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Algy's Investment Podcast
John Chatfeild-Roberts: The Investment Philosophy That Compounds Wealth Through Any Market! | #23
00:53:10
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- [00:00]
A
The service owned £2 million of that fund and after the crash they were allowed to redeem £10,000 a day. So it was going to take them a very long time to exit. And the reason was that that fund was full of rubbish stocks.
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B
What weighting would you prepare to give a very high conviction fund manager in an equity portfolio?
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A
The highest we've ever had was 34.5%
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B
in Findlay park investors ability to time the market. Do you think that many people out there can time the market?
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A
Very few. The truth is that most people buy at the and sell at the bottom.
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B
What has been your best fund manager selection in your career thus far?
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A
James Finley and Charlie Park. The fund they launched in 98 was launched at $10. I looked this morning and the current price is $233. It's gone up 23 times in terms.
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B
And today my guest is John Chatfield Roberts, somebody who I've spent the last 30 years thoroughly enjoying working with. He's got a very incisive mind. He's an incredible investor and he was the founder of the Jupiter Merlin portfolios that have a very long and extre record. You lost your parents very young. You then went into the army. Did you find the army almost felt like a second family to you?
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A
I wouldn't say the army was a second family, but all my best friends come from those army days. The army is a family.
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B
Are you worried about inflation today?
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A
I'm always worried about inflation. I've been worried about inflation ever since I was a child.
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B
The best way to protect yourself from inflation firstly, Welcome to Algie's investment podcast and today my guest is John Chatfield Roberts, somebody who I've spent the last 30 years thoroughly enjoying working with. He's got a very incisive mind, he's an incredible investor and he was the founder of the Jupiter Merlin portfolios that have a very long and extremely good track record. John was also the chief investment officer at Jupiter from 2010 to 2015, as well as getting involved in all sorts of other charitable activities. So John, welcome to the podcast. At last I've got you on.
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A
Delighted to be here, Al. Thanks for asking me.
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B
So this is a question I asked Edda Bonacarte a while back. What was it like growing up in the chat for Roberts household?
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A
Oh, gosh, well, obviously it's a very long time ago, I think. I mean it was privilege because I went to public school, but actually my father fell on hard times. Inflation took him out, so to speak, financially. So that taught me a Lot of lessons. And my mother was absolutely brilliant. She gave me a love of history, a love of music, a love of art. She taught me a huge amount of things. And we were very lucky growing up after we'd left London, in the countryside, being free to roam.
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B
And I remember you got a sister Essex.
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A
Yep, absolutely.
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B
And you've always been incredibly close. And you then had a tragedy early on in your life in the sense that you lost your parents very young. You then went into the army. And did you find the army almost felt like a second family to you?
- [03:28]
A
Well, the way it was was actually my parents died whilst I was. Well, my father died whilst I was at Sandhurst and my mother when I just joined my regiment. I wouldn't say the army was a second family, but all my best friends come from those army days and the army is a family. And anybody who hasn't been in the services probably wishes they had been. And if they don't wish they had been, they should.
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B
That's a lovely answer, that. Then you decided upon fund management as your career.
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A
What
- [04:09]
B
created that decision?
- [04:10]
A
Okay, so there was a year between those decisions. So I left the army in 1988. I went to work for a company called Midas Cars in Corby. We made two cars a week. It was a kit car company. I was meant to be managing the factory. It turned out I knew nothing about managing factories and poor old Harold Dermot who employed me probably made a big mistake. I was made redundant because the factory had burned down. It was a very long story and so I had to sit down and work out what I got to do next. The army teaches you to do an appreciation, which is to set out what your aim is, your objectives, and then the course is open, what you can do. And I worked out that what I was really interested in was the money game. I had some background, I'd done economics at university, I'd done maths, economics and history at A level. And so I thought I was bumptious enough to think that I might be vaguely good at it and then did the hard traipsing around trying to find a job, which in the recession of 89, 90 was difficult, but managed eventually you certainly did.
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B
And so for our listeners today, could you explain what a fund of funds is? Because that is the business which you have built over the last 30 years.
