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Algy's Investment Podcast
Pete Davies: Where are the Risks and Rewards Over the Next Decade? | #24
01:27:10
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- [00:00]
Peter Davies
We're in a world where most of the risk is in the public sector, not the private sector. And that's really weird, A because it hasn't happened for 40, 50 years. I think this decade the opposite is true. You will get rewarded a lot for not doing the same thing as the index.
- [00:12]
Podcast Host
Why is it that I look at your portfolio and you've got 24% in three banks of the overall portfolio, why is it that you feel comfortable owning larger positions in banks versus tech?
- [00:22]
Peter Davies
What was so interesting about last year, within our portfolio, banks were the least volatile, whereas tech had lots of volatility. When you want an asset to have a lower risk premium, the fact it's getting less volatile is normally a good sign.
- [00:32]
Podcast Host
Very good sign.
- [00:33]
Peter Davies
If you assume the world isn't going to reward the same style throughout every decade, which I wouldn't, because it boxes
- [00:37]
Podcast Host
you into a corner.
- [00:38]
Peter Davies
We've tried very hard to avoid getting boxed in.
- [00:40]
Podcast Host
What should a truly active fund manager do to be justifying their fees? So you've identified a whole stack of differentiated tech, but they're the picks and shovel companies.
- [00:50]
Peter Davies
Our contention would be that objects are going to get way more intelligent this decade. But it doesn't matter whether Nvidia make a ton of money. The brain getting more intelligent is only going to be relevant if bodies will use that intelligence.
- [01:01]
Podcast Host
Welcome to Algae's investment podcast and today my guest is Peter Davies, who along with Jonathan Regis is joint head of their global developed market strategy at Lansdowne. They run a highly differentiated global CCAV and it seriously caught my eye, this fund about 18 months ago and this episode we're going to look back on how the team got on in 2025 and and then focus most of our time on their thematic strategy and the outlook for investors in 2026. So, Pete, thank you very much for joining me.
- [01:39]
Peter Davies
Pleasure.
- [01:40]
Podcast Host
So my first question is a big question this one. What are the big macro trends right now?
- [01:45]
Peter Davies
So I think I'd start at a decade level, which is, I think, the big trend, and then we can come on to some of the more cyclical ones. So the structural trends, and I think the starting point is this decade is very different from last decade and we'll come back perhaps to whether all portfolios reflect that. I would say the three dominant differences from this decade to the last one are one, the bit of economic. I always look for which bit of economic growth is going to be stronger in a decade 20 years ago, with China industrializing last decade, the consumer Internet this decade, my basic view is Western Capex is going to have to be very high. Lots and lots of drivers of that. My basic view is the supernormal growth in the world this decade is people building stuff, physical stuff, physical stuff in the west, which hasn't happened for 30, 40 years. And we'll come on to some of the beneficiaries and reasons for that in a sec. I think the second point would be where is the risk in the world? And I think what's totally different this decade to any point in certainly my career is we're in a world where most of the risk is in the public sector, not the private sector, and where bonds are the riskier. If there's going to be a big problem, it's going to probably be government bonds. And that's really weird, A because it hasn't happened for 40, 50 years and b because investment theory starts with bonds being the risk free asset. And yet if there is a sort of structural problem, it's probably the governments in some form become insolvent. So very few of us have a way of thinking about those sort of things. And then the third one, which is the political side, so we've got where the growth is going to come from, we've got where the economic risk is. I think in political terms the dominant theme this decade is de globalization. And again the reverse of what we've all got used to for the last 20 or 30 years. And something I'm sure we'll come back to at industry names is if this is a decade of de globalization, after a long period of globalization, probably the things that did poorly out of globalization might start doing well and the things that did well out of globalization might struggle a bit. And the aggregate of which I think gets you to a really interesting point, is that the distinct feature of this decade, I'm sure it's generally true, but certainly this decade it's probably going to be the complete opposite of most of our investing careers.
- [04:04]
Podcast Host
Well, that's really interesting because that brings me on to my second point, which is, which is why so few fund managers change their portfolios. I mean, there are so many fund managers I know that literally they haven't owned banks for 15 years.
