follow on from that. There are some fantastic opportunities to invest in companies that are doing just that in terms of, you know, h vac and refit and so on.

Speaker 0:
You know, some really, really vibrant companies that I think people don't don't associate with Europe, so I I mean, I I think there's some real opportunities for for the themes that that

Speaker 1:
talk about I mean, one of one of the points about Europe is Europe has set regulation UK, and Europe has set global regulation. But it's been led by regulation rather than necessity. And and I think the key change post Ukraine

Speaker 1:
has been that it's not about purely which is clearly important, purely environmental driven change. It's also necessity because of energy shortages and and need for independence and roll roll some of the huge mega sort of geopolitical inputs together and and, you know, we could go on for hours talking about those various inputs. But those are changing government policy, and those are changing central bank policy.

Speaker 1:
And those are leading to more domestic investment near shoring on shoring. All of those are secular changes and and secular changes like that. They take time for the market to fully price them. So there's a transition that we think we can take advantage of because it's taking time to come through.

Speaker 1:
But as it does then maybe some industrial capital goods type businesses will look like secular growth stories because it's a long term trend. So we've maybe got to separate the need just to own technology for growth, to own individual businesses, for growth. OK, thank

Speaker 0:
you. Well, I mean, we talked. I mean, I mentioned at the start as well that sort of Europe as a centre for growth. So let's dig in to that a little bit more on the remains of the programme. So,

Speaker 0:
um, I I want to come on to things like the sort of the greening economy a little bit later. And that transition number, the one I want to start with was Gareth. Um, about a third of your portfolio is in digitalization as a theme. So what? What do you mean by digitalization? Is Europe a leader or is it playing catch up in this space? Well, we, as you say, we've got about a third of the portfolio in digitalization. The the main kind of component of that is in it services.

Speaker 0:
Um, which we've had a big exposure to for for a number of years. Um, so these are the business consultants. They technology agnostic, and they're going into both public and private sector, and they're helping with this digital migration so it could be cloud cloud storage. It could be cloud migration. You know, when everyone suddenly went to work from home during covid, a lot of businesses realised that they weren't capable of doing that because they hadn't upped the investment. So there's there's all sorts of strands, you know, um,

Speaker 0:
automating, uh, order processing, um, components within, you know, ER P systems and so on, so that what we found was a real pocket of value. There we found that these companies were on higher free. They they they were smaller companies. You had to dig down, but they were on higher free cash for yields in the market. And they they were typically growing, you know, high single digit to to low double digit. So we we found them fantastic. Um, investment opportunities.

Speaker 0:
Um and we think that's a continuing theme. We think Europe, um particularly in small and mid area, is very behind on its digitalization programmes for both public sector and private sector. So I think there's a good tailwind there.

Speaker 0:
Um, but we also last year, uh, we we tended to shy away from more product type companies, software businesses because, you know, they They were just on multiples that we couldn't understand. People talked about them as being on. You know, it's on 10 times sales. But if you buy a US competitor, it's on 16 times sales. Therefore, this is cheap, and that just doesn't work because it doesn't work to our language of free cash flow yield. But there was a big D rating last year, and we've just gently

Speaker 0:
started dipping our toe in the water there. So we've got around 6% of the fund in, um, software as well. Um, and we've actually started to see a bit of corporate activity in in software where our private equity, um, in one instance in the portfolio came in and

Speaker 0:
and purchase one of the companies, Um, and and that just gives us a bit of confidence that maybe the valuations have gone too far. But we think digitalization is a good long term structural mega trend, and Europe does have, you know, people say it's very difficult to get technology exposure in Europe. There are some fantastic big car companies. Um, there are also, you know, I mean, and to our language, they they feel generally quite fully valued it doesn't mean that they're bad investments. It's just a different investment style.

Speaker 0:
But for us, the real opportunity is going into the Valley of smaller companies. Obviously, for your fund is digital transformation. If I can call it that a theme or

Speaker 1:
absolutely and and to that point, you know, we we we can get access to you. Sorry we can. One can get access to it in large land in Europe as well and and with the ability to pay dividends. And you know, a name that I think is

Speaker 1:
really interesting to look at is is Simons for that regard. Siemens is involved in digital infrastructure. It's involved in the in the digitalization of factory. It's also undergoing its own fundamental change in terms of spinning off and divesting the non core assets. It's got a health care business as well, which gives you that that grounding through cycle in terms of the free cash flow,

Speaker 1:
um, to sustain the underlying business. And I think maybe that isn't fully rewarded by the market. In terms of the conglomerate nature of of that business, there's there's often calls for them to divest that, and I can see the logic of that. But equally the combined group to us looks looks attractive. And the multiples ones paying for that company are, you know, mid teen multiples, which, given the global positioning of that business

Speaker 1:
we think, is really compelling and and the pushback one might give to them to that story is, Well, hold on, you know, And five minutes ago I was talking about China and the fixed capital investment and that not being the same and and obviously Siemens has benefited from that. Plus, the geopolitics about offshore to China is clearly more challenged than it has been for the last decade or so.