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A
A fund of funds is a one stop investment solution for investors. If you invest in one single share, say Shell, unlikely to go bust, but Shell could go bust. There are big companies over the years, GEC Marconi went bust back in the early 2000s. And if you're a shareholder in a company that goes bust, you lose all your money. So you should diversify. And academics say, well, you need probably about 20 shares, different shares to, if you like, lay off that risk. But of course, to do that, you've then as an investor got to research 20 different companies, which is enough to do when you're trying to run your life, do whatever job you do, and you might not be interested in the slightest. So why don't you go and go and buy a fund which has 20 or 30 shares in it? Well, yeah, but there are shares all over the world and there are more than you can invest in the uk, you can invest in America, in Japan. So there's a whole plethora out there. And what we in the fund of funds world are doing are trying to create a one stop shop where you, the investor chooses what you're, if you like your risk profile, what your aims and objectives are, choose one of our funds and you then get the gamut of the investment world through the people we consider to be the best fund managers out there.
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B
And so having chosen which is the fundamental for them, across your pretty much seamless range of different risk profiled funds, are they more suitable to large or small investors?
- [07:13]
A
Both. I mean, we take people from 50 pounds a month right up to, well, the sky's the limit. The largest investor we had was £120 million. And the odd thing is the more money you have, the more it makes sense. There's a thing called capital gains tax in the uk. Within a fund you can make changes with no capital gains tax to the underlying investor until they come to sell their original holding.
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B
And that's the point. There's a tax point.
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A
Absolutely.
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B
And of course we don't have much of a capital gains tax allowance anymore, do we?
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A
No, I mean it's virtually zero now. It's been cut in half in the last year again and the rate I imagine will go up again. So this is a big tax break.
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B
And when did you launch the Jupiter Merlin fund to fund portfolios?
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A
Well, I started managing a portfolio service for Lazard in 1996, which was converted into the Merlin funds in 2001. 2. So basically, one's got a 30 year track record, give or take.
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B
And can you summarize basically how much money you and the team manage? And we've touched on it already, but whether a fund of funds is high risk or low risk?
- [08:40]
A
Well, currently we manage over 6 billion pounds, which is a reasonable sum of money. My suggestion is that funds of funds and the Jupiter Merlin funds are low risk investments in that they are widely diversified across geographies, across sectors, across different fund managers, across different shares. They have different, I want to say, risk profiles. Some are more volatile than other, but it does depend on how you define risk. I define risk as losing all your money.
- [09:14]
B
I think that's a very, very sensible way of going about looking at investing in risky assets. And what is your flagship fund? And I'm not sure if I'm allowed to ask this, but how's it performed over the years?
- [09:29]
A
Okay, well, the original one, that's the biggest of the original three is Merlin Growth. It's been going. Lazard bought it in 1997, so it's been going a long time since I've been running it or I and you and the team. It's done more than two and a half times its benchmark. I think performance figures are very difficult to talk about from a compliance perspective and all sorts of things. But from the people who originally invested with us back in 1996, there are many people who are still with us. And the only reason people stay with you is, is because you've given them a good outcome.
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B
And roughly how many investors do you think the Merlin portfolios might have in them has any guess?
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A
I mean, it's going to be a couple of hundred thousand, I would have thought.
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B
Wow.
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A
So perhaps a bit more.
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B
It's an awful lot of people that are trusting you.
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A
Absolutely.
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B
So let's move now onto my favorite subject, investment philosophy. What is your investment philosophy?
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A
My. Our investment philosophy for the Merlin funds is buy the right quantities of the right people at the right time. And to elaborate a little bit, it's all about people. We think that there are some good investment managers out there, but there aren't very many. And the idea is to identify them. Then you've got to think, well, in what circumstances are they going to do well? And to give you a sailing analogy, you sail faster if you've got the wind behind you. If you're tacking up into the wind, you go forward, but you go more slowly. And so you want people who've got the wind behind them, so that's the right time. And then depending on your conviction, if you've got a high conviction in a portfolio manager, you should have more money. If you've got a lower conviction, you should have less money with them.
- [11:36]
B
I think we're going to move on to strategy in a little while because the amount of money and the conviction you as a team have in managers is a fascinating point for people to learn. Everybody has strengths and weaknesses. What do you think is your biggest strength that you yourself bring to the Merlin team?
- [12:01]
A
I'm an optimist. I'm a glass half full investor. I think you have to be, otherwise you won't again slit your throat. And I think that optimism and I think risk taking as well. I'm a risk taker, but to take risks you've got to balance up the risk and the reward. And I'm very, very well aware that you make most money over the years by limiting the downside.
- [12:29]
B
So I think your other incredible skill is patience. But we'll come on to that a little bit later because as Warren Buffett said, it is paramount to beat the market. You have to be patient. So how does the team hang together? You've got a small team. How do they work together?
