Speaker 0:
hello and a very warm welcome to this video update on the Premier Might and diversified fund range. My name is Jonathan Wilcox, global head of distribution here at Premier Might. And I'm delighted to have with me Neil Birrell, who's the chief investment officer at Premier Min but also the lead manager of the Premier M and Diversified Fund range. And what we're gonna be doing in this video is

Speaker 0:
asking Neil how he sees financial markets and what we've been doing across the fundraise in terms of as allocation. And what are the investment thoughts and views that Neil has. And the team has going forward and clearly, you know, over the last few months, really, we've been barraged by a whole series of macroeconomic data. It's been inflation. It's been interest rates, et cetera. And and the market has been basically responding to that constantly. So perhaps Neil,

Speaker 0:
the best place to start when we talk about your thoughts about the whole diversified fund rate is actually what is going on in inflation. What is going on in interest rates? And do you think they've peaked at all yet?

Speaker 1:
I do hope so. Um, that that that's the starting point. And I think you know, uh, well, first of all, we can't just talk about sort of, you know, interest rates and inflation without thinking about it in a global context.

Speaker 1:
Um, for for some time now, um, the macroeconomic data, as you refer to and I think it's worth just sort of for for being clear what we're talking about here it it is data releases, um, from from governments and from central banks, um, on on inflation on on interest rates on global growth on on economic growth or GDP gross domestic product.

Speaker 1:
Um, and all the other factors that sort of make up an economy that gets lumped together to be called sort of macroeconomic. So, you know, country level and global level, sort of sort of data. And And it does feel, um, and you mentioned sort of more recently, but it feels like that's been driving the prices of assets, whether it be bonds or or stock stock markets, company shares, property, just about everything. Pro, probably since the advent of covid. When that sort of dominated, um, everything,

Speaker 1:
um, and inflation probably, um, which was not really present around the world. um, in in any sort of, um, serious way. Uh, since the global financial crisis, what happened through covid sort of sowed the seeds for inflation to to come back and and to haunt us. And that came about because of the, um the huge I'm gonna say liquidity, right. The huge amount of cash that was pumped into the the the global system. Uh, and that came from

Speaker 1:
dramatic lowering interest rates. They came from things like the furlough scheme. All that type of thing, which taking place around the world, produced liquidity. As you put more money into the economy, you would expect that over time to create inflationary pressures because people there's more money around more and that that started coming through. And then you remember back in in in the final quarter, I think it was 2021 when, um, the the the energy sort of, um, you know, prices started sort of coming through queuing.

Speaker 1:
Exactly. Absolutely. And, uh, you know, we were queuing up for petrol way before that. Um, there was there was supply shortages, and a lot of that was covid induced, as well as a result of covid just, you know, the the the the the the economic system had not sort of got back to where it where it was. We were nowhere near full. Employment companies were sort of, um, way off the pace in terms of whether they should have been in terms of in terms of supply. And then we had Ukraine and the Russian invasion. We just exacerbated all the problems. And that's when inflation

Speaker 1:
sort of kept shooting, shooting through, Um, and all that can really happen in that situation is that central banks. And by that, what I mean is the Bank of England, uh, the Federal Reserve in the US, the European Central Bank, the Bank of Japan, et cetera, et cetera. Uh, they're typically independent of of of governments, which is which is a good thing. And and what they've got is inflation targets. Most typically, although interestingly in In in the US, there's also other targets they've got. But in the UK, uh, which I'm sure we'll talk more about is just inflation. And they've got a

Speaker 1:
target that they they've got to meet and and really the only tool they've got to be able to do that is to raise interest rates by raising interest rates. That has a has a number of effects. Uh, one of which is that it makes it, um uh, putting money on deposit in, in in your bank, or or indeed anywhere else becomes more attractive, so you're less likely to spend it. It also means that going borrowing money becomes more expensive, so you're not going to spend it. So it reduces economic activity, which in and spend it,

Speaker 1:
which in itself sort of reduces inflation. So that's the pretty simple equation. You know, The trouble is that you can't it's pretty blunt or you can't control it. I mean, when when you sort of import a lot of clothes and a lot of food like we do in in the UK, um, raising interest rates. I mean, people aren't going to stop buying clothes or buying more important food. Frankly, they've got to keep buying the food. Um, and and so it's difficult to get rid of what's sort of called core inflation. Uh, the sort of the basic goods and services sort of sort of rising.

