Speaker 0:
Um Well, first of all, the 1st 10 years of the life of the fund were were were quite quite exciting in an awful lot of ways. Um, we would just come out of the global financial crisis. We were rolling through a period of ultra low interest rates through through the 2000 and tens. And as we got to the start of this this day,

Speaker 0:
decade, the 20 twenties clearly hit covid, which, you know, Global Pandemic was sort of a new thing. Then we moved through all the problems of that. And then we had a war in Europe. So it was quite a quite a period. I was really hoping that the second decade would be somewhat calmer and particularly start a bit calmer to make our investing lives just a little bit easier and a little bit more predictable.

Speaker 0:
But to answer your question directly when when we look at the start of this year, interest rates looked like they were getting towards their peak. Inflation looked like it was getting towards the peak. At least the rate of increase was slowing and therefore markets or stock markets, bond markets and all other asset prices were reacting

Speaker 0:
to that change. The thing is that when you get asset prices reacting to what we call macroeconomic events or macro events, and by that I mean expectations and data releases for inflation, for interest rates, for economic growth,

Speaker 0:
for forward looking indicators for employment, all those types of economic factors that they can have a really big impact on the prices of assets and they move very, very quickly to discount or to take into account what those data points are saying. And so we have this really quite volatile period

Speaker 0:
and then round about the exact point when the diversified fund or growth fund became 10 years old. We were in the midst of what people were at the time calling a banking crisis, and all that did was just exacerbate all the issues. We had an extraordinary change in the expectation for the interest rate movements and also for inflation as a result of that which caused even more volatility.

Speaker 0:
People worried through the problems in the banking sector, about people to tighter credit conditions, and by that we mean it's more difficult for companies and individuals to borrow even governments in this sort of instance, probably to borrow money, and that's going to have sort of a negative impact

Speaker 0:
on economic growth. All these big factors were sort of coming into play, causing sort of issues for markets. So it's been quite it's been an eventful start and I'd imagine that the rest of this year is probably going to be thrown at us, sort of similar sort of issues that we've coped with so far so far this year.

Speaker 0:
Um, yes is the answer to To to that, but I think maybe it's just worth framing it in in the context of of what we mean by this sort of banking, you know? Problem. Um, as we all know, it started off in the US with the regional banks there, particularly on the, uh, on the West Coast. Uh, it became a bigger issue. Um, when when Credit Suisse went under was bailed out by by by U BS

Speaker 0:
Um, and then it's continued to sort of rumble on through, and we still got sort of issues in in the US regional banking regional banking sector.

Speaker 0:
So it has an impact on the funds in that asset prices will move and react to that. But again, that's what I call almost a macro influence upon asset prices. But more specifically, we did have a very small amount of exposure to what's called to bonds or contingent convertible bonds or 81 bonds, and would have read about well. Most people have read about those in the price of the

Speaker 0:
time of the Credit Suisse problems that had a direct impact on it, but very, very small. It was part of other holdings, so yes, it did have a direct impact. However interestingly, since then, they've actually done. They performed an awful lot better, and we do think they got to levels that are presenting really quite attractive returns from where we are at the moment. We didn't hold any of those Credit Suisse bonds that weren't repaid, so that wasn't anything written down to zero, and it was a case of market movements. Had an impact, had an impact on them.

Speaker 0:
You know, I think maybe looking ahead just a little bit for for the banks as as, well, um, we got called a crisis. I don't really think it was a crisis. I think it was sort of a problem.

Speaker 0:
I think It's difficult to say it's all over. We're still seeing it rumble on at the moment, but in terms of the funds themselves are really quite comfortable, their exposure to the bond markets. We've got exposure with our shares that we own in the banking sector and we spend an awful lot of time thinking and worrying about these types of exposures, analysing them and understanding them.

Speaker 0:
We're aware of just about every decision we're making has some level of risk. Every investment we make has some level of risk, and managing that risk is clearly quite vital in building a portfolio. But again, I think it's worth remembering. These are very, very diversified portfolios and so any individual exposures are really quite small.