- [12:52]
A
I think the best way of getting a team to work together is to let people do what they want to do. Because what people want to do is the things that they enjoy and the things that they enjoy they tend to be good at. So what you've got is, I think the word is these days, a neurodiverse team. So you want people who have different skill sets, who have different outlooks on life and then you meld them together. I think it's quite important not to have too many formal meetings. Formal meetings require decisions to be made and what you want is actually a continuing conversation. So the way the team is set up, we all sit in, if you like, not quite a bubble, but I made sure that the desks face outwards, so all you need to do is spin your chair around and talk to people. Whereas when you've got people with their desks facing each other these days, what you actually have is a screen between them, which is a barrier.
- [13:50]
B
Very simple and it definitely works. And how, how do you avoid the trap of group, Group thinking? I mean, you talked about neurodiversity, but when it comes to decision making it. Does it worry you when everybody agrees to do something at the same time?
- [14:08]
A
Absolutely, yeah, definitely. I'm always on the lookout for contraindicators. So you know people outside the team who, who have a good record of being absolutely wrong. So that is a useful input if you like their group think is very, very dangerous. And that's why you need neurodiverse people. You always need people who are disagreeing.
- [14:33]
B
And how do you find it psychologically when you are very worried that you've got group thinking going on and you just sort of dig your feet in. Do you find that a stressful thing to do?
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A
Yeah, absolutely. But the thing is, you have to do what you think is right and so if it's stressful, it's stressful. But yeah, I mean, that's what you're paid to do. Absolutely. I mean, running money is not meant to be. I mean, theoretically it's simple, but it's not easy.
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B
And with your wealth of experience interviewing fund managers and having seen them go through poor periods of performance and outstanding periods of performance, what is it that makes an outstanding fund manager?
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A
Oh, gosh, that's a very good question. Well, firstly, they've got to really enjoy what they do, so they've got to have a love of the game, if you like, but lots of people have that. They've got to be competitive. I mean, they really have got to win. Want to win, rather, for what it's worth, I want to win. They've got to have attention to detail and the overview, the sort of the helicopter view, if you like. I think long longevity is pretty important and to have longevity you've got to have a strong constitution, as you mentioned earlier. They've got to have patience. Those would be the sorts of things I'd be looking for.
- [16:03]
B
And I sort of have to ask this question. Do you ever utilize the opportunity of investing in cheap index tracking passive funds?
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A
We have occasionally over the past 30 years, if I'm honest, not particularly successfully. But we've used an enhanced index tracker once, we used a FTSE tracker once, and currently we own the Gold etf, which is basically gold bullion packaged in an ECF form.
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B
And can active fund managers significantly outperform over the long term?
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A
Absolutely, they definitely can. I can give you examples, but they can't all. I mean, that is mathematically impossible for everybody to win. So, as I said, you're trying to identify the ones that can win and there just actually are not that many of them.
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B
And the ones that can win and have got that skill set and that passion and that competitiveness, generally speaking, how different are their portfolios against the index? To what extent are they replicating the index as a percentage of their portfolio?
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A
They're very different. If you invest in the index, you can't possibly hope to beat it. It just isn't going to happen. So they will own shares that are in the index, some of them will own shares that are not in virtually any index, if you like. It's really important that they know that they have to take on risk.
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B
And so they might have up to 80, 90% of their portfolio. That is not reflected by the index.
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A
Yep, absolutely.
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B
I think that's really important because we're not talking about people who are taking active decisions for career management, we're talking about fund managers who are genuinely very active in their risk management and stock picking skills, aren't we?
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A
Absolutely. And of course, very active. The word's very active. Everybody thinks, gosh, that means they're turning the portfolio over, you know, once a day. Absolutely. Definitely not. You can have a very, very different portfolio and it doesn't change very much from year to year at all, but it's very actively very different.
- [18:36]
B
And what has been your best fund manager selection in your career thus far?
- [18:43]
A
Thus far has to be James Findlay. James Findlay and Charlie park launched a fund called Findlay park back in 1998. James actually ran foreign colonial US smaller companies and I invested with him in 1992. The fund they launched in 98 was launched at $10. I looked this morning and the current price is $233. What that means is it's gone up 23 times in dollar terms over those 27 years and that's compound rate of about 12.5%.
- [19:17]
B
And over that period of time and that staggering performance, were you ever tempted to sell it?
- [19:23]
A
Oh, yeah. I mean, in the sense of, you know, you have to keep questioning. One of the things we do is we see people every six months. And the great thing about James particularly was that he would adapt to the new environment. So it started out as a U.S. smaller companies fund. It then moved into U.S. large cap because he could see some of the companies that got expensive. He then had a dabble in technology, but that didn't work particularly well. First time around he had a dabble in Latin America, which went really well. And then that got too expensive, so he sold that. And each time things are changing, you know, you are tempted. But as you quite rightly said, the key is patience.