Speaker 1:
So the banks have got to put the, um, central banks have got to put up interest rates in order to get inflation back to where they they they want it to be or starting to get it. Got it falling. Now it is falling. We're seeing the data to come through. It will continue to fall just because we're seeing the increases from last year sort of sort of falling out exactly. So year on year numbers get better. It's just a mathematical thing. So let's assume that happens for for for a little while that interest rates are going to have that effect, which which is a good thing but we don't actually know, is the

Speaker 1:
full impact of the rise of of interest rates. So there's this thing called policy lag, and it takes somewhere between sort of 18, 12 and 18 months, probably for the full effect of a change of interest rates to take effect. And and we don't know what all the increases have done are gonna have that we've had so far what sort of impact they're gonna have. So, um, I think if you look around the world, um, and you look at where we are in in different parts of the economic cycle, we

Speaker 1:
countries tend regions tend to go through cycles together. That's separating a little bit. At the moment, the US is quite a long way further ahead where it looks like they're doing a very good job of inflation. There it looks like, you know, it could be beaten. Um, although predicting inflations the tour difficult thing to do. So I will always use the word could I will never say have, um um and it looks like interest rates there might have peaked Europe maybe as well here at home I I think we're more likely to see rate increases partly because in

Speaker 1:
inflation is is is not sort of beaten yet, um, that there's still evidence that it still remains sort of fair, fairly strong. So whilst I think we're quite a long way through the process, I still think there's enough uncertainty around inflation and rates certainly domestically, but we can't say we're through the worst. And

Speaker 0:
before we talk about the economy in more detail, um, I'd like to go back to one of the points you just talked about. You talked about the fact that UK inflation seems to be higher than in many other markets around the world. Why is that?

Speaker 1:
You know it. It's sort of if you if you look back over over time in inflation, uh, does seem to be more embedded in in the UK economy, um, than it does elsewhere. And I I've been asked this question quite a few times, and there isn't a simple answer to to to be frank with you,

Speaker 1:
Um, I. I think it comes from from a number of areas. What one is, um it you know it Look at the sort of employment in in the UK. And, um, and the jobs market is it's it's not very flexible. Um, in in the US, it's relatively easy to lay people off relatively easy to to hire people. So therefore sort of, you know, wage, um, demands and and and wage growth, um, are are more flexible over here, and the inflation gets driven by any number of things. What you want is demand pulp.

Speaker 1:
Um, where it just people want to consume more products and therefore spending more money and prices go up. Um, and the other one is where you sort of you get this sort of price push? Um, and and And that can come through from the companies having to raise the prices, their goods and services because the wages they're having to pay their staff are going up. They got to maintain their margin one way or another. And in the UK, that sort of that relationship is just That seems to be a little more complex, um, than it is in a number of other countries

Speaker 1:
and and therefore it's more difficult to remove inflation from from the system. You know, having said all that, you know, through the 2010, we didn't really experience any over here. So, um, you know, it's been a while since we've had inflation. This is going back to way before the global financial crisis that inflation was a concern. So, you know, the the world's a very, very different place to to what it was then. The way economies are structured are very, very different.

Speaker 1:
So it's it's a challenge the Bank of England's got. It's something the government's gonna care about as well. Um and and I think you know, I think time will tell how it comes through. OK,

Speaker 0:
now you know, you talked about people who got less money to spend. So people are spending less money on the economy, and they're worried about their houses dropping in value. Seeing the house price falls going on, um, and paying more on my mortgage to pay off my house, et cetera, et cetera.

Speaker 0:
You know it can and I see job cuts everywhere. You know, should I be worried about a recession in the UK? You know, is that something that we should all be worried about?

Speaker 1:
Uh, well, let let me take that in sort of two ways. First of all, in in terms of, uh, the economy. And then secondly, on how sort of financial markets might look at it, if that's ok. Um, and in terms of should we worried, worried about a recession in the economy. Um, this is gonna sound a bit sort of brutal in some ways, but recessions aren't necessarily bad things.

Speaker 1:
Um, they well, they, um, when you think about it, I mean, normally, a recession has come about because of this economic cycle. You get excesses built up in economies. Um, you you get sort of, um, you get bubbles built up in asset prices, House prices are, you know, a very, very good example of that,

Speaker 1:
and and what you can think of recessions in some ways, as as as sort of like the air coming out of the balloon or a bit of a bloodletting, whatever you want to call it, and then it sort of you sort of rebase, um, during sort of high growth periods. Um, relatively bad companies or bad businesses can do relatively well because, you know, there's huge demand for everything. Um, and, you know, just think about it. You know, when you get to the stage whereby

