Speaker 0:
Hello and welcome to this panel on the UK outlook and future trends in investment trusts. I'm delighted to be joined by alliances Simon Gurgle, Finca Monica Tepe and invests Kiera Mallen. So, Kieran, if I could start with you, could you give me a bit of an intro to the trust and the four independently managed share portfolios? Sure. Um, so I and James Goldstone, uh, manage the invest Select UK equity portfolio.

Speaker 0:
Um,

Speaker 0:
because of the history of the investment trust, there are four share classes.

Speaker 0:
And there's, uh, the one that James and I manage the UK. Uh, Equity one. Uh, there's a global equity income portfolio. There's a managed liquidity portfolio, and there's a balanced risk portfolio each run by different teams.

Speaker 0:
And the unusual thing about the trust is you can four times a year. You can elect to switch your investments from one to the other,

Speaker 0:
uh, without incurring capital gains tax, which is related to the history of the trust. But it's an incredibly attractive feature, I think for some people, um, and very unusual feature. Um, but I manage the equity, uh, the UK UK equity part of it

Speaker 0:
so they can change to different market conditions. You can take a view. So it's It's so depending on the shareholders view on things they they can they can switch between those two different asset classes and through the four different asset classes and Simon merchants. Trust is a real historic trust. Could you give us a bit of a background into it and how it works? Yes. So Merchants has been around for 100 and 3300 and 34 years now, I think, and we just reported results today,

Speaker 0:
Um, it's a UK equity trust. So, uh, 95% of the assets are in UK equity Large cap typically, and the objective is to pay a high and rising dividend stream and to deliver good capital returns. Um, so in the results we just announced, we've announced the 41st consecutive year of dividend growth and the dividend is now once again covered because during the pandemic the income was cut in the market. We had to pay an uncovered dividend for a couple of years. We've now grown that to be well covered again,

Speaker 0:
and the numbers have been strong. Performance has been strong as well. So

Speaker 0:
and Monica, you're coming at this from a slightly different angle. What does Finca look for when they're researching trusts?

Speaker 1:
So at Finca, we actually choose to look at the less trodden path. So we go more into specialist sectors, alternatives anything that requires a bit more analysis, and it's harder to understand. For investors, we think that's where you can add more value as an analyst is getting something that is rather complex or unknown or unfamiliar and translated into something that's more than

Speaker 1:
adjustable. And I guess you can go and diversify your portfolio and invest in things that go outside where the bulk of portfolios are. I guess in equities and bonds and

Speaker 0:
you sit on the statistics committee aren't too familiar. What does the do and how does it work?

Speaker 1:
Yes, so the the Association of Investment Companies. So it's essentially a trade body for London in closed funds or investment trusts. So about 400

Speaker 1:
50 such funds, most of them are members of the IC. So I guess there's two things that they're trying to do. One is to help investment trusts to be the best they can be. In terms of structure, invest governance and all those sort of things and then go and tell all investors that would buy them that they exist to and to understand their their benefits. So, actually, I would encourage anyone who would like to know more about investment trust or they know a lot. But they want information data

Speaker 1:
to go to their website. It's Z a IC dot co dot UK. Um, and there's a section on, um, it's called research tools. I think, Um and there's all sorts of things you can do. You can create your own portfolio and philtre funds and compares them. Um, so it's definitely worth a look.

Speaker 0:
Monica Research companies K. When you're researching holdings to the portfolio, what is it that you look for?

Speaker 0:
Um, well, for the UK share class, which is what I'm here to talk about, we, um it's a bottom up process. So, um, and it is about finding businesses which make good return on equity that are managed for the benefit of shareholders by people that we can trust. They've got a good balance sheet, um, and really going to make good long term investments because you have quite a long, low turnover

Speaker 0:
in the portfolio. So it's about finding businesses that that have got, um either currently a good source of competitive advantage. Or perhaps, you know, changing themselves into into being a company that might be like that. Um, we're also cognizant that we have We have a portfolio here, and we're trying to to to have a balance and and and, um, and have the opportunity to perform well in in different environments. And so, um, there are some parts of the portfolio doing doing other things. Uh, you know, other jobs if you like. And so,

Speaker 0:
um so we have some gold mining shares, for example, in the portfolio, which they're a bit of an insurance policy, and we have some very strong dividend credential companies in the in the portfolio to to ensure that there's a good source of income in there as well. But predominantly, it's It's about buying, you know, advantaged well run businesses that can can make good long term investment. And Simon, something that's been in the news recently, would be hard to ignore. That the S V b crisis and banking in general was a fairly

Speaker 0:
difficult one to include in the portfolio How do you feel about banks in general And the UK s banking sector in particular?

