Speaker 0:
the Dayan, joined by poor Nevan, who is fund manager at the FNC Investment Trust. This trust is the oldest trust in the world, having been formed in 18 68 which, incidentally, was the same year that he knew Young was discovered. So some good heritage there but today as more than 5 billion in assets, and it is a member of the Footsie 100 index.

Speaker 0:
Now, rather than going back and looking over that long history today, what I want to look at is the current challenges that the trust is spacing, how it's easy out for global market and helpful has been navigating that. So welcome, people. Thanks for

Speaker 1:
coming.

Speaker 0:
So let's start with that big

Speaker 0:
picture. You know, this big battle that central banks and governments around the world are having with inflation at the moment, which I think we can acknowledge is going better in some countries than it is in others. How's that impacted your portfolio construction this year on what you're kind of outlook for?

Speaker 1:
Yeah, it's been really interesting periods we came into 2023 I think, with widespread pessimism with regard to the global economic outlook, people, if one considers the perspective they had towards the end of last year were expecting

Speaker 1:
a recession to be unfolding at some point in the US this year. We're concerned clearly about that. Look for growth in Europe on the UK so quite ah, pessimistic perspective on growth. There was some concern with respect, Clea Tiu inflation. But I think the consensus was looking for a topping out of inflation rates sequentially year on year

Speaker 1:
on hoping, hoping that there was going to be the near term peak in interest rates. Now it reflect on what's actually happened. Over the course of last 6 to 9 months, growth has actually been much more robust than people had assumed. And certainly in the US, that has been the case. Europe technically did inter recessional, albeit the mildest recession I think they possibly could have had, with two negative quarters sequentially

Speaker 1:
on the UK again, a lot pessimism. But actually the growth pictures not been quite as bad as people don't anticipated inflation know their looks been somewhat more variable, coming down more quickly in some areas than other and certainly others, and certainly in the UK

Speaker 1:
has been well documented. The picture he has been much more problematic, with inflation proving to be much stickier than had been anticipated on interest rate expectations being revised up, such that here 6% is now essentially in the market for the peak. For Bank of England to reach, you can contrast that, tus again, expectations of ebbed and flowed. We had markets have been looking for a pivot,

Speaker 1:
a quick peek and then cuts in interest rates in the US. As it stands now, I think maybe one more rate rise is expected in the US, with cots anticipated towards the latter end of this year. On terms that growth Pictures said, it's been it's been better than than had been expected. But E significant

Speaker 1:
question for markets is whether that recession, which had been expected, is delayed or whether it's been avoided altogether. So was I meant from a portfolio perspective. We came in to this year relatively conservatively position in terms of are gearing levels, holding some some cash in the portfolio. We are a diversified trust. We try TO

Speaker 1:
be relatively robust in terms of divers for, of course, a range of different underlying structure. Perhaps we against that as we go through on our returns you to date of around about 3% in knave tal to return terms to date.

Speaker 0:
And when we think about kind of digging into some of that portfolio construction, you made what looks like a very savvy move now in kind of 2020 to get out of a lot of those US growth stocks. That then, as we very publicly saw, did not do so well. To what extent are you back

Speaker 0:
cane? That market now in comparison to the rebels, you rat before

Speaker 1:
sure, we'll bring that that move in context. Actually, we started making some quite significant divestments from large cap growth stocks in the US in the second half of 2020 for several reasons. But really, our expectation the interest rates were going to be rising from

Speaker 1:
the zero band. We're expecting inflation to rise. We're expecting growth picture to pick up that point on DWI observed very stretched valuations in terms of that growth value, the growth space against the values space. So we had evaluation perspective and then a catalyst, which we saw in terms of the cyclical backdrop which was going to become, I think this conducive for performance of those large cap growth stops. So starting in the latter half of 2020

Speaker 1:
significant sales in 2021 on, then culminating in our final significant sales, nearly part of 2022 on, as you said it was with the benefit of hindsight, wrote of the well timed in the sense that clearly last year, one of the big themes was the road to performance dispersion between the big growth stocks on the rest of the market and value in particular, with growth underperforming

Speaker 1:
by around about 20% on DK, Putting those doors moves that we meet into context. We sold around about $800 million out of their large capital, so it was quite a significant shift in terms of of the portfolio from an overweight growth stands to underweight stance.