Speaker 0:
It's really quite interesting what's going on at the moment. In fact, it has been for some time central banks, the Federal Reserve in the US, the European Central Bank, the Bank of England. That's what we mean by central banks have very clearly taken the view that the risk or the impact of long term high inflation is

Speaker 0:
considerably greater than the risk of recession. Increasing interest rates has the effect or should have the effect of dampening inflation, reducing the rate of increases in prices. But it also has the effect of dampening economic activity,

Speaker 0:
of causing slowdowns in economies and risking recession. But that's their view and for what it's worth, I think that's absolutely right. We've seen over the decades that inflation is a very bad thing for economies, what we saw at the start of May and in the middle of the May from the Federal Reserve, the ECB and the Bank of England. They all put up interest rates by 0.25 per cent as expected by markets.

Speaker 0:
It's difficult to know whether that's the last increase. I think we take it by region. I think it's possible that it's the final increase in the US. I think it's unlikely it's the final increase in Europe and I think it's very unlikely it's the last increase in the UK and all of that is because of how inflation is

Speaker 0:
actually moving in the US It's been coming down or the rate of increase has been coming down for quite a long period of time in Europe. It's still a bit of a problem in the UK as we sit here now it's still in double digits and clearly that's that's got to be beaten. So it's impossible to say that inflation is beaten. I think we'll see spikes as we go on. I think it's quite difficult to say that we're yet at the peak of interest rates as well.

Speaker 0:
I I think it's difficult to say that we're heading for recession. It it's really quite difficult to predict what what's going to happen, and and part of that is because of what everyone's sort of terming this, this policy lag and by that, what I mean is the impact of interest rate rises or increases takes quite a long time to actually have that full effect.

Speaker 0:
Most people would suggest it takes between 12 and 18 months for the full impact of an interest rate change to be seen in the economy. So therefore we don't actually know the true impact or full impact of the very first rate increase that took place and there's been a huge number in all regions, just about all regions since since then

Speaker 0:
and in fact we've only just had one in the last two or three weeks, so therefore that's all got to work its way through. And as I mentioned, I think banks are determined to beat inflation. I think they have to beat inflation and therefore the concept of rates being higher for longer is one that we should probably be buying into. There are certainly expectations amongst some, and indeed in some areas of financial markets are expecting this at the moment. That interest rate

Speaker 0:
in the US may well start coming down later this year, much less likely to be the case in Europe. Very, very unlikely to be the case in the UK, So I think what that means is the risk of an economic slowdown or an increased economic slowdown is even greater. The risk of recession is even greater, but that's going to be later at some point this year. But it's worth remembering that an awful lot of this isn't known. It's what everyone's talking about at the moment. So it's not all bad news. I think it's also worth remembering that

Speaker 0:
recessions aren't necessarily bad things. If you think of them as a bit of a bit of steam being let out the bubble not bursting but sort of letting air out quite slowly. It can be quite healthy. It's bad because unemployment sort of typically rises and companies go bust as a result. But what it does mean is you sort of have this sort of clearing event almost and out of that. Out of the sort of the ashes of the turmoil come new companies come refreshed and comes more economic growth. So it's a bit of a clearing event. It's not necessarily a bad thing.

Speaker 0:
I think it's worth remembering that these are actively managed funds, and by that we manage them at various levels, manage the risk and the return of profiles at various levels. We manage it as allocation level. So in other words, how much we have in fixed income or bonds, how much we have in stock markets or equity markets, how much we have in property, which to us is listed property companies, how much

Speaker 0:
we have alternative investments. And by that we mean investments that are lowly, correlated to the traditional asset classes of bonds and companies or stock markets, and they can be just about any asset class. To be honest with you, it could be everything from energy storage to renewable energy to shipping to

Speaker 0:
music streaming. All these types of things are really quite attractive, and also then we do risk management of the portfolio overall. So we're managing that. But very importantly, within those different asset classes, we will have portfolios exposed towards different asset classes. They're managed day in, day out every single day. When I look at my screen, I'll see individual changes taking place in the portfolio from the specialist fund managers for managing those pots of money asset allocation level. We've only made one relatively small change this year

Speaker 0:
that that was back in the spring when we reduced the waiting to stock markets to equities and more, particularly the global equities. And part of the reason for that is it's very important to us when we're making asset allocation decisions that the managers, the specialist, fund managers in each asset class actually finding things to do, things they want to buy. If in any particular period of time, they're finding it more difficult to buy things, and why would we allocate more money to them?