Speaker 0:
Well, I think

Speaker 0:
when you invest in banks, you've always got to be aware of what's going on and the trends in the industry and the and the pressures, the challenges. But the banking industry has been completely re re-regulated, or much more. Regulator regulation has been massively enhanced in the last 15 years since the since the global

Speaker 0:
financial crisis. We see banks now with much higher levels of capital, uh, less leverage and much more stringent regulation and stress tests and so on. So when we look at the UK banks, we actually think they're they're pretty strong, pretty solid, certainly compared to where they would have been 15 years ago. Um, they they're all profitable.

Speaker 0:
They're generating significant cash flows and paying quite large dividends, and actually many, many of them doing buy backs as well. So we are finding opportunities in both some of the larger banks, but also some of the more specialist smaller banks as well, which is quite interesting and often have even stronger capital ratios than the large ones. So it's an area where we do find opportunities.

Speaker 0:
Um, but we you know, we we have to be selective in that and UK equities more generally, are they looking fairly cheap compared to the rest of the world? They are, really. Ever since the Brexit referendum in 2016, the UK market has got cheaper and cheaper compared to other markets in the world. With the exception of last year when it started to outperform. Actually,

Speaker 0:
um and we do see good value. And not only that, we see very polarised opportunities in the market. So there's extreme. There's a very large gap between more highly rated growth companies and many of the other businesses. And as a stock picker, there's fantastic opportunities to buy good companies at really attractive valuations compared to their history.

Speaker 0:
Do you think that's a fair assumption about UK companies? I do and and and you know, we we share that, you know, similar, similar view that it's it's very, you know, it's very tangible if you look at the performance of the UK market versus other markets, particularly since since 2016, as Simon said.

Speaker 0:
And even where there are great differences between markets, however, so you know it's often pointed out that the UK markets got quite a lot of very large, quite mature businesses that perhaps facing some challenges or at least are much older than maybe comparable companies in other parts of the world. So you kind of have to cut through that a little bit. I think if you're going to compare markets, but even when you do that, you can find businesses in the UK look very much like peers in other markets and

Speaker 0:
you and I'll throw out some names. And they might ring other bells like C R H, for example, that we listed in the UK much cheaper than comparable businesses in the US. And you might say the same thing for, you know, B A T or or for, you know, a variety of other businesses where you can, you know, look like for like, um and, um, and and perhaps, you know, we 1111 way to reconcile that has been that, you know, better share price performance is perhaps as the two you know, equilibrate. But but also,

Speaker 0:
um, some companies might be tempted to go and live somewhere else, so we've seen a bit of that too.

Speaker 1:
On that point, could I ask a question? I've always So I I I I've been around. You've probably been around longer than I have, so I can think about the last 15 years or so. Um, and it was pretty easy. The arguments that the UK market is cheaper than normally you'd compare it to the US. Um, where is a time when the UK was more expensive or it was in line or sort of on a historical basis? Or is it sort of something that's structural, of course, that it will,

Speaker 1:
But it's interesting to see. Is it something that will always be there? Or as a time when there's more money flooding to the UK and similar companies actually have? There's more demand for them because I know it's hard for you EU as investors. There's a lot of money to to buy in the UK for tax reasons.

Speaker 0:
I think if you look back over the very long term, the UK has tended to trade as a bit of a discount to the US, but actually quite close to the rest the rest of Europe

Speaker 0:
and that has widened out. I think the numbers roughly 10 to 15% would be a very long term average. But it's around about 40% now, and it's actually quite a big discount to Europe as well. So the discount has definitely widened out since 2015 or 2016 pre pre. And maybe it's going to start to close now. Um, as we're seeing, we're seeing better trends. I mean, certainly some of the sectors that are predominant in the UK have been much more in demand in the last year or so.