- [04:19]
Peter Davies
No, I agree. I think, I mean, I can't really answer for every other fund manager. I think we're unusual in the sense that we structurally assume we are going to change our portfolios. We've always said that our analysis is three to five years, but we should expect our analysis to reveal very different opportunities in different decades and therefore it doesn't surprise us that we have to change portfolios or even change products to accommodate that. I think a lot of the fund management industry, by contrast, talks to a process which is kind of output based rather than input based and says we are looking for a particular kind of share, which often quality, growth, whatever you call it, income. And I think therefore, once you start doing that and say there's only one kind of share we want to invest in, it becomes very hard to change your portfolios for different decades because you get accused of style drift. I mean, our view would be style is a very dangerous part of fund management. If you assume the world isn't going to reward the same style throughout every decade, which I wouldn't.
- [05:25]
Podcast Host
Because it boxes you into a corner.
- [05:26]
Peter Davies
Yeah. And you get that boxing in. I mean, we've tried very hard to avoid getting boxed in either at the style level or the position level. You know, you. And often we've, you know, partly because we've probably made that mistake once or twice. You know, if you start assuming that you're associated with a particular share or a particular style, it just becomes very hard to take an unbiased decision. And the reality is the world changes. So I guess where I'm getting to is I'm not sure what we're seeing at the moment is particularly unusual. I don't think fund managers do that very often. And, you know, it's hard. The flip side for us is it becomes a lot harder to explain. You know, less people are prepared to look at the individual positions, you know, because we're going to have a different type of position in different eras. It's often hard for people to understand exactly what we're trying to do. They want to cling on to some sort of hook that doesn't really exist
- [06:10]
Podcast Host
and that enables them to hang their hat on that particular hook. What is the gold price telling us right now? Because it just keeps on going up.
- [06:19]
Peter Davies
Yeah. I think the really interesting thing about 25 at a macro level was not just the gold price. It was the fact that the gold price and tech, for want of a better term, both did very well. Yes. Because at some level you might assume that tech is associated with optimism about the future and gold about pessimism about the future. And I think behind that lies quite an important point about this decade. Coming back to my bond point, which is probably there are two outcomes possible this decade. There's either a ton of private sector investment generates productivity growth, et cetera, potentially good returns or bad returns, but generates sustainable growth similar to the 1990s and through doing that alleviates some of the problems in the public sector in the same way the 90s saw deficits fall. I think if that doesn't happen, the reality is the frailties of the public sector are very hard to resist and something unusually difficult happens based around risk in the public sector. I think those two, which are actually very extreme outcomes, one's very good, one's very bad, are actually, I can't put it into numbers, but compared to a normal distribution skew, one of those two things almost definitely is going to happen. Now, I think the middle ground is incredibly unlikely this decade. I think compared to most people, I would probably say the good scenario is much more probable than the people who only talk about gold. But I think it's important to view the gold price as being good gold and tech at the same time. And talking to what I think is right about this decade, which is it's either going to be very good or very bad rather than assuming it's very bad. Which I think is sometimes when people talk about when people look at the gold price, it draws them into conclusions that something must happen rather than.
- [08:10]
Podcast Host
If you had to have a diversifier outside of your fund strategy, would you own gold or government bonds?
- [08:18]
Peter Davies
Well, within our fund we both own some gold shares and some. Do you. Yeah. And I mean, but I think it's assets rather than gold. I think I might. We'll come back to the. What is a real asset? Is another question we'll have a debate on. But, but. And of course, yeah, I think in the scenario I find it very hard to imagine a negative scenario on a long term view that isn't to do with the public sector and therefore to me bonds are a very poor investment. Dangerous, I would say if I'm looking for this year, I think one of the reasons I'm relatively optimistic going into this year is if you know where the risk is and you don't think that risk is particularly plausible in the imminent time, take advantage of it. I mean, what I've said to people throughout and we've had it in the UK a few times is what I've always said about this decade to people is if you accept that bonds are the risk and not the opportunity at the point, and there have been various points where there's been a skew in bonds that makes you want to buy them, that's telling you to buy. That is probably a very good timing indicator, but you should probably apply that through buying equities in the uk. We've had it two or three times in the last four or five years where a lot of my friends have gone out and bought some bonds and it's been timing wise exactly the right thing to do. But I just, I just can't see how bonds are.
- [09:36]
Podcast Host
That's a very good answer. Do politics affect markets in any shape or form?
- [09:42]
Peter Davies
Definitely, they definitely do. I think also markets affect politics as well. I mean I think actually one of the challenges, particularly in countries like the UK that perhaps are not exogenous political systems to the global world is often the things that happen to politicians are way beyond their control and much more influenced by global economic factors. And so they do. And I think it's one of the hardest things for us as a team to accommodate is working out, you know, especially, especially because politics has tended towards tail events.