Speaker 1:
But the interesting thing about a global position business like Siemens that's maybe the undervalued gem within the group is that they have exposure to all the other markets around the world. For example, um, they've got exposure in Thailand. They've got exposure to Vietnam. So where that offshoring is moving around the Far East, they are able to benefit. And frankly speaking, Seamans doesn't care where the factory is being built.

Speaker 1:
It doesn't care whether it's being built in the US in Europe or in new emerging markets, and they're building factories of the future that save people money in the medium and long term and therefore, those capital investment decisions are very hard for those underlying businesses to stop doing in more challenged economic backdrops. Thank you.

Speaker 0:
Example of digital transformation we can bring in. Um, well, there's There's companies like, you know, we we've got a small company in in Italy called Cyber, which, um, is involved in detection and managed response for cyber security. Um, it appears in a lot of Gartner reports, Um, it's just very much under the radar, But obviously cyber security is absolutely huge, Um, and that you know, that's in in a fantastic position. And again,

Speaker 0:
you know, the the the types of, um, you know, the type of qualities that that business has. So it's profitable. It's cash generative. It's growing at 50% per annum.

Speaker 0:
Um, how How scalable is business like that? Do you have to keep putting talented people into it? Or once you got a platform of it, does the do the rest? It's It is a factor when, when you know when we are when we are discussing with with companies how how they are managing the growth potential. I mean, cyber is fairly exceptional in terms of the growth it has, and it does have a It has a very scalable model.

Speaker 0:
Of course, it's a product type business, so it's about getting the distribution. It's about having, you know, it uses CS A, which is a big, big business, to to distribute its product. Um, so it's about having the quality of distribution there. But for the the the other businesses that I was talking about, um, in in, uh, digital transformation in the I T services,

Speaker 0:
um, they're they they scale slower. So, you know, if you're buying an I T service company, you don't expect it to grow at 30% per annum unless their head count has gone up by 30% per annum. But for us, a business that's on, you know, six or 7% free cast for you growing at nine or 10% where it can, you know, get some operational leverage, but it can increase its head count by between five and 10% per annum. They're they're sensible parameters and and they're good businesses. We don't need them to grow at 20% in order to be attractive.

Speaker 0:
Um, so again, it's it's back to this tradeoff between value and growth and and what, you know how much growth you get. I

Speaker 1:
think the digitalization theme it's so obvious in terms of. But there are There are companies that are hiding in plain sight. Um, because there are There are some very obvious candidates to play the semiconductor industry, the semiconductor supply industry in Europe. But on the other side, there are again businesses that are transitioning themselves to be relevant in the digital sphere.

Speaker 1:
And don't underestimate to the point Gareth is making about small, midsized companies and we're talking non listed companies. It's a hard transition to digitalize. They need help, they need real support and consultancy. And again, we've got exposure to that through the likes of Cap Gemini. But also even an advertising agency, as was something like public has transformed itself from being a typical creative advertising agency to the New World, which is

Speaker 1:
merging into what was typically the world of consultancy. And they've bought into businesses like Epsilon and they and they've integrated them into their group and are becoming a complete CMO solution. So a marketing solution for their customers. And by doing that,

Speaker 1:
their order backlogs are growing, their revenues are growing, their margins are expanding and they're making themselves future proof. And if you look at an advertising business, these companies have been around for 40 50 years, and they've never stayed the same. But the market is sceptical about that evolution and and therefore the multiples to be able to buy those businesses on nearly double digit free cash flow yields. And and when when we were buying those companies and they're still on high single digit with no doubt on the balance sheet,

Speaker 1:
we think those are attractive propositions.