Speaker 1:
Yeah, that that is a big difference. 40 versus 15. That's that is,

Speaker 0:
in my view, I think some discounts

Speaker 0:
probably justified, You know, you look at if you try to work out why, Why? Things should have different ratings, for example than growth and returns and risk, uh, sort of three drivers. And

Speaker 0:
if we're comparing to the US, then the UK companies in the UK have grown less. They make lower returns, risk where you can you can argue over. Um but, uh, So there might be justification, I think. Which is why I think just you know it. Maybe it requires a bit more kind of picking apart than just looking at one index versus the other. But I think there's a more than a grain of truth that the UK is too cheap versus the US. Um,

Speaker 0:
I mean, it might be the US is too expensive. Um, there may be a part of that on occasion, but, you know, but, uh, uh, it's, you know, hard to hard to say sometimes, but I think the argument for the UK is quite strong. It's just worth remembering, of course, that the UK about 60% of the sales and profits of UK businesses come from abroad. So when you invest in the UK, you're actually investing in the global economy, not not just the UK economy, which is why some of these are so start. Because often it's the same in to take an energy company, an oil and gas company virtually the same business as the US one

Speaker 0:
in Europe but actually much, much bigger discount. It would also be tough to have this discussion about historical comparisons without talking about investment trust as well. And Simon, they've been around for a long time. Why there's such an enduring force in the market. What is it about them that really means they're a mainstay.

Speaker 0:
I think there's some great features of our investment trusts that make them unique, but certainly different to other types of investors. Investments. Firstly, you have an independent board of directors who's there solely on the benefit of the shareholders who are thinking and considering shareholder views. And they they've actually got quite a lot of flexibility to move things around over time. And, you know, we've changed dramatically in 100 and 34 years. Um, second thing is, you can take gearing. You can you can borrow as a trust, which is clearly an open-ended, uh, fund A unit Trust can't do. Um

Speaker 0:
and, um often, the fees are actually quite low compared to open ended funds. So there's a lot of, uh, good opportunities and and the final point is you don't have forced inflows and outflows. The board can control that. So, as a fund manager, you can invest for the long term with with confidence that you're not going to have a forced redemption,

Speaker 0:
which means which might make you more more wary about investing in less liquid stocks. Monica, the mechanism of these things as well is really where investors can find some value.

Speaker 1:
It is so it's a it's a I guess it cuts both ways. So there are investors who who like discount, you know? Oh, I'm going to buy when the discount is wide and sell, or it will be a very good entry point for me. Um, and there are some that don't want to buy them because of the the the discount risk. Um, so I think it is something that that cuts both ways. But I would think one reason, you know,

Speaker 1:
investment trust. I think they do have a following. Not all investors like some. There are some that really like them and stick to them. And there are some that would rather avoid them. So it's It's a different investors. They have different way of investing. Um, some of them find them too complex and some other like, um, you can you can get an advantage by understanding them, And I know where to invest and understanding them better. Um, but, um

Speaker 1:
um, yes and no. On on on the discount point. Um, I I agree that, um And now there are quite some interesting opportunities out there, although with underlying assets being quite volatile. I guess it's hard to know whether it's a it's a true bargain or whether maybe and Avis will will follow

Speaker 0:
and going back to Simon's point about flexibility and the idea of changing remits. How are things explained and then justified when you go to the board and make these decisions? Um, well, it's certainly you know, some, you know, explain that the the

Speaker 0:
the particular features of investment trust, you know, very clearly there. And and it is

Speaker 0:
it's always worth remembering them because it's a very different proposition to to an open ended fund to an I CV C or or equivalent. Um, and, um, it is a particularly, um, close scrutiny. There is from the board because you meet them five times a year, six times a year, Um, as well as meeting the the shareholders of the trust as well. So there's a great deal of, uh, and and they get board packs full of everything and can ask you anything. And so,

Speaker 0:
um, they there's a more transparent relationship than most client relationships, and, uh, and and a more continuous one as well. Because the board the tenure of a board member is is many, many years. And so, um, it's a great, um, discipline, Uh, on the fund manager, I think you know that, uh, that we, um we have to account for ourselves so often, uh, to the same people. You know what you said last time and, uh, and can hold you to account for that. So it's a It's a very, um

Speaker 0:
you know it. It's a very interesting feature, I think investment trust, and go back to Monica's point about the discount. What's the current discount on the trust? Well, it's over 14% on the on the UK share class, which is a pretty big discount. You know, um, in the time I've been involved in the in in the trust, So I think that's a, um that's an interesting opportunity, I would say. Um uh, we, uh we do have the board has got a share buyback, uh, discount control mechanism policy where we don't,

Speaker 0:
um, uh, say very much around, you know, the levels and what have you. But they have in the passport back shares. Um, and, uh, and so that's, you know, you can see that in the, uh in in the, uh, in the releases. Um, and so that's, uh, um seems to be quite a quite a good size discount on the share price, right? Right of this this morning, which I I view

Speaker 0:
optimistically because I'm an optimistic person. There's an opportunity there for, perhaps for somebody and the current yield.