- [20:05]
B
Gosh. I remember once we went to go, Angus Tulloch was the one, was the person who I used to go into meetings with you and occasionally, definitely a couple of times it happened and I thought, right, we're going to sell this fund when we came come out, you know, when we have the meeting and then by the time we come out of the meeting, we both look at each other and go, let's double our weighting.
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A
Absolutely.
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B
Those meetings are, they're actually crucial, aren't they?
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A
Very, very important. I do remember talking To Angus Tullock some years ago and we were discussing what was important, was it geographical asset allocation or fund selection? I Should you be backing the manager or backing the. The place you're investing? And to give you an example, in Japan, Japan has been a graveyard for investors until very recently for many, many, many years, over 30 years. But within that there are funds that have made good money manager fund selection.
- [21:06]
B
So fast forwarding to here and now, who is your. Or can you give me an example of your highest conviction global equity manager
- [21:19]
A
in the Merlin portfolios currently, I think there are probably two. They're about equally weighted, I would say we've got something called MFS Global Contrarian Value run by Anne Christine, who is a relatively new investor to us and, and she's a value investor, hence in the name and she looks to be good. And closer to home, there's a young man called Brian McCormick who runs the Jupiter Global Value Fund and again, we think value. I mean, there's a lot that's very expensive out there, but value is not expensive and I suspect both Anne Christine and Brian will be names to be savored in the years to come.
- [22:09]
B
And actually that brings a very good point because obviously Christine's fund has a charge to the Merlin portfolios. But does the Merlin team double dip on the charge of the underlying manager as well as taking your annual management
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A
fee on Jupiter funds? There's no double charge.
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B
Brilliant. That's really important for people to know because there's actually no advantage to you as a team to be selecting favoring internal managers unless you think they are best in class.
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A
No, absolutely not. I mean, the critical thing for us is we are remunerated on the performance of our fund and so if we buy a fund internally, which is less good than an external one, there is no benefit to our clients at all. Quite the reverse.
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B
And over what time period do you judge fund managers? How do you work out how good they are?
- [23:11]
A
I like to look. We like to look at their performance between inflection points so that you can see how they're doing compared to how you think they should be doing inflection points when, say from value to growth. And if you've got a value manager who's done really well in a growth bull market, you might just want to look carefully to see what they've got because they might actually not be a value manager.
- [23:41]
B
They just say they are. Yep, very clear. And so let's move now on to the actual portfolios themselves. I got a very clear understanding of your team's philosophy. But let's talk about the strategy. How do you construct your portfolios in terms of exposures to investment styles and also risk management?
- [24:11]
A
Well, the thing to remember, of course is we're not starting with a blank sheet. We've had these portfolios for 30 years. What you are trying to do is to make sure, as I said, you've got the people who've got the wind behind them in the, in the majority. But you always want a little bit on the other side of the boat just in case you're wrong. And it sort of makes you concentrate a bit more if you are actually watching it and you own it. So we're looking at the geography, we're looking at the style, the value and the growth. And we're looking, we like to keep quite concentrated portfolios. So across our fund range, and as I said, We've got over £6 billion, we own 28 different funds, that's across eight different Merlin funds. So there's a lot of cross pollination, if you like. The same holding pops up in a number of funds. Most of our funds would not own more than about 13 or 14 funds.
- [25:17]
B
And what weighting would you be prepared to give? A very high conviction fund manager in an equity portfolio?
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A
Okay, well the highest we've ever had was 34.5% in Findlay park, probably about 10 years ago. Now currently our highest convictions are in the sort of the mid-20s, the low to mid-20s.
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B
And so the top five holdings
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A
would normally be something like 60% of the fund.
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B
Okay, this is really fascinating. So actually very concentrated portfolios at the top end and then some smaller holdings at the bottom end of the portfolio
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A
which might be either going in or coming out or just lower conviction because we're not sure.
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B
And what's more important to you? Manager selection or controlling geographical asset allocation?
- [26:18]
A
Manager selection, controlling geographical asset allocation is a microscope in the sense of there are big, big themes. So over the last 30 years, if you've had an underweight in America, that's been a problem. But should you be flipping in and out of Japan or China or wherever today? That's not really our game. But trying to identify the best people who can make money in their particular sphere is much, much more important.
- [26:53]
B
And what is your strategy you found to be when markets have hit a crisis?