Speaker 1:
Looking at the picture now and what we've done on a year to date basis, we actually there's two parts. This one is obviously the value component on what we've been doing. The second is growth. We've been selling and sold early this year, $150 million of US value stocks,

Speaker 1:
several reasons again. One that underperformance of growth last year had had narrowed to some extent that value the value case for value overgrowth. Albeit I think there is. Still, the case to be made on the cyclical backdrop looks somewhat less conducive, in my opinion, for value stocks, in the sense that we were expecting this growth downturn to unfold hasn't happened really yet

Speaker 1:
on dry zing interest rates Way felt that that would be, you know, impactful in terms of the relative performance. So we shifted some capital to know faith, Matadors said. Value

Speaker 1:
anarchy did some of that into into to grow stops. So we've we've levelled up Tiu a great extent actually that growth, value trade. What I would say, however, is that the question of time horizon here growth stocks have done incredibly well. Year two dates on. I don't think many people anticipated the resurgence which we've seen

Speaker 1:
with, You know, two. Penny Pawn with the Robot is magnificent seven of the top five stocks delivering almost all the games in the US market on DS, the market cap weighted index performing the equal weighted Index in the US by about 10% points. It has been a really narrow market with a small cohort of the usual suspects, really driving returns, plus new video for the obvious reasons of AI and that team in particular.

Speaker 0:
And so do you think that valuations in that area to stretch now for you to more meaningful E go back into it? And would you be waiting for another potential drop before you would re enter?

Speaker 1:
Yeah, so? So, To be clear, we have exposure. Tiu us large cat voice stops. If you look at our list of top 10 Top 20 holdings, you will see Amazon in a video on So on Microsoft in there

Speaker 1:
I do have some concerns, I have to say with respect Tiu the general generalised value of that space and some stocks in particular on there are clearly lessons from history in terms of Greek companies delivering against expectations or meeting expectations, which were high high at that point.

Speaker 1:
But no, actually delivering the kind of outperformance from the stock perspective that one might have assumed. And really, that's about those companies growing in to the those high levels evaluations on there is a case to be made. I think our questions currently which will find out in due course the answer to whether or no Vidia, for example, great business clay. Fantastic position, very dominant. That same with the market,

Speaker 1:
but 40 times revenue. You know, there are some parallels there with instances where again, cos have grown in to their current valuation through time. So it's an open question. I think that what we seen certainly is a rapid expansion evaluations rather than

Speaker 1:
a real significant improvement yet in the fundamentals from an earnings perspective in those companies. So it's it's pretty finely balanced. You have to weigh that valuation point. I think, against that sec Rickel backdrop which, if I am right that recession is more likely than not, is probably not great for the voice signal of the market. Says we have a conundrum. At present, I would say which which I think argues for diversification.

Speaker 0:
Yeah,

Speaker 0:
you talked about kind of that. Slightly more pessimistic view coming into the year, which presumably means that you ramped up slightly on your cash levels. I think you've got about 6% of the portfolio in cash at the moment. Is that high based on kind of the long run? I mean, you don't need to look all the way back to 18 68 cash levels about is that quite high? And what are you waiting for to deploy that other than a bit more optimism?

Speaker 1:
So it is. The castle is relatively high compared to history and think it was cash in the context of world gearing picture. So we have around £580 million worth of debt, which is outstanding long term fixed rate debt, which, which is again very well diversified,

Speaker 1:
blended boring right on that's 2.3% or thereabouts fixed so incredibly low boring rates. And in fact, last year we drew down a 40 year loan at 1.87%. So fixing in

Speaker 1:
for normally low, boring rates for the trust which I think will give benefits for year to come years to come. So we've got that that gearing, which is in place on offsetting that gearing to some extent, is that cash position, which is between five and 6% today quite higher out of history, reflecting

Speaker 1:
the relatively cautious stance which we we have a more we looking tiu essentially change that stance. It's one of one of two things boldly or combination there of one is a changing the fundamental light look. So as I indicated, I think that the second half there is a reasonable prospect of growth slowdown me will be their earnings expectations do prove to be somewhat optimistic

Speaker 1:
if we're too pessimistic. And actually, the fundamental backdrop is better than I assume

Speaker 1:
on the Fed and other central banks managed Tiu trade that narrow path of immaculate disinflation, keeping growth on track without triggering a recession. That B one catalyst for change on the second simply evaluations again. If you take the US market is the bellwether. It's trading not for of 19 times for multiple. In terms of PE

Speaker 1:
on, you've only seen that kind of multiple in the US and a couple of periods in recent history. One was that that that post immediate period post pandemic, the onset of the pandemic on the second was late 19 nineties. So it's unusual to see the market trading on this high multiple as we are today on. That leaves little margin for error, so evaluations improve. Then we'll re engage on frankly, if the fundamental backdrop is better, continues to be better than we've anticipated.