Speaker 0:
It's 4.2% on a historic basis as we speak today. And if you did the all share and that's on based on the share price, Um and, uh, and the all share on the same basis I looked back at the f was 3.6, um, So, um uh, because obviously you get the you get the, uh, accentuation of the dividend because you're buying the shares at a discount If one was buying the shares. Uh, today,

Speaker 0:
um,

Speaker 0:
and, um um and And as Simon mentioned around merchants, uh um, dividend track record. Um, we haven't been around as long as, uh, as as that trust. Um,

Speaker 0:
we have the ability. The trust the board makes a decision around the dividend has the ability to pay, um, from from capital, uh, and has used that in the in the past um, last last year than the year before

Speaker 0:
and maintain the dividend during the covid year. So I think that shows the importance of the dividend and the flexibility around the Simon you mentioned earlier about the results coming out today. Any highlights that you'd like to mention?

Speaker 0:
Yes. I mean, the key point is that we've we've we've grown the dividend again, again for the 41st consecutive year, and that's fully covered by earnings. So earnings dip by, You know, a lot about 30% in the pandemic, and they're now recovered most of the way. But the dividends now covered again, which is, you know, a great comfort to shareholders. I think the other thing is, the total return was strong 7.6%

Speaker 0:
against the market, which is 5.2 for the year ending January. Now, if you remember the year ending January, many asset classes, many equity markets are actually down. The UK was one of the best performing markets, and we performed better than that at the N A B level. So that's really pleasing. Um, and actually that was after a very really strong year the previous year. So we've continued to deliver good performance, and I think we are about. I think we were second in the peer group

Speaker 0:
of of about 21 funds over both one year, but also three years and five years. So you know, the performance has been strong. So we delivered the two objectives of income income growth, but also total return. You know, we both delivered last year, and the trust has the ability to use gearing. And for those that maybe aren't too familiar what the real benefits of using gearing in a trust. Yeah, the advantage of using gearing is the gearing is really borrowing.

Speaker 0:
We can borrow money to invest in the to grow, invest in more assets to deliver more income and and and a better total return. If the cost of debt is less than the return you make, then by definition, you're going to enhance the return you make over time. At the moment, our cost of debt is about 4 4.5% and we're getting a running yield on the portfolio of about 4.5%. So we need virtually no capital growth to for the gearing to pay off in the long term. If we get capital growth on top of the income,

Speaker 0:
then the gearing will be very beneficial. Um, clearly the downside of gearing it makes you more volatile. In rising markets, the asset value will grow quicker. In a falling market, the asset will go down quicker. But with that caveat, the gearing allows the fund to make better returns if if you can exceed the cost of debt and also it allows us to pay out a higher income, a high dividend. Um, it's some of the mechanics of the way the the cost of debt is charged within the structure, but it allows us to pay a higher dividend. We would do if we didn't have the gearing.

Speaker 0:
Monica. Is that one of one of the key tenets you look at when you're researching these kind of companies?

Speaker 1:
Um, so the I guess that that's where investors are split as well, in terms of the income that pays out. So there's sometimes long debate about whether the income should come from, um, organic income that is pro produced by the portfolio, or that can you pay out some of your capital gains or pay out of capital

Speaker 1:
income, but certainly for investors. Um, we know the IC talk have their list of dividend heroes. Um, that is a very important point for a lot of investors who are relying on an income from their portfolio. So if they know that that income is going to be at least what they had last year or higher Um, that is a that is a big, um, big selling point. And I think part of the big followings that investment trusts have are for those investors that requires the income.

Speaker 1:
So, uh, yes. So the the trust, that campaign and I don't know how many investors will have had them for 40 years, but that sort of track record, you know that the funds themselves will have a great incentive to to keep it going.