- [10:16]
Podcast Host
Yes.
- [10:17]
Peter Davies
So certainly some of the hardest parts of my career have been driven by very unlikely political things actually happening.
- [10:23]
Podcast Host
And obviously examples of Brexit and things like that would be, would be, would be good inflection points on, on what markets then did. But going back, looking forward to 2026, we've got the midterm term elections coming up in the States and will they have any bearing on equity markets? Do equity markets like midterm elections?
- [10:45]
Peter Davies
That's a good question. I mean I've certainly seen, I mean my view for 2026 in general at a macro level and I'm not sure how important this macro will be for our returns given the good pennies and themes and made probably more about timing rather than ultimate returns. If I look at where what I would say is the biggest differential for me, for us relative to others, that's both bottom up in the portfolio and top down makes sense. It's probably us feeling like there are a lot of drivers of why economic growth should be quite strong this year at a point where most people are quite pessimistic of economic growth. I think to me the midterm elections are a part of assuming why that might be persistent and that you've got to assume that the aim of the government of the US for the next nine to 12 months will be cheaper house, less inflation, less energy prices, good stock markets and cheaper things. So I think it's probably more that the midterm. I doubt the midterms. Maybe I'm wrong, but I'm not sure I could necessarily tell you I'm going to trade something massively differently on because of the midterms, because of things. But I think the framework that your
- [11:56]
Podcast Host
macro view for 2026 sounds like it's pretty positive.
- [12:00]
Peter Davies
It is on growth. I mean I'm not sure that necessarily, you know, it's very hard and it's very positive on, you know, I think this is a year where quite a few of our companies, some of which actually haven't necessarily done as well as other parts of the portfolio, you know, if they don't the likely trading environment for them if it doesn't get better this year, something like UK housing for instance, has been any number of reasons why, you know, our view of good companies in a structural long term growth market where there's massive undersupply political desire for more houses, you know, lots of good things theoretically going on. Last two years in particular has probably been almost the only source of the housing's probably been the only source where the company, the outturns for the companies haven't been quite as good as we might have hoped for. I think in an environment where inflation's falling, interest rates are falling, you know, if you don't. The good news for us I hope is that this is the perfect conditions for them to do well. The bad news is that the alternate argument, namely the structural growth won't come through if it doesn't come through this year, you haven't really got an excuse for it. Yes, but I think the reasons, if you said why is there likely to be a decent growth period? You've got politics as we talked about, unlikely. Even debating what you want to happen, pretty unlikely. You're going to get a big fiscal constraint going on. The capex drivers we've talked about for many, many years, there's a myriad of them, AI being the leading one, but massive reasons for capex to happen. And the thing that's constrained economic growth, not just in the UK by the way, actually our biggest disappointment has been US housing rather than UK housing in terms of where we've had to downgrade our numbers a bit. But basically interest rates being a bit higher and bond yields being a bit higher partly because of fears around persistent inflation that should alleviate this year given that there seems very little either labor inflation or fossil fuel inflation likely. So you should have a pretty benign situation from that perspective and from a policy perspective you've got a new. If you accept the premise the US is probably the foundation of global policy, you've got US monetary policy with a new Fed chairman who's likely to run policy looser than the prior one and a fiscal situation where you've got as you say, an election imminent. So I think all of Those point to a pretty strong growth pattern. And interestingly, if you do get that without inflation, the idea people might extrapolate it, beginning to think about the scenario we're talking about of a longer dated growth period driven by private sector capex, you know, has the capacity to make people think it might be persistent as well. You know, it's. Yeah, you don't see the, you don't immediately see the constraint to it. It's not like people are going to suddenly start spending money on any of those things. So. Yeah, so.
- [14:39]
Podcast Host
So in a nutshell, it looks to me as though in the short term there's no more tailwinds than there are the headwinds for equities to have a reasonable backdrop. Who knows what's going to happen? But it looks pretty.