Speaker 1:
you know, if you if you've got this sort of strong economic growth, you've probably got more inflation with it, you don't want these booms to go on. So, um, central banks put up interest rates to try and try, and, um, to try and slow it down, government will take fiscal action as well, or tax action. Try and slow it down. So you get this cycle and what happens when you go into recession is that bad companies go bust. That has the unfortunate effect of clearly sort of people losing their jobs and that sort of thing. But

Speaker 1:
at the same time. You know, at that point you've got lower interest rates and everything's re basing. New companies start new companies, form employment starts and you get good companies sort of growing up as a result. So we shouldn't be scared of it now that that's sort of quite easy to say. If you're not one of those people who's been laid off during that period, clearly, you know, that's, you know, a complete sort of situation a bit, but at an overall sort of economy level, it's not necessarily,

Speaker 1:
um, AAA problem where we are at the moment. And and I think if we go back to the start of this year, I think most most commentators or certainly an awful lot of commentators would have been thinking the UK was going to be a get to to be in a recession or certainly close to a recession.

Speaker 1:
The the economy has remained relatively robust. Surprisingly for me, to be honest with you, robust through this rising interest rates sort of period and so I think and you certainly you look at the Bank of England data and you look at our forecast and other forecasts, it looks like we are going to ski to recession. Now I and in terms of the second part of want to say is about

Speaker 1:
Does it matter to to financial markets? Are share prices or bond prices going to react? As a result? I'm not sure they are. To be honest with you, I'm not sure it matters too much. If we go into a small recession. If we have a big one, you know, deep one and elongated one. I think that's a different story because, you know at that point you get company profitability, falls, et cetera, et cetera.

Speaker 1:
However, markets look through, they look to the future. They, they they, they price in or value in what they think will be happening going forward. And at the moment there is no great expectation of recession. So I don't think it's the end of the world for, um, for for markets. Now, clearly I'll carve up with it. I could be wrong. That's my view, Um, but it's it's one that

Speaker 1:
I'm sort of. I've come round to more over the course of the last few few

Speaker 0:
months. OK, that's really interesting. OK, let let's bring this back to the diversified fund range itself, which, of course, your lead manager of Neil. You know, what has the last six months affect over the last quarter as well? You know, what has the impact of all the macroeconomic environment that we talked about? What impact has it on the asset classes? That which you've been invested in,

Speaker 0:
Uh, question number one. But maybe I'll give you the second question at the same time. And then what do you now think in terms of sort of going forward, What you're trying to invest in going forward

Speaker 1:
as we came into, um, this year, Uh, we were cautious in, in, in, in our approach, Uh, we were worried, um, about the the the the economic outlook. We genuinely thought that all the action had been taking place in terms of raising interest rates. There was there was a clear risk that that that they will economies or send economies, um, in in into

Speaker 1:
into recession. And I don't just mean the UK I mean more globally. It was clear risk, but we also had sort of problems, you know, with the the US and the US, the debt ceiling sort of problem there. So the government's ability to finance itself there was It was a bit of a problem. We went through the the the You know, some people are calling it a banking crisis. It's also I've forgotten about it now, doesn't it? With the with the with Silicon Valley Bank and credit Sue. I mean, it's Yeah. I mean, that's what we were talking about in April, And, um, and and that

Speaker 1:
that was a concern as well, because people thought that credit conditions and by that I mean the ability to borrow money was going for for companies and individuals was, was was going to, um, be much more difficult. And all those sort of factors added together to us made the the economic outlook really quite quite difficult, the way that came down to be reflected in in the positioning of of the funds. And I thought, this is across the fund range rather than too specific, and it it sort of

Speaker 1:
very broad, broad brush. But we were low risk or lower risk in the fact that we had more exposure to to bonds so typically lower risk investments with more predictable returns than we'd ever had and we had lower risk to companies or stock markets than we'd ever had through the 10 year history of the range of the funds. So that gives a feel for for for what? Our what our approach was. Now, as as we've gone through sort of the rest of the year,

Speaker 1:
um, I mean to be, to be honest, the the view varies within the team, by the way, I mean, if one or two others were sitting here, they wouldn't be quite as positive as as me at the moment. But I've been doing this for longer than them, and I think I've seen sort of probably more cycles. Well, let's hope so. And, um, and and and I, I sort of started thinking about you know, where we've got. I've been surprised by how strong economies have been. I've been a bit surprised by how strong markets have been, as as well, to be honest with you,

Speaker 1:
um and and I'm just sort of getting to the stage now, and I have done over the last sort of few weeks and a couple of months just sort of thinking about this concept of, of of it looks like the economy, we're going to bumble our way through. Frankly, um, and if we can do that, then then I think you know, the outlook for markets is, um is relatively good. Um, I mean, again, caveat with all the facts that there could be sell offs, et cetera, et cetera. And I think volatility will remain, and that's probably quite important to remember.