Speaker 0:
And it was quite interesting because whilst they were thinking, Yep, I love this company for the long term. I love that company for the long term. I think this is really interesting. If you said, would you buy it today, they'd go Well, maybe not in the short term, It a little bit more problematic in market levels of overall. And so we reduced the target, waiting to stock markets or to equity markets and put that into cash. At that point,

Speaker 0:
cash in itself has got a much better return than it has for a very long period of time now, way back since prior to the global financial crisis. And also, if you are a little bit worried about the outlook, what you actually want is some cash, because if you get distressed periods in markets or stressed periods in markets, what you can typically do is to find really good assets. Really attractive prices and cash gives you the opportunity to buy into those. But it was a relatively small range change across the range of funds.

Speaker 0:
We've been cautious for a while, and that gets expressed at that asset allocation level, but also within the asset classes. Our exposure to bonds, which we think are providing much more attractive returns for much less risk than they have done for a very, very long period of time and therefore a much low risk investment. Exposure to bonds is higher than it has been for a very, very considerable period of time.

Speaker 0:
Similarly, our exposure to equities is lower than it's been for a very long period of time. So I think that gives a good feel for our sort of exposure at the moment, our caution for the economic outlook, our caution over the outlook for asset prices.

Speaker 0:
I think it's worth cavi all that, by the way, that we are investing for the long term. OK, we're looking to make really good returns relative to the risk within each of the funds over 357 year periods, so that's the sort of timescale we're taking. However, you do look at the short term, you do worry about price movements in the short

Speaker 0:
term and indeed the medium term and we just think be better opportunities. So now is the time to be relatively low risk. There'll be a time over the next few months, maybe early next year when it's right to increase the risk and by that I mean taking riskier positions within the bond portfolios, but also increasing the exposure to companies then as well to equities, then which is traditionally a higher risk asset class.

Speaker 0:
Um, in in every single asset class where we are finding interesting things to do with within markets again for, for for for the long term um, I I suppose maybe the best way to describe is to look at, um, our our equity portfolios or the global portfolios or or the UK

Speaker 0:
portfolio. And it's worth bearing in mind that, you know, the stock markets are very broad all around the world, all different sectors, all different types of companies, all different sizes of companies, and still finding lots and lots of things that want to do there. But within the cautious approach, we are focusing. We've got more in the UK than we have done for quite some time. Actually, if you look at the UK stock market, it does look cheap. By international comparison, it looks pretty good value

Speaker 0:
by historical comparison as well. Within that, small and medium sized companies are really quite attractive relative to larger companies in the UK. So that's sort of an area of focus. We find lots of good companies and lots of you know, the different industries

Speaker 0:
equally. We'll be looking for companies that might do relatively well in periods of economic downturn. And they do exist, you know, sort of discount retailers, for example, expect to do better in that sort of environment. We're also looking for companies that we describe. They're in secular growth phase sectors. So companies that are growing industries, for example, areas of technology look really quite quite attractive at the moment.

Speaker 0:
Um, and whilst we don't own the great big US Telecom, um, and communication and technology companies in a very, very small way,

Speaker 0:
there are companies that make computer chips or semiconductors that go into everything that's got to do with technology. They look much more attractive. Healthcare looks relatively attractive, relatively defensive at the moment. So, yes, we can find lots we want to do in stock markets in bond markets again, that's an enormous asset class, so we can find really interesting areas of the bond market. We want to take exposure to not government bonds, but bonds issued by companies in the UK and Europe. Corporate bonds are really quite attractive at the moment,

Speaker 0:
property is an interesting one. As I mentioned to us, we don't invest in physical buildings. We invest in companies that manage buildings and own buildings, and they look on valuation terms relative to history, really quite attractive at the moment. They're actually producing really interesting income as well at the moment. So whilst it's a difficult environment for property or real estate, we're getting quite nice income from them.

Speaker 0:
And and then in the alternatives, which again, as I mentioned, our asset costs are lowly correlated to, um to traditional asset classes like bonds and equities. Yeah, things like shipping look attractive. Um, music streaming looks looks good value at the moment. Um, I think also, you know, energy storage is clearly a growing renewable energy is clearly that's been, you know, really quite

Speaker 0:
badly hit in terms of valuation of those assets recently, they look really quite attractive. So across the piece, we can find lots of things we want to do for the long term that we think are going to make attractive returns for us. But that's all sort of wrapped up in a bit more sort of short term caution and risk management more generally