- [14:53]
Peter Davies
Yeah, I mean what we tried to do was have a think about what might go wrong in that concept. And if you said what could go wrong? I think and basically exclude but accept the idea of unknown unknowns as we see with geopolitics at the moment, there's always something. I think if you said what are the predictable unknowns, Sorry, the predictable risks. It would be the capex sentiment towards the capex sours. An obvious risk will be people get skeptical of the returns on AI capex and suddenly you go from here to here. That could happen. I think the one that's subtler, that I don't think is that plausible, but I may be wrong on, is
- [15:41]
Podcast Host
the
- [15:41]
Peter Davies
idea that what you're already seeing, which is bits of inflation, normally inflation is either fossil fuels or labor and neither of those looks particularly plausible. Obviously it's dangerous to say the latter when we're going through the stuff with Iran, but it generally feels like there's plenty of labor around in most markets and, and fossil fuel supplies seem at pretty high levels. And so what you're seeing though is very pronounced price inflation in some niche areas, particularly those around AI. So undoubtedly US electricity prices are going up probably more than is comfortable politically, potentially in some form an inflationary impulse, you know, copper prices, DRAM prices, you can see pockets of inflation. And when you see growth, obviously your main question is at what point does that become too much growth? Our instincts would be the scale of those two things just isn't high enough. But we may be wrong on that. The DRAM prices give or take $100 on a mobile, on the cost of an iPhone if you put it through. So it's not immaterial. But ultimately I think problematic inflation tends to be either labor tightness or fossil fuel tightness is the assumption we're making.
- [16:51]
Podcast Host
So that unfair advantage that the US has had over the last five years is probably going to diminish relative to the UK and Europe, isn't it? Because we're beginning to get a handle on our storage of.
- [17:06]
Peter Davies
Yeah. And the lng. Yeah. I mean, if you look at LNG capacity next year, this is the year where you should begin. As you say, European gas prices should be coming down a lot. Even not assuming any return of Russian gas to that given replacement by renewables and increased LNG supply. And the effect on electricity prices in the US of AI is going to be a really interesting phenomena, I think, from less, to be honest, from an economic perspective. But if you ask for where some risks might emerge, the idea of political risk around that electricity price rise impacting sort of either policy or sentiment, that definitely would be something I would keep an eye on as the year goes on.
- [17:56]
Podcast Host
And do you think that the AI genie that's escaped from the bottle is actually in surprise to a lot of people, going to force mankind to think much harder and invest much more money in nuclear energy because it's the only way we can actually create enough energy? Or was that, is that a misperception of mine?
- [18:16]
Peter Davies
I definitely think, and it's interesting, I should have made this point. One of the fascinating things about the inflation theory of that sort of pockets of inflation I described is actually the output will be more capex, whether it's dram, copper or energy. What's so interesting and why we feel so confident about the CAPEX theory in aggregate is the response to the problems is even more capex. And I think you're right and definitely I think the broadening of the CAPEX is a good way to think about AI. I think we would, you know, we owned, for instance, Prismian, we owned in this, in the portfolio to benefit from more cabling, et cetera, more electricity stuff. I mean, to be honest, I think we're hopeful that, you know, that whether it's nuclear power stations or anything else, I mean, our view, we own a lot of steel, cement, building materials. I mean, to be honest, I think we feel that given what's going on on the supply side of those things and the presumption that there is never any incremental demand for any of them, actually the easiest way to play the stuff thing, whether it's nuclear power stations, gas ones, whatever is in the end, it feels very hard to imagine people not using a ton more building materials and that that's not priced in at all. That demand inflection isn't priced in at all.
- [19:31]
Podcast Host
That's what we're going to come into that in a second because the question I get to ask you a bit later on is is other companies that produce this stuff cheap or expensive? But we'll save that one for.
- [19:42]
Peter Davies
But to your question around, I guess what I'm trying to come onto is undoubtedly there'll be a need for more electricity and undoubtedly that will breed more capex. Whether that creates a supply demand mismatch that's investable today compared to years ago when we were buying Prismian is less obvious to me because it's more well known. And whether it's nuclear or renewables or whatever is, you know, there's lots of work, there's lots of ways. I'm not sure we've necessarily got a clear idea. It's probably the right way to frame it.
- [20:12]
Podcast Host
Okay, I like that. Okay, now we're going to focus on the fund. Let's have a little look back at 2025. But before we do that, I want to imagine that you're Talking to my 92 year old mother and you're explaining to her in a thumbnail sketch how you and your team that you work with run the money.