Speaker 0:
It's it's kind of back to the point you made earlier that you know the next. The next generation of growth companies may well be very, very different types of businesses to to the ones which have been very prevalent in the last

Speaker 1:
decade and and sorry to to interrupt. But the pushback there is to say, This isn't about the growth. Businesses today are not going to be growing, and that's the It's not a fight against this versus that,

Speaker 1:
it's that other businesses can grow in this world, and you're not paying those growth growth multiples to get exposure to them.

Speaker 0:
Thank you. No, There's lots we can chat about digitalization. But I wanted to to move on to another topic because you both touched on it. Which is this issue about energy transition? Um, Europe being a potentially being a bit of a leader there. So, um, Oliver talk talk us through that because I I When I was researching this, I could say it was a big It's a big theme on the website for the European team in the round. So and you've touched on it a little bit about this, you know, government, central banks, everybody

Speaker 1:
looking at

Speaker 1:
I don't I don't want to sort of go back too far into history. But recent history, Europe Europe has been the global leader in the E s G framework and the need to decarbonise and the and the route to net zero. And there's been a huge government push to do that. And they're using the public markets, the equity and debt markets to to drive real change there by changing the cost of capital for good businesses in in perceived terms, versus bad carbon emitting businesses.

Speaker 1:
Then we get the Ukraine invasion and Europe has no gas or the that was the perception, and we were guaranteed to have recession.

Speaker 1:
Our sense at that time was that the policy setters number one goal was get through the winter, get through winter 22 to 22 23. And then we felt fairly confident that we would get a significant response to create domestic energy security.

Speaker 1:
The point being that the green agenda, which is hugely relevant to huge parts of society and voters, frankly, has now combined with the the brown economy and needing for that energy independence. So you've got these two mega themes coming together, and that means that we expect an unstoppable momentum in terms of this agenda, whether it be from the Green Side or from the energy independence they they're inter intermured.

Speaker 1:
And what does that mean? That has huge implications for utility companies and the ones that we believe will be successful versus those that aren't? It has a huge impact on businesses that are able to be part of the solution, So those might be building materials companies that are part of the renovation cycle that that can help support homeowners business owners, real estate operators that are having to operate in the confines of new, tougher regulation in terms of emissions.

Speaker 1:
But also there's a requirement to retool and towards low carbon intensity

Speaker 1:
and therefore energy intensity, meaning the electrification of vehicles. And and I think the Europe is a has been a leader in terms of the complexity of the ice engine and efficiency and has been rumbling away in terms of the E V. Now we've come together and being able to put out a solution. That's the combination of both and and get those,

Speaker 1:
um, the the the the the efficiency of those battery technologies and operating systems up to standard to compete on a global footing. So the point being it's affecting all parts of the economy. And therefore we think there's exposure that's interesting in the more defensive end of the world. So, for example, the right type of utilities that have that defensive defensive, um, future proofing so in e. D. P. The Portuguese utility.

Speaker 1:
But it also means that at the other end of the spectrum, there could be an industrial or a cyclical that is part of that solution. For example,

Speaker 0:
thank you um, Gareth, what have you got in this? Because again, I think energy transition commodities is a big part of your portfolio as well that it's over a third of the portfolio, um, commodities and energy transition. I mean, it's quite a broad church, so we again tend to play it through the smaller companies. We tend to play it through the kind of picks and shovels if you like, and in the same way as the the digitalization we're buying the consultants with, with areas and commodities

Speaker 0:
an energy transition, we've got companies like Brunel, which is a staffing company. It's one of the largest staffers to the energy sector in the world. So, you know, if we're going into a Capex cycle, um, uptick, which which it appears we now are, in order to try to, particularly in Europe, to, um, secure sovereign energy. Um, then, you know, they they

Speaker 0:
massive beneficiary of it, and they're you know, they're growing double digit. At the moment. They're paying a 5% dividend yield. It's 51% owned by its founder. We've also got areas like, um, that helps recruit staff. What? It Basically they outsource HR function for um, the energy sector. When When they you know, if they do a new drilling campaign that Brune will will staff that, and they they've got the best consultants in the world on their books. But again, it it's kind of picks and shovels. We've got T G s, which is a seismic

Speaker 0:
data company, Um, which, you know, we think is really well placed as well. We also, you know, slightly more sort of directly. You know, you're talking about, um he was kind of saying it's now born out of necessity that that, um, Europe is acting, and you've got this critical materials act that's coming through that basically says they want 10% of all critical materials to be extracted within Europe, 40% to be processed. So our play on that is, um, companies like Advanced Metallurgical Group,