Speaker 0:
I know we've mentioned it before as well, but the revenue reserves as well

Speaker 1:
so they can smooth out the, um, the income that pays out so you can use your reserves that you built up in times where you had

Speaker 1:
higher income to to top up your dividends. And yes, we when when you didn't. And also you're preserving your your capital so nobody can say that you're paying out of your capital, and therefore you're reducing your future power of delivering growth and income

Speaker 0:
on that point just worth emphasising. The merchants pay this dividend out of either income or the reserves that built up from previous income. We haven't. We haven't dipped into capital to pay the dividend

Speaker 0:
and Kieran going back to the broader outlook for the UK or when you look at the macro view inflation, water rate, I know it hasn't come down as quick as some of our European peers. What do you think?

Speaker 0:
Um,

Speaker 0:
so right at the beginning, I said it's a bottom up process. And one of the reasons for that is, uh, I don't like to take big economic views because I certainly don't think I'm capable of making correct forecasts. And I, um I'm not sure anybody is, but, um, with that caveat, uh, it's, uh we all have to have a view on these things. And, uh, I think mathematically it has to be a smaller number towards the end of the year. Uh,

Speaker 0:
you know, consensus of eco economists, the O b r et cetera, uh, all think that that seems, you know, the the all the prices of freight and commodities and everything you can name is much, much lower than it was, you know, from here on, actually through the rest of this year, last year. So? So the year on year comparison has to be a smaller number.

Speaker 0:
I think it has to be. I guess the question is, where does it settle? Does it go to a very low number, or is there something sticky going on in the in the economy? So I think, um uh, so I think it's definitely going to be lower. Um and, uh, markets seem to think interest rates are almost peaking. Bank of England is very straightforwardly saying, pretty much, you know, everybody from the Bank of England n PC saying, Well, they're going to go up a bit more, So I guess they're going to go up a bit more, but not very much more. Um,

Speaker 0:
so I'm, uh, I think that's becoming less of a headwind. I'm always optimistic about the UK market opportunity. There's lots of fantastic businesses with great features. Um, so that's, you know, that's my job. To try to find those, um and hopefully they're businesses which aren't going to be too reliant on a particular economic outcome. Companies in control of their own destiny as much as they can be.

Speaker 0:
And so I'll again put you on the spot here with this question. We've had a lot of good things in the UK to join a new trade agreement, and without spending too much time on the macro, we'll move on. What do you think the outlook is looking like for the UK?

Speaker 0:
Well, I, I think, gave a very good summary. In terms of inflation. I think it's it's it's, um it's very challenging to To to know. I mean, there's a lot of pressure. There's a lot of challenges on businesses the economy could definitely could go into recession. Um, everybody's watching the employment data to see whether we see you know, a real recession where, uh, sadly, a lot of people lose their jobs and and you know, we see the real contraction in the economy or whether we just have a period of slower growth and maybe maybe a technical recession, where

Speaker 0:
GDP growth marginally below quite high level of inflation. Um, but it is difficult and I think we we position the again very bottom up in terms of stock positions. But try and think about different scenarios, and I think that's the way to think about. It is there are scenarios where the economy actually sails through without a recession and growth is OK and unemployment stays low. And in that environment, the more cyclical stocks probably do very well initially, Um,

Speaker 0:
there are scenarios where you'd have a worse downturn, maybe a recession, and perhaps the cyclical stocks sell off, but they're already quite depressed. So when we look at the market cyclical shares, already pricing and a lot of bad news, I think so. In general, we we slight preference for cyclical shares. But a bit like was saying earlier, we've got a balance in the portfolio because it's very hard to predict. Certainly, in the short to medium term, where the economy is gonna go,

Speaker 0:
I'm bringing it back to what we had to talk about. Investment trusts Monica. So one of the key, uh, tenants of these closing structures, you can play a theme in investment trust. When I first got into the industry, that was what was told for me is pick any theme you want and investment trust will probably invest in it.

Speaker 1:
Um, yes. And I think that's that's the beauty of investment Trust. Um, because you asked me, sort of What do I look in? Uh uh, when When? When? Research. And I think that's one of the, um what investors are doing. So you you are looking for, I guess, companies, when you invest in companies that the share price is gonna go, go up, adjust the forest and so on. Um, while investors that invest in normally they build a diversified portfolio and they allocate,

Speaker 1:
um, so they look, how much would I want to be exposed to the UK some some to the US or emerging markets or so on, but also asset classes, which have certain sensibilities or factors. So there could be sectors that benefit from a higher low price or sectors that benefit from high interest rates or low interest rates. So you can look to build a portfolio

Speaker 1:
which sort of hedges certain things. So you'll, even if some things will be affected negatively, you'll have some that will do well. And if overall, they can all write those challenges overall, you will make money, but also you'll have less volatility. Um, so at any one point, you not you not betting your whole house on on on one factor?