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A
Well, the first thing is, did you anticipate the crisis? If your portfolio is full of rubbish and you have a crisis, your portfolio will go very, very badly. And I will give an example from many, many years ago. I inherited when I worked at Henderson's, a portfolio service that had residual holdings in something called Hill Samuel uk, smaller companies. And I discovered from the previous incumbents of my job that that fund had been bought in the early. Sorry, the mid-1980s. And what had happened was that the 87 crash had come. The smaller companies market had literally lost all liquidity. And I think the numbers were much smaller than they are now. But the service owned £2 million of that fund and after the crash, they were allowed to redeem £10,000 a day. So it was going to take them a very long time to exit. And the reason was that that fund was full of rubbish stocks. So when you've got a crisis, well, as an investor, you should make sure that your portfolio is not full of rubbish. It's full of companies that are going to survive and prosper, whatever the weather.
- [28:24]
B
That's very similar to what Terry Smith was telling me a year or so ago when I interviewed him. Some of these companies have been through the Second World War and come out the other side, so I completely get that. And liquidity is something which is very close to your heart, isn't it?
- [28:42]
A
Well, you learn by your experience and by your mistakes. And very early on I learned that liquidity was absolutely crucial. I could give you the story. It was. It was an investment trust I held. I think I'd got, I don't know, a million pounds in it in a particular portfolio. And I could either sell it at, in those days, something called the Touch, and say that the price of this thing was something like 98 to 100. So. So you could sell it at 98, but for a million pounds. The dealer said, well, I can sell it all at 96, or I can sell half now at 98 and we can work the rest. And being young and foolish, I said, well, we'll sell half now at 98 and we'll work the rest. And of course, what happens is that it falls away from you. So we sold the half at 98 and I think we sold the rest at probably closer to 90.
- [29:39]
B
So that's a bitter lesson.
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A
Absolutely.
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B
What is the most stressful period for you thus far in your investment career?
- [29:49]
A
Well, stress comes as a fund manager, from underperformance generally. But in overall terms, I think the most stressful bit was actually Covid. And the reason was that I was very angry because it seemed to me that the world had gone completely mad and we were, as a society, we were doing many wrong things. I looked at Sweden and thought, gosh, I wish we were all behaving like the Swedes were, so that was pretty stressful.
- [30:21]
B
And the global financial crisis.
- [30:25]
A
Well, stress is the wrong word. We had a very good financial crisis, so, boy, did we work hard. And, you know, you got home every night and you were still looking at your screen, you know, going to bed and that sort of thing. But because as a team, and that's you, Me and Pete Laurie had worked out in late 2006, early 2007, that everything was. The wheels were falling off, we had positioned our portfolios accordingly. And so we'd sold our smaller companies, we'd sold our sort of higher risk positions, we'd upped the gold, we'd got decent cash weightings. So waiting for it to unfold, it was fascinating.
- [31:15]
B
And what did your gold weighting peak at in your.
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A
Oh, gosh, I want to say 12, 13%, something like that.
- [31:22]
B
It was a significant amount of gold.
- [31:24]
A
Absolutely.
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B
If I remember correctly, at one point, the Merlin portfolios own more gold than Latvia.
- [31:31]
A
I think it's something like that. It was many, many, many tons, hundreds of tons.
- [31:37]
B
And what do you think has been your biggest investment mistake?
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A
How long have we got? I mean, the thing about investing is that you make mistakes the whole time.
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B
Maybe ask the question a different way. What is the biggest opportunity which you missed?
- [31:58]
A
Yeah, well, in my head, that's easy. That's not buying technology again. After the GFC, we did buy it eventually, probably 10 years later, but we missed out on pretty much 10 years of a straight line going up.
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B
Which brings you to my next question, which is, are you happy to buy specialist sector funds in your portfolios?
- [32:22]
A
Oh, definitely. And interestingly, it's something that the team has debated a lot because these things, if you buy a specialist fund well out of benchmark and it goes wrong, it hurts a lot. So, you know, it is something that is debated a great deal. But yes, very happy to buy specialist funds. We own Blue Box Global Technology. Right now. We own a small amount of Merrill lynch, sorry, BlackRock, Golden General, and we've had specialist funds, financial funds, European smaller companies funds, technology funds, all sorts of things over the years.
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B
And how about your best investment calls that have made the clients. A really lot of money as a result?