Speaker 0:
um, which have a lithium in mine, Um, obviously lithium for, um the E V batteries. And they are going to be the first accredited European provider of lithium hydroxide, which is a processed, um, lithium. That that gets used by the E V manufacturer. So you know that that's kind of a a res plus transitioning company as well. And then and then we've got a lot of kind of net zero drivers that that, you know,

Speaker 0:
that all he was mentioning about, you know, things like building control and things about building upgrades. Um, we've got, uh, wind farm developers who are, um, you know, they're profitable. They're cash generative. They've got net cash balance sheets in Europe. Europe's got some vibrant companies that are involved in a lot of these areas. Like I say, it's a very broad church, but as a stock picker there, there's real opportunities. We we tend to go down the market cap spectrum because we find you can have pure plays.

Speaker 0:
Um, for us that that you know, that's our style. I just come back to what you're saying earlier if I put the sort of sceptical case which might be, well, it's it's great that the Europeans want to be big on all of this stuff, and they were leaders, but they're going to get taken out by the Chinese. If you look at electric vehicles, I think I think it's this year. Doesn't China overtake Europe and Japan combined on the number of electric cars? It's likely to to sell overseas. You know,

Speaker 0:
you're just gonna get wiped out. And you, what's the danger? You're nailing your colours to an industrial policy that doesn't ultimately doesn't have any legs?

Speaker 1:
It's a global issue. It's not a European issue. So that's the first point, and and look to the picks and shovels point What? What are we trying to do? If if, if one believes in electrification and I think that would be a brave bet to bet against it, then there's a global shortage or of copper.

Speaker 1:
And if we can own a business in Europe that is one of the leading copper mining equipment manufacturers

Speaker 1:
and that we can see the structural growth in the need for copper and it's becoming more difficult to find, it's becoming more difficult to mine. And the quality of the mined or is is increasingly lower, which means more more mining per per tonne or per kilo of of copper. If we can get exposure to those businesses, then, frankly speaking, I'm not concerned whether it's Chinese vehicles that they're going in or European manufactured vehicles.

Speaker 1:
I think we've got to be broader in terms of the the set and and I guess it depends whether you're going into the smaller company space or indeed, off the beaten track in all cap space. But when we're looking at, I had a meeting yesterday with A with a Norwegian aluminium company. It's fully integrated. But the real US p of that company isn't the aluminium integration. It's the fact that it's benefiting from

Speaker 1:
the structural growth in terms of fixed capital investment in the domestic market in Europe, but also that 75% of its energy is renewable. And that means that the competitive landscape for that company, it was always around about the middle point of the cost curve. It's now gone to the bottom end of the cost curve, and that's on a global footprint.

Speaker 1:
At the same time, the geopolitics of Russian aluminium and indeed Chinese aluminium on the global market is becoming more challenged. So the moat around this business is becoming energy and geopolitics, and it's exposed to the secular theme that we think is happening and we're not paying secular theme multiples for the business.

Speaker 1:
So we we we would argue that that's the place to go hunting off the beaten track and not be taking the Europe has to win here in in automotive technology versus the rest of the world. And, frankly speaking, I wouldn't bet against the the European O EMS meeting on that technology and industrial. But

Speaker 1:
it it it it is open season to new car new car manufacturing. And that's a challenge.

Speaker 0:
Get your thoughts and also particularly if these businesses are operating in a global environment. I mean, how much time do you spend thinking about protection of things like intellectual property? Because you don't want to be in a company that

Speaker 0:
providing a great service,

Speaker 0:
uh, comes into a fantastic new market. And then about three years, it's been pinched and reverse engineered, and you get taken out, Yeah, again. You know, we tend to be involving quite a lot of service type businesses where they're not. They're not single product. They're not relying on, you know,

Speaker 0:
really significant, um, intellectual property. It Sure it's going to be a risk. Certainly. You know, if you've got if you've got software, can it be replicated? And that that's going to be a huge debate now with the rise of a I and what's going to happen with with basic code,

Speaker 0:
um, going forward. But like I say, our our part of our defence is to be more in service type businesses and, you know, having having a kind of strong footprint rather than relying heavily on intellectual property, which tends to be much more kind of game changing single product companies that you know, you you usually don't make money at this stage in the cycle, which is, you know, more difficult for us to invest in, given the cash flow,

Speaker 0:
um, discipline that we've got. OK, we've got a couple of minutes left, So, um, I want to start putting thoughts together. I mean, we talked through a lot. There's a huge amount more we we could discuss, but, um, so we get a final thought from each of everything we've been talking about. If there was kind of key theme or idea you want to leave us with from today, what would that be? Oliver, Can I start with

Speaker 1:
you?