Speaker 1:
They were willing to put some that cash to work

Speaker 0:
and you've touched on diversification and you have a decent portion of your portfolio in unlisted. And there's been quite a lot of focus on unlisted portions of trusts recently. The most recent, obviously, with Scottish mortgaging their headlines often the trust, because you goes focus so much on diversification. It's seen as a kind of steady Eddie trust. One way you can sleep well at night if you hold it, which I've

Speaker 0:
think that might surprise people that you have. I think it's around 12% in in private equity and in unlisted. How do you square those that kind of impression of the trust with that obviously much riskier end of the market that you've got there?

Speaker 1:
Sure. So we do look to be a one stop shop for investors in terms of providing ah solution for investors who are looking for exposure to growth assets when single Thursdays. I'm talking about listed equity and unlisted equity Private equity

Speaker 1:
because we're closed ended fund that gives us the tremendous, tremendous advantage have been able to take that long term perspective, lock up capital on DWI, have a very long history and experience of investing in private markets. Aunt, have any

Speaker 1:
general terms had a post of experience there. So we have delivered good levels of return excess return above public market coolants by investing in the private market space. So in general terms, it's been it's been a creative to returns for our shareholders. I would make the point as well, though the private equity spaces is very wide, very broad, very deep in terms of the opportunity set

Speaker 1:
on, I think, in contrast, Tiu some other clothes ended funds. We take it a very diversified approach there as well. So we're no focused on late stage disruptive tech. We've got much of our exposure in mid market. Buyout space tends to be cheaper in terms

Speaker 1:
of evaluations on offer, operating businesses generating hi loaves of free cash flow. Andre also have exposure to hard to access leading growth and venture managers in the US on DS in Europe, predominantly something that investors wouldn't otherwise be able TO

Speaker 1:
gain meaningful exposure to. So I think we're providing access, certainly turn area of the market, which can provide addition, returns for shareholders on bond. We find that the opportunity said there is rich on provides again an additional social return for shareholders.

Speaker 0:
And is that that 12% allocation is that high in comparison to history and on what you're kind of cap on, what proportion for portfolio you'd let that get.

Speaker 1:
So the target range is 5 to 15%. Periodically, we in the post GFCI. Given what happened in liquid markets, global financial prices, I should clarify we SO the private active waiting,

Speaker 1:
pushing through that 15% target level that that was a function really of liquid markets, equities collapsing in the proportion in on this too. Going up so 12% we got today is is in the Rangers to what we would typically target on. We've got a well considered programme in terms of thinking about how much capital we need to commit given these air very long term investments in order tiu assed first possible maintain within that target range of 5 to 15%

Speaker 0:
on when we look at the April diversification, I think some people might be surprised that the UK makes up a similar proportion of the port failure to things like emerging markets, which we UK investors obviously we know they tend to have that home by us, that very UK focus. Can you talk us through where you see kind of emerging markets? They've had a tricky time of late,

Speaker 0:
but why you think that they merit a kind of I think it's around 10% of the port failure in that sector.

Speaker 1:
Sure. So if you actually look at the portfolio, I know your friend to interview the 10 and 10% UK emerging markets, if you could just a listed exposure. Actually, we've got considerably Maurin Emerging Markets than in the UK We're in the UK we probably five or 6% of the portfolio as opposed to the 10%. So it's actually

Speaker 1:
exposure to unlisted investments was pushing that the UK exposure level,

Speaker 1:
the headline on the emerging markets. Interesting in the sense that train is obviously the most significant component of that portfolio. The re opening theme there had been expected Tiu provide a strong catalyst in terms of returns on DSS, somewhat been somewhat disappointing in terms of trainees, performance forms of the Chinese stock market, specifically rising interest rates. Given some the currency links that we've seen that is detrimental to believe.

Speaker 1:
Emerging market returns. What I would say from a city longer term perspective, actually, the growth picture in Asia in terms of that, that premium, which has historically existed over developed markets that is compressed through time. And you expect that as a function of demographic change, there's a premium nonetheless on dure. You're getting that premium in terms of the growth prospect on the underlying economic fundamentals on a discount to that which you've been able to access historically.

Speaker 1:
That said, I do think if I'm right, that inflation is probably little bit stickier than people are. Assuming that growth maybe is slowing down globally a bit more than is hope for in terms of market pricing at present on that rates, while the next you know, if one looks forward 12 months rates were probably heading down in the US they will be held to a higher levels than had been assumed previously.