- [33:16]
A
Well, I think the thing to remember is you want to be very careful about hubris. So, yes, we have had some good calls. I think the best. I think the best insight we had was probably in the early 2000s when we realized that China was growing very, very strongly. We didn't particularly like the Chinese stock Market. But we worked out that China was just sucking in all these raw materials. And so we put money into JP Morgan Natural Resources Fund at a time when it was only a 20 million pound fund and the salesman was trying to sell us, I think, I don't know, European growth or something like that and couldn't believe that we were doing this. We made out like bandits. I mean, probably made five times our money, I think in a very short space two or three or four years. And for that matter Eastern Europe. At the same time, many of the same things were happening. The dollar was weak. We really, again, that was a big call and it paid off in spades.
- [34:22]
B
So risk is not knowing what you're doing and you certainly did know exactly what you're doing by buying those specialist funds.
- [34:29]
A
Well, I hope so.
- [34:33]
B
Has your fund manager turnover reduced over the years?
- [34:37]
A
Yeah, I think the patience point is well made and I think over the years I certainly have become more patient. So I mean, possibly it's something to do with the way the market is as well. People seemed to move companies more historically, which of course upsets the portfolio if somebody moves. So yes, I think managed turnovers reduced a lot.
- [35:06]
B
And what about your thoughts on investors ability to time the market? Do you think that many people out there can time the market?
- [35:18]
A
Very few. The truth is that you should be pretty much wholly invested the whole time because there are great, great statistics that if you miss out on the 10 best days of the stock market over the last 20 years, you've missed out on half the rise or something. I mean, I don't know what the actual figures are, but they're pretty staggering. And most people, I mean the truth is that most people buy at the top and sell at the bottom because that's what human beings do. They like a chart going up, they get enthused and they dive in. And really and truly they just don't understand the power of compounding. They don't understand the long term reasons why you should be invested. And they even think that the stock market or stock markets generally are gambling, which is just not the case.
- [36:15]
B
I remember Warren Buffett saying that if an investor does nothing else, they should read Benjamin Graham's the Intelligent Investor Investor, Chapter 8 and Chapter 20. And that basically summarizes a lot of what you've said so far today. So when do you feel under the greatest pressure as a fund manager? Is it just when you're underperforming in a bull market?
- [36:41]
A
Underperforming? I mean, the truth is we try to compound and so we, we try to lose less money in a bear market and we try and keep up in a bull market. Underperformance of any sort for any length of time puts you under pressure. For us, normally that's not keeping up in a roaring bull market.
- [37:06]
B
What do you think is the best market inflection point that you and the team have identified in the past?
- [37:17]
A
Well, let's think there's. I mean there's three I can think of. So the erm, exit back in 1992, when actually I was on my own was a huge inflection point and the UK market went off to the races after that. And as it happened, because I'd read economics and because I wrote a dissertation on whether the UK pound should be in the rm, I sort of got that one right. Then the start of Gulf War in 2003, I think that was a pretty big inflection point. You might remember, Albert, you and Pete were, I won't say on the roadshow or possibly on Cheltenham racecourse, but either way we turned the portfolios over something like 60%. We'd pre written all the orders because we reckoned that when, when the war started, life was going to change, which it did.
- [38:09]
B
Was that a classic case of invest on the sound of the cannons?
- [38:13]
A
Yeah, absolutely, yeah. I mean it was definitely the right thing to have done. And then I think Vaccine Monday. I think it was called Vaccine Monday. I remember walking up the road, we'd got a Grantham office, which we still have, and I walked up the road to the station. I mean there's nobody about much and thought to myself, this changes everything. And then it got back and you'd written on the whiteboard, vaccine changes everything.
- [38:44]
B
That was probably just lucky. Which is the most attractive stock market to you today?
- [38:53]
A
Well, I mean, it is a good question and I pausing for thought there, we like our holding in Japan, which is called Morant. Right. Whether Japan itself is as attractive, I couldn't tell. But we think the fund that we own is very attractive. Interestingly, the UK stock market is really quite cheap and it's cheap for a reason, because pension funds have been sort of basically prevented from buying it. And politically we seem to keep shooting ourselves in the foot and have been doing so for a number of years. But you look where the money's going. So companies keep being taken out by private equity because they're cheap. Yes.
- [39:45]
B
And of course, caveat emptor for what you just said about Japan. It's performed very well in the recent months and trees don't grow to the moon. So it's, it's. But I remember the managers and the member of the strategy and it's a first class fund. John, are you worried about inflation today?
- [40:11]
A
I'm always worried about inflation. I've been worried about inflation ever since I was a child. I did a little bit of prep before we came here, so I was looking at the old petrol books, which I did bring actually, so I'm quite a detail man. So I do keep a record of every time I fill the car up, which my mother did. And I can see that the price of petrol when I first had a car back in 1981 was. It was about 80 pence a gallon, which translates into. I think, I think the number is 17 and a half pence a litre or thereabouts. Currently at our local garage, it's 1 pound 37.9, which is up almost eight times. And that is an inflation rate of about 4.5% a year.