Speaker 1:
Um, now within asset class. That's sort of the key issue. Um, now everyone knows all of that. I think most people have read about certainly the the dominance of the large eight US technology and communication companies.

Speaker 1:
You know, Amazon, Netflix, Google, Tesla, Microsoft, et cetera, et cetera. The impact they've had on markets now, we we weren't positioned in those at at the start of of of this year. We own NVIDIA, which has been great news. It's been the biggest contributor to to returns over the last 12 months or so. Uh, we also own a little bit of Microsoft. We also owned other semiconductor microchip manufacturing businesses like Broadcom. They're all beneficiaries of what's been the A, I sort of growth in it. But

Speaker 1:
you know, there's no Tesla, no Netflix no Amazon, this type of thing. I've done really well, so that sort of impacted on performance. The reason we didn't have them is because we simply thought in valuation terms, they looked expensive now, already even at the beginning of the year? Absolutely, absolutely. Now I I'm not saying they're bad companies because they're not. I mean, they they they I mean, they are outstanding companies. But we started worrying about their valuation, and we started worrying about their continued growth rates. And Apple's

Speaker 1:
maybe the best example of that. I mean, sort of flipping about. There's any sort of semi iPhones any one person can have, um, and and yet, you know, they're continuing. And also it's coming through in their sales figures. Actually, just look at them over the last the last three quarters and also the forecasting for for the next the current quarter, uh, that it's going to be sort of a much less robust than it has been in the past. The growth rates are slowing, therefore there's less attraction to them, and what we've been able to find or think we can find

Speaker 1:
is is much more, um, better valued companies of high quality in other areas of the US market and and indeed, um, elsewhere. So we've not benefited from this This rise in, um, in in the share prices by and large of of these big eight companies, which has been quite, uh, dominant. Um, because we weren't expecting that. That sort of outcome. We've also got quite a high rating in the UK the UK stock market.

Speaker 1:
Um, and that has been, um, relatively sort of, um, disappointing for us as well, because within that, we got a reasonably high exposure to small and medium sized companies where we see much better growth prospects than we do in the larger ones. So we're in a situation whereby we are absolutely convinced by the strategy we've got It hasn't played out, um, in, in, in, in, in, uh, in the end,

Speaker 1:
which the allocation, the stocks allocation through the course of this year. Our bond allocation, which been relatively high. Uh, we've not been a huge beneficiary of what's sort of taken place. Their bond markets have been pretty, uh, pretty weak. Frankly, um, through through certainly, um, over the course of this year, so far equally, we've got exposure to property companies, which have been hurt really hard because of concerns about the economy and exposure to alternative investments in the shape of, uh,

Speaker 1:
investment, trust or investment companies also hit quite hard. So whilst this year has not been the best that we've had on record, the more I look at it, the more convinced I am by the strategy that we've got in place at the moment for two reasons. One is, I'm convinced that what we hold is the right thing to be invested in and and just as importantly, what we don't hold, I think looks sort of relatively expensive and is not the area we want to be in.

Speaker 1:
So, you know, it'd be easy to sort of follow the herd and and then move into these more popular assets. That's not for us. OK, we care about the long term. We're not gonna get whip sort and dragged into shorter term, uh, movements in prices or different asset classes. Thank

Speaker 0:
you, Neil. So I suppose my final question, you know, as investors in the

Speaker 0:
diversified range, are looking back on the last six months and reflecting everything you just said. Are you more positive or more negative than you've been compared to the last six months. As you sit here today

Speaker 1:
as I sit here today in the middle of August, I am more positive on the the economic outlook than than I have been,

Speaker 1:
um, you know, again it it surprises the rest of the investment team when I say that because I'm sort of know the grumpy old one. when? When I look at markets and let's call them markets. OK, by that I mean sort of the whole of the bond market, the whole of the stock market. I can't get overly excited about those. They don't look expensive. Download tube and the areas of the bond market are really attractive. But what I can get excited about is what we,

Speaker 1:
which is what really matters. Because that's what influences the the the the price of the shares and the fund, the the asset value of the fund that future returns. You need future returns and how investors will do. Yes, Neil

Speaker 0:
Birrell thank you so much for sharing your thoughts with us today. It's been an absolute pleasure and thank you as well for taking the time out of your day to view this video from Premier Maron on the diversified fund range. Thank you