Speaker 1:
Then again, it is balancing out what is that quite a post evaluation perspective against the near term, where I think that the fundamentals just a little bit challenging but longer term thing. Asia does offer good opportunities for investors from growth perspective

Speaker 0:
on those familiar with the trust will be aware that you work slightly different need to others in a kind of manager of manager approaches. So you allocate to farm managers to run these different areas these different mandates, which means that you have to go through a very similar process. That deal. Why investors Financial advisors have to go through when selecting fund managers. So what are the key?

Speaker 0:
The things that you're looking for when you're choosing a new fund manager to allocate tiu maybe some of the essential must haves and some of the big red flags that you would avoid?

Speaker 1:
Sure. SO. As you said, we operate on approach where my role is essentially sourcing and selecting underlying strategies or managers to combine

Speaker 1:
in a manner. We're looking to add returns and reduce risk. The principal diversification. We do that by investing only in private but public markets. Global and regional managers were looking for while most fund managers deliver their returns through the manner in which they invest now, that obviously relates to

Speaker 1:
the region that they invest, but also the style that they choose to invest with and whether that's a value approach, quality approach or a growth approach typically on. Then you've got the size considerations as well, Whether they're large, cap smoke happened so on. So we need to think about the overall portfolio composition and how managers fit with what we require on what is complimentary to what is actually the portfolio.

Speaker 1:
But specifically, we're looking for managers. Tiu have a wealth or a philosophy, that process that is consistent, transparent that they will a deer to obviously you want confidence in terms of individuals you're dealing with and persistency in terms of tenure,

Speaker 1:
alignment of interest, on consistency, of performance. Clearly now, getting all of those components on a consistent manner is is difficult. But I think that what we're looking tohno of with our manager selection is to minimise surprises. So

Speaker 1:
you want to be surprised in terms of manager outcomes against expectations, all managers will deliver a variable performance over long run. We're looking embassy for it to be acquitted against the relevant yardstick, which we choose without yard stick, you nose clean, defined by the manner or the style in which a manager in vests on blending those different styles on the lining to styles which we know

Speaker 1:
historically and Perspectively are likely to add value. I think it gives the best chance for success

Speaker 0:
on. We've just got time for one final question, so I thought it would be good. I mean, there's a lot of negativity and markets at the moment. I thought it would be good to end on quite a one negative one. Positive. Say I want to know. What's the one source of most caution for you at the moment? Most pessimism in market on. Then what's the one most positive thing that you can see out there? So let's start with the negative so that we finish on the poster.

Speaker 1:
Okay, so there are many negatives is actually, I think the negative imposible kind of the flip side of the same thing to me at the present time. Much of one's perspective on the outlook if you look forward 12 18 months, hinges upon how you see the outlook for the global economy on whether there will be a recession in the US.

Speaker 1:
US is the critical public on me or not on to be negative. Frankly, you just have T assume that many of the leading indicators or the yield curve, for example, are right in terms of what they appear to be predicting on that we know that monetary policy operates with a long and variable lag on that coming quarters, right, you're going to see the impact of that tightening policy and liquidity on. They're going to see a downturn of this downturn in the US economy in terms of recession.

Speaker 1:
It is going to lead, I think, to earnings downgrades on probably to multiple compression, that that is the negative and that is very negative, those native But I think again you need to put in intimate perspective. There are recession's on their recession's on this need be deep recession, but nonetheless that is a negative and that would give rise to, I think, a negative return from here for global actives, the converse of that the postive case is that this point about immaculate disinflation, really that we do?

Speaker 1:
I have a picture where growth moderates globally, to the extent that the labour market loosens a little bit, takes a bit of the heat of wage pressure, for example, that enables central banks to take their foot off the accelerator in terms of rate hikes. Ondas inflation comes down to actually look forward. Tiu rate cuts So you tread this very narrow path. It does exist and is credible to annoy. Outcome were

Speaker 1:
nation has avoided in growth moderates Inflation comes down central by its CART. Start cutting interest rates. Current levels. Evaluations on the markets are justified because because of the forward re expectations coming down and growth actually holding up, that that is the positive stance on, in addition to that, that some of those companies which we mentioned on discussed earlier on

Speaker 1:
you know, actually, the EI theme on related activity is transformative. It does boost productivity.

Speaker 1:
It does yield outside returns in terms of earnings prospects. Tiu Tiu companies that are lying to that theme that is the bull case on again, you know, is no. It is perfectly feasible that that does transpire on balance, unfortunately, are probably tilt towards the slightly more native perspective. Right now, we're a lot of indicators suggesting

Speaker 1:
actually is going be a tricky appear for growth in coming quarters and has been up to this point.

Speaker 0:
But it was nice to have that for a into positivity wasn't at the end briefly, Yes, thank you so much for joining us today.