Speaker 1:
You haven't given me a time to say it. And so I'll I'll I'll I'll wait for you to cut me off, But, um, look,

Speaker 1:
the the the economic cycle is uncertain. Um,

Speaker 1:
but uncertainty works both ways and the market, um, gives the best opportunities when there is uncertainty for it to cross over.

Speaker 1:
So the way we're trying to through our portfolios trying to navigate that is to build a blend of businesses that are intrinsically defensive on one side. So they're ayc agnostic and, because of the income mandate, are able to pay us dividends through tricky times.

Speaker 1:
But on the other side

Speaker 1:
of the economic outlook that we're in at the moment,

Speaker 1:
we can see a strong secular tailwind to and and and a and a change to the dynamics of European industry, meaning that you have businesses that are going to struggle to survive in the higher cost world, whether that be the cost of their their debt or the cost of carbon or

Speaker 1:
the frankly needing to reinvest and retool their own businesses that have been and and maybe these companies have been run for cash, so you will have creative destruction. You will have businesses going out of business, and that means that companies can make good returns in the cyclical space. So we want exposure to that as well on the other side, and we're blending portfolios with that defensiveness and that opportunity, the other side, given the cheap valuations of that cyclicality.

Speaker 1:
But what we're missing is purely buying premium size businesses. And the point is that it's those premium businesses today, those comfort stocks that have performed very well over the last decade or so that have risk of price discovery, risk of multiple contraction and and that, if I want to leave anything, is beware of that multiple risk in the context of the macro environment, we're in OK,

Speaker 0:
so great companies aren't necessarily great. Investments would be is is the

Speaker 1:
is the most is the key

Speaker 0:
thing to keep an eye there. Thank you. How about you? How are you? Position your final thought, but pick up on that. So I mean, I think what we've been discussing today is you know that being invested in Europe gives you an opportunity to be invested in a number of big structural,

Speaker 0:
you know, long term mega trends, not necessarily how you might conventionally think of them, but, you know, digitalization, commodities, energy, transition and all the all the kind of variances thereof there. There's a huge and vibrant opportunity

Speaker 0:
in Europe. Um, I I think that debt is an issue? A absolutely, Um, and I would be very cautious on leverage. Um, the other thing I would say from from our personal perspective, obviously is You know, we've got a a heavy bias towards smaller companies.

Speaker 0:
If you look at what's happened in smaller companies in Europe for the last five years, they've actually underperformed as an asset class. And that's been a continuation of of the theme that we've been discussing where you know, you've had cheap money, you've had large car quality growth being the place to be and, you know, and these businesses have done really well The long term trend in small companies is is for compounding out performance at about 5% per annum. If that reverses, you know,

Speaker 0:
we think we're we're positioned really well for it if you got the strength of the balance sheet to see through the economic wobbles. We've already had a few economic wobbles in the last few years to deal with. So what would you say if someone said, Actually, one of the the things of the modern world Gareth is it's all about scale. If you look at what's happening in banking at the moment. First Republic basically go to JP. Morgan. Go to bigger go to bigger asset managers are getting bigger. Everything's getting bigger as we have this world of globalisation, the catalyst for people to look at small cap.

Speaker 0:
They may be great businesses, but it's never going to be there, would you? I mean to To us, that's the opportunity. So what? What we What we've seen with the portfolio is we get a lot of corporate activity. So and and our answer to, you know, well, small companies. So if no one covers them and no one can invest in them and and scale and everything like that, you know, big funds can't can't invest

Speaker 0:
that that's that's a huge opportunity, because either they're going to generate cash and they'll reinvest it for growth, or someone else will come along and buy them. You, you know, you still got a lot of private equity interest in the market. We we invest in companies with no debt, so you don't need to put huge amounts of leverage in to make them work from a private equity perspective. But there's also going to be a lot of corporate consolidation It's about having that cash flow discipline.

Speaker 0:
We have to leave it there. Thank you for watching the show today. Do stay with us. We've got some information coming up in just a second on how you can potentially use this for part of your structured learning just remains to me to thank our fantastic panellists Gareth of and Oliver Collin of invest from all of us here goodbye for now.