Speaker 1:
Um, so that's that's the beauty of investment trust. So you can buy, you know, music royalties. Um,

Speaker 1:
I don't know how that is correlated to to Maybe if you have a recession, people will will be more willing, spend more time and listen to music, but renewable energy and shipping and all sorts of things. So I think because those are the two things that investors look for or when we talk to them is one the returns they want to make money, but also they want to diversify, so reduce the risk and they look for

Speaker 1:
things that are correlated or negatively correlated. So that's why most of the IPOs that have happened over the last 10 15 years have been things that have a lesser correlation to equity markets and bond markets.

Speaker 0:
People would counter this and say, if I want to invest in a theme, I could look at an ETF, but often these thematic ETFs, they can distort the market, often by investing in too small a company.

Speaker 1:
Um, so there are so sometimes there is a tracking errors that comes from, uh, from these ETF when they go into two smaller markets or two liquids or they can't track them properly. So I think emerging markets was one that historically had a big, um, tracking error. Um, but also, investors tend to look for, um, again, there's two groups of investors. Some that they say, Oh, I I I I I don't want to risk, uh, sort of extra returns from active management when I can lose money.

Speaker 1:
Um, but generally, all the investors that invest in funds they do want sort of active management and ideally, to to beat the benchmark or beat the market. Oh, interesting.

Speaker 0:
Yeah, it's It's one of the perfect things of the structure. Simon, don't you agree?

Speaker 0:
Yeah, absolutely. Um, you've got enormous flexibility in the structure. Um I mean, merchants trust started off buying railroad bonds in America, and and now it's UK equities.

Speaker 0:
Yeah, Going back. Monica, One of your points about the IPO market. It was quite a tough year for investment trust IPOs in particular. Last year, we did have one for the UK quite recently. It's a good sign for investors, right? I think

Speaker 1:
they raised £12 million. So there's a UK small, small microcap investment, so

Speaker 1:
I I I wouldn't take that, given that it was such a small amount that was raised as an indication that the, um it's a really hard period in IP o. So I think it was 1976 sort of the last time that there wasn't one for a single for a entire calendar year.

Speaker 1:
Um, it's it's, it's still it's still tough. Uh, normally, when there's uncertainty out there, when prices are moving around a lot, when you have a lot of things trading at discounts, Um, it's just hard to sell somebody something that you pretty much want them to buy at par, and they don't know what's in it to just give me the cash and I'll go and invest it Well, they can go and it's like, Well, I can see the front here. It's trading on a 15% discount. I know it's a holding. I know it's a manager.

Speaker 1:
So until that sentiment changes and things in the market become more expensive, then it's pretty much what you're offering, You're saying, Look, you can buy something. Things are training on a premium. You can buy this at par. So until we get to that moment, I think things are a bit, um

Speaker 1:
uh, more challenging. Or unless, of course, if you could come up with some things that, um it says that you can get great returns with no risk, everybody would buy it. It's just very hard to come up with something like that.

Speaker 0:
And, Kieran, I won't ask you to the kind of the bonnet too much of the portfolio. But s S E is a really good company. If you wouldn't mind giving us an insight into that, please. Um, sure. So utilities is the biggest overweight sector, Actually, the portfolio which, um,

Speaker 0:
contrary to perhaps the I think the perception sometimes about utilities is they're quite boring. Um, and, um, and of course, in large part or large parts of them are boring in the best of possible ways, which is actually look back at the track record of the utility sector is performed extremely well over many decades. Um, and that's, um, particularly the regulated ones. That's because of the regulatory, uh, agreement is that efficient businesses can reward their shareholders, and,

Speaker 0:
uh, modestly. But modest reward built up over decades turns into a very good reward and low volatility and not very correlated to other things.