- [41:07]
B
So 4.5% inflation doesn't sound too scary, but the compounding effect over the decades is absolutely astronomical, isn't it?
- [41:16]
A
Well, to give you another example, I started working at Henderson's in 1990. The first season ticket I bought was 2,388 pounds, which today doesn't sound very much, although in post tax terms it was actually a third of my opening salary. So it was a lot of money. Today's season ticket is now 12,000. I think it's £896 or thereabouts. So that's four times as much. And that is an inflation rate of about four and a half percent again.
- [41:54]
B
And the best way to protect yourself from inflation?
- [41:59]
A
Well, firstly stay in work because basically wages carry on up with inflation to a greater or less extent. But as an investor and if you're a pensioner, obviously you're not in work, you must invest in real assets and the two main real assets are shares or property. The problem about property is it's large, it's illiquid and requires maintenance, which you have to pay for shares. The problem is that they're volatile in the sense that price on a daily basis goes up and down. But. But over the years, shares, and it's been proved historically, make a real return of about 4% over and above inflation and that's what you need, otherwise your purchasing power is just destroyed.
- [42:48]
B
So at 4 1/2% it pretty much halves your purchasing power over 15 years. Yes. Shocking. Do you think you earn enough gold in your portfolios? Because that's also an inflation hedge. Isn't it?
- [43:00]
A
Well, it certainly can be. I mean, it's up quite a lot this year already and we've got about 3% in our portfolios, which possibly we don't have enough. I mean, it all depends. We live in an uncertain and a turbulent world and gold has certainly been a good contributor to our performance this year. The only snag about gold is that it's not actually doing anything. I mean, you make a huge amount of effort to dig it out of the ground and you're getting grams per ton from a gold mine and it's coming out of the ground and then what happens to it? It gets made into ingots and it's put back in the ground.
- [43:37]
B
It's doing nothing for the global economy. Is it correct? Yeah. And we've talked about the team quite some length, but specifically, what do you think your behavioral biases are?
- [43:54]
A
My behavioral bias is, gosh, well, I tend to be over optimistic as, as I mentioned. Yeah, no, I probably. If something's going down, I'm quite keen to get rid of it and almost whatever, you know, I'm probably a bit shoot from the hip, actually. I do look at things in quite great detail, but I'm. I could make fast decisions which may not always be right and very often they are very right sometimes.
- [44:32]
B
It's amazing how that door of liquidity shuts if you don't move quickly.
- [44:35]
A
Absolutely. But remember, in investment you have to be. I think the word is humility. But you've got to understand that you're going to be wrong quite a lot of the time. And actually if you're wrong 49% of the time, you're probably a hero. And if you're wrong 51% of the time, you're a disaster.
- [44:57]
B
Are there any advantages for the Jupiter Merlin team of actually working within Jupiter as a business as opposed to any other fund management business?
- [45:07]
A
Oh, huge, Huge.
- [45:09]
B
What are they?
- [45:10]
A
Well, it's a lovely place to work, for starters. And actually if you're going to work, go to work every day, you should enjoy the people you work with and you should enjoy the environment you work in. So that's, that's a start of a 10. It's always had the idea that fund managers within the rules can do whatever they like. So there's no house view of what's right or wrong. So that is different. Huge beneficiary of that. And so we can go and talk to Bram McCormick mentioned earlier, who's a value investor. We can go and talk to growth investors, we can Go and chat to all these people and we may not agree with them, but you're getting a worldview and it's just around the corner.
- [45:56]
B
So all those different perspectives at any point in time are invaluable resource, aren't they?
- [46:01]
A
Absolutely. And as you get to know people over time, Dan Carter's been doing Japan for over 20 years with Jupiter and you know, you know where he's coming from. It's just a huge, huge help.
- [46:16]
B
And what, what do you love about your job so much that keeps you from even considering retirement? Because lots of people of your age have retired already and I don't see any sign of that happening anytime soon.