Speaker 0:
What's changing in you know, this year and in recent years is renewables, and they've found a growth industry to attach to

Speaker 0:
a regulated and relatively low growth, uh, part of the business. Uh, so S S E is the one of the biggest renewables businesses in the world building wind farms. Um

Speaker 0:
uh, but you might also say similar things from the national grid where it's going to connect all those wind farms up And, uh, and S S E national grid also expanding overseas. And so they've utility companies by their nature, bounded, you know, by the border of the country. They operate in normally, but those have Those two companies have found opportunities to expand elsewhere. So, um, the

Speaker 0:
the the common theme through many companies from this result season earlier in this year was the the the Chips Act, the I AJ a the Infrastructure Investment and Jobs Act in the US and the Inflation Reduction Act in the US uh, and uh, and that's all about the US, um, finding great finding that a huge desire to to have energy independence and invest in renewables, which I think is going to ignite investment

Speaker 0:
across all sorts of industries and all sorts of places in the world. But, you know, some of some of the UK companies are exposed to that S S E is only slightly. It has an office in Boston, but it's not really there. But national grid, you know, 40% national grid is is is in the US. So I think, uh, renewables has been chugging along very nicely for many years, but I think there's a a spark has been lit in the US this year. And Simon, would you take a similar view on S S E?

Speaker 0:
We do. I mean, um, when we look at companies, we look at three areas. We look at the fundamentals of the business, Which is is it a strong business? Is it sound sound? Financing is it can put strong competitive advantages. All the stuff you'd expect. We look at valuations. We want to buy companies below what we think they're really worth so that we can make money from a revaluation. And the third thing is what we call themes, which is what are the external environment? What are the growth drivers and and move to renewable generation is a massive theme.

Speaker 0:
Um, we are seeing huge demand for the transmission networks and S S E, but half the business is actually transmission distribution as well. So it's as you connect all these wind farms together and you you have power that's intermittent and and not coming from, you know, coal generation or gas generation. Very consistent. 24 hours a day. You need a very different network. You need a lot of investment. You need e v charging points. So there's a massive need for electrification and investment. Which S S E is providing,

Speaker 0:
um, and and companies like National Grid, um, and also for the renewable power itself. So, yes, that long term theme is part of the investment case for a company like S S E. Yeah, and any particular areas of the portfolio where you're fairly overweight, maybe areas you're you're quite underweight.

Speaker 0:
We we've got the most overweight is is around areas to do with construction and the consumer, but particularly construction and building materials, and we're finding a lot of individual business. Both House builders but also companies making products for the housing industry and for the construction industry there is quite diverse. Some of them have much more US exposure, some more UK. Some are Irish. Uh, some are distribution, some manufacturing,

Speaker 0:
Um, but across there we're finding a lot of companies that look really good value on a long term basis. I think the problem is the challenge is the short term is clearly very difficult, particularly for the housing market, and may get worse before it gets better. But we're finding companies with strong balance sheets that can trade through that period, come out, the other end stronger. And we think they'll make us good money in the medium to long term and also paying good dividends as we go through that. So I'd say that area is one where we've got quite a lot of the portfolio in in

Speaker 0:
housing and building related products here, and that's the key, isn't it a strong balance sheets, depending on no matter what the sector,

Speaker 0:
it helps it well, I suppose it's about having the right balance sheet. So so Some of the utility companies have got quite a lot of gearing, but that's absolutely fine. Um uh, but in general, it's a it's a it's a really good point. It it It allows companies to do what they want to do, and it allows to do for the shareholders, not for the people who they've borrowed money off and gives them financial flexibility. They can invest when they want to invest, not when they can afford to invest if you like. So it's and it gives them resilience because the world doesn't, as as we have discovered as we discover every single year.

Speaker 0:
Uh, if you make a forecast about what's going to happen this year, you will be completely wrong because something weird will happen. And we've already had one or two weird things this year. But companies need to be resilient against odd things happening. I won't ask you for a forecast or a crystal ball, but what are you looking forward to for the trust for the year ahead for the highlights? Um, well, I am optimistic. In general, I think it's sensible if you invest in equities just to take a slightly longer term view And I think

Speaker 0:
you know something like, you know, s S e national grid or or or the ones we've talked around. If things work out for them as we electrify the UK economy, um, the opportunities are massive. You know we need if we're going to like an A V is like an extra house. So if everybody everybody's got one of those, it's like we we're gonna need twice as much national grid as we've currently got and Distribution Network. So we need twice as much of all that stuff.

Speaker 0:
That's decades of growth for these businesses, for example. And it kind of doesn't matter what happens in the short run, because that's ahead of them as an example. But, you know, it's so,

Speaker 0:
uh, it's that kind of thinking, you know, we're we're sort of trying to have all next, you know, the the retail company, which, um, you know that that that's in a good position to do very well in a very, very difficult kind of environment it operates in.

Speaker 0:
But to do well for a very long period of time. Whether this year is, you know, slightly worse or better than expectations, I don't know, but I'm pretty sure it's well set up for the longer term. So that's the kind of thinking we try to have in the investment. And Simon again. I won't ask you for a crystal ball. But if you have a forecast, well, I think we you know, we don't try to predict what's going to happen over 12 months. But when I look at both the cheapness of the UK market, but within that

Speaker 0:
the number of companies trading well below historic levels offering really good value I mean, half of our portfolio is on a price earnings ratio of less than 10. And these are not weak companies. These are generally strong companies, often market leaders in what they do may be cyclical. So perhaps they're over earning a little bit, and earnings might come down a bit in the short term, but on a long term basis. These are businesses in general that we think are are really well positioned

Speaker 0:
and can deliver good returns, and starting from a very modest price is often a good way to make a good long term return When that comes through. I couldn't tell you, um, but we have delivered strong returns with this approach in the past, and I'm very excited about the opportunities we see as stock pickers in the market. But just going back to the the history of investment trusts. Simon this this this structure has been around for a long time. Investors have maybe not been popular at the moment, but they will come back if it's anything going to make them come back in their droves.

Speaker 0:
Well, we were starting to see a couple of years ago we were starting to see people look again at UK companies in particular. And there was a recognition that Brexit was starting to get into a rearview mirror and the economy hadn't fallen off a cliff and unemployment hadn't shot up and a and actually there's a recognition as well that most UK companies make most of their profits from overseas, so they're not really plays on the or exposed that that exposed to the UK economy. We were starting to see interest in the UK and then we had the pandemic. Then we had the Russian invasion of Ukraine

Speaker 0:
that there's always been something that's pushed people back, but actually the the UK stands out in valuation terms. We're a very open market. We have really strong standards of governance compared to many much of the rest of the world. We are going to see more corporate takeovers. We see we haven't seen many in the last 12 months because of the volatility in the market and interest rates. But I think that will come back. And I think all of that should be a good underpinning

Speaker 0:
to the UK market. So I think it's quite an interesting period. I want to get this future of investment trusts. Where do you see the space going? I guess in the next 10 2030 years,

Speaker 1:
Um, well, I think I I wouldn't I I don't like making forecasts. And and I think that's the beauty of working with funds that ultimately you, um you know, there are some investors that approach it to saying, You know, I know what the future would look like, and I'm going to invest in a way which will take advantage of that. Well, I say, Well,

Speaker 1:
I don't know where the future will do So I'm going to build something diversified, which kind of covers all area, so we kind of operate on the idea that I don't know what's going to happen so better, kind of try and reduce risk and sort of spread it around.

Speaker 1:
So that's the nice thing about the investment. Trust is that you can really do that. So I can't tell you what this big asset class is gonna be, how it's gonna work, whether it's going to be a return to, um, possibly just to vanilla long equities. But that's how the sector works. It adapts with time. So new things, new products are going to come new asset classes and, uh, it it it it will grow. I'm I'm certain of that just because you have the flexibility you can do it. It's a structure that allows you to do it,

Speaker 1:
and it all depends on what's going to happen in the world. And, uh, investment trust will will follow.

Speaker 0:
Yeah, that flexible structure it's going to endure, right? Uh, yes. Well, it's merchants. Perhaps, you know, shows that it can endure through, um, it's often time attempting to think that things we're currently facing are, um, but unusually difficult. And it's certainly some horrendous things are happening currently. Um,

Speaker 0:
but unfortunately that's been there's been plenty of horrendous things in the past, and and companies, you know, haven't investment companies have investment trust have endured through all sorts of ups and downs and changes. And if you look back on, you know, history of the stock market or just a history generally,

Speaker 0:
you know, the the past looks very different to the to to the current situation. And and yet investment trust is still here. Yeah, well, look, I think that's a really good place to leave it. Everyone, thank you very much for being here. Thank you.