- [46:29]
A
No, no, I've got my, my feet firmly under the table and I've got my. So I'm dug in. I mean, firstly the people. And I have to say, alt, it's a great sorrow that you're not coming into the office every day, but I seriously hope we're going to see a lot more of each other outside the office instead. So you know, the people. It's a real challenge managing money every day because you're, you know, you're challenging yourself against the market, you think you're going to be better and sometimes you are and sometimes you're not. So I mean, there's a constant, constant challenge. And I don't know, but I do feel a responsibility. As we talked about, probably a couple of hundred thousand investors, people do rely on what we're doing. They rely on us to buy a new house, to buy a new car, to fund a retirement, pay for a wedding, gifts to godchildren, that sort of thing. So we do have a great responsibility and you particularly and I have tried to make sure that the new Merlin team, the David Lewis's, the Amanda Sillers, Venetia Campbell, George Fox, Alistair Irvine are good enough to take over the reins and I think they are. But I still think I've got something to add.
- [47:55]
B
Again, just like Warren Buffett, I'm going to hang around as chairman just in case I'm needed at some point in the next five years or so.
- [48:01]
A
Well, I'm only 63, he's 90.
- [48:03]
B
Yeah, you got another 30 years to go. And so brings me on to my next question is do you invest in your own funds yourself? People need to know this.
- [48:15]
A
Absolutely. Merlin balanced, for what it's worth. I mean, we've got eight funds and the would be totally pointless investing in all of them. Mellon balance. And I've got it, my wife's got it, my sons have Got it. My mother in law's got it. And if that's not pressure, I don't know what is.
- [48:31]
B
Absolutely. And do you think fund of funds as a strategy has a bright future in tomorrow's world?
- [48:42]
A
I seriously think so. And the reason is that the tax regime in this country is getting tighter and tighter and it's one of the few ways that you can have a globally managed, actively managed, top performing, hopefully portfolio that is free of tax, capital gains tax, until you come to sell it. And it's a great tax break. And if you choose the right manager. And of course I would say that was Jupiter Manning, but you know, there are plenty of others out there. You can see what it's doing every day of the week. You can see whether the performance is good or bad. I mean it's not. I mean it's the opposite of being hidden away in the shadows. It's completely transparent.
- [49:27]
B
You've answered that quite beautifully. Do you need luck in this business?
- [49:32]
A
Oh, huge, huge amounts of luck. What did Napoleon say? Give me lucky generals? I think I've been a very lucky. I don't know about general, but you know, sort of half colonel or something like that. No, I mean life, you know, we can all work hard, we can all try hard. My father always said do your best, try your hardest at whatever you do. But you know, you can have bad luck.
- [50:00]
B
Yes. And that, and that can also compound as well. What are the best books that you've read that you would want to highlight for up and coming young budding investors?
- [50:16]
A
Gosh, there are really quite a lot. I mean, there are lots of lovely books out there, some of which are more interesting than others. Funnily enough, I think the first book I would choose would be John Littlewood's the Stock Market. It's out of print, but you can buy it on ABE books. John Littlewood used to work at Rowan Pittman, which was a stockbroker and he had a very well known son called William who used to work at Jupiter some years ago who was a top performing fund manager. This is a history of the UK stock market. And it goes, I think from 1945 to about 1990, odd or thereabouts. And it's a very detailed exposition of what happened over those years and you will learn a great deal from it by reading it. One of the interesting things is that do you know it was illegal to borrow money to buy shares in the 1940s?
- [51:11]
B
I didn't know that.
- [51:13]
A
So I mean everything that the private equity world does today, you wouldn't be allowed to do.
- [51:18]
B
And what advice would you have today to to young investors?
- [51:24]
A
Read as much as you can. Absolutely. By that I don't really mean looking at Bloomberg or the Financial Times or the Economist. I mean reading proper books about financial. You mentioned Benjamin Graham's the Intelligent Investor. I mean classic. I would suggest you don't read that first because it's relatively heavy going. I mean, J.K. galbraith's the Great Crash. I mean it reads like a novel. It tells you about all the human frailties. You know, I think it was the bank of New York, the managing director who was shorting his own stock. I mean there were all sorts. I mean it's just classic stuff. Michael Lewis has written a number of books. There's the Big Short, the Meltdown Tour. I mean there are about seven or eight great books which I thoroughly recommend. There's the Little Book of Behavioral Investing, James Montier. It's a great book, brilliant book. And there are a number of other little books of investing, one sort or another.
- [52:27]
B
Well, John, thank you so much for your time today, for giving us a very clear insight as to how you and the team manage the money and for convincing me that actually what you've done by building the new young team as you future proof the business for the next 25 years. And I wish you all the very best of luck with your portfolios and may they go ever upwards.
- [52:53]
A
Thank you, Alge. It's been great chatting and I think Alga's investment podcast has got a really bright future ahead of it. So well done you for doing that. Thank you.
- [53:04]
B
You made me blush.