- [20:38]
Peter Davies
Well, I think there are two things that make us different from most people and then there's a set of views that we can talk about. So the first thing I'd say to your mum would be these are the things that are. These are the themes that we're investing in today. Do you think they're sensible or not? And if you don't think they're sensible, they're not going to change very much. They'll change a bit. But realistically her return for the next four or five years will be are these, are these companies and themes the right ones to back in terms of who we are and how we do things? I think there are two big distinctions. One is a point I made earlier that we expect the world to change and therefore we do different things at different times with the three to five year time frame. And what we look for is where things are changing, especially where those things are accompanied by a degree of complacency around the market that things won't change. And today that breeds plenty of opportunities given we've got a world that's changing a lot and as you rightly said, probably an investment community that hasn't changed a lot. I think the second thing that differentiates us, which is more time specific is but I think incredibly Powerful today, actually is one of the things we did a few years ago was over 20 years we spent a lot of time working with IP in the UK and the universities a lot. And I mean, it's a different product from what we're describing because it's dedicated to unlisted, but it's the same team who look at both things. I think our exposure to the university IP and the thinking that's going on within universities and actually, to be honest, the whole of the unlisted space gives us a sort of perspective that's incredibly differentiated amongst listed investors. I think the same is true in reverse. I think the fact that we do listed investing helps our unlisted. But I'd say to her, we're probably about the only person who does both of those things, albeit in different products, to try and get our research to be different from other people. And the common thread is differentiation.
- [22:24]
Podcast Host
And so people who are listening understand what you're talking about. Are you talking about companies that are being born out of the Oxfords, the Cambridges of this world and their ecosystem specifically?
- [22:36]
Peter Davies
Yeah. And, you know, as people can hear some of our work elsewhere on that, you know, we've been doing that for 15, 20 years. And, you know, if I look back at last year, obviously we'll talk about the listed space, but one of the quantum companies are, as a team, one of our biggest successes was one of the quantum companies that we'd been backing for many, many years turning into a unicorn and reflecting the potential of the whole ecosystem. So definitely two going together in a product is a bad thing, but the two going together into a research team, I think is a very good.
- [23:07]
Podcast Host
Really good.
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Peter Davies
Yeah. Especially at a point where, for us, if you take something like AI, for instance, this question around large language models, we're talking to a ton of academics about people trying to look for alternatives to Nvidia, et cetera, et cetera. The debate around what's the value of. In the end, the debate around are large language models economic or not? It's pretty hard to add much value listening to the big companies. And certainly that's the debate that's at the forefront of many of the venture capitalists in the UK because they're looking for the companies that you've got to be careful on the other side, which is obviously the venture capitalists always assume a disaster for the big companies, but I think we definitely feel like in areas like that, or defense, where the industries are changing very rapidly because of quite deep technology, it would be very hard to replicate Our understanding of the situation for the big listed companies without doing what we're doing here.
- [24:00]
Podcast Host
Okay, so what did the world index return for sterling investors last year?
- [24:06]
Peter Davies
About 12.58 or something like that.
- [24:09]
Podcast Host
Okay, so it's a nice, it's a. That's a nice return. How many stocks in your portfolio managed to generate a return of more than 50% last year?
- [24:22]
Peter Davies
Quite a few. I mean the fund has holded in sterling terms about 35 or 36 or something like that.
- [24:27]
Podcast Host
Percent. Yeah.
- [24:29]
Peter Davies
And so clearly a chunk of the portfolio will have done. And the nice thing was that came from a wide range of different positions.
- [24:37]
Podcast Host
Came from across themes.
- [24:39]
Peter Davies
Yeah. So we, last year we divided the portfolio. When we were talking about the portfolio, we tended to divide it into four of which one was other. And each of the three themes, Banks building and Data plus as we call it, had positions generating more. And the other category also did through some of our holdings in defense and airlines. So all bits of the portfolio had. It was nice, actually. I mean, it was unusual that it wasn't. And I think gives them. The main comfort one gets is, to be honest, the valuations and the prospects for these companies. But the breadth of the contribution, especially at a point where quite a lot of people are worrying about the narrowness of markets, the fact that our portfolio from very uncorrelated areas managed to find some interesting thing, good performance is I think got to be a good sign. And also I think so, for instance, our UK banks did very well, but it wasn't a great year for uk. Few people would look back on last year as being a great year for the uk and I think highlights the fact that for all the talk about thematics or geographic biases, the shares that we, I think, owned and own had such distinct qualities and valuations that you did and do have a very big margin of safety, albeit you're not going to get all of them right all the time.
- [25:53]
Podcast Host
Well, that's an incredible return across those three themes, which we'll talk about more in a second. But what about at the other end of the portfolio? I mean, how many stocks fell more than 25%?
- [26:06]
Peter Davies
One or two, but not many. I mean, I would say if you said where are the disappointments for last year? The big one was just. And you could say this is offset a bit by banks because you could perhaps argue that rates were a bit higher than people expected and that probably was good for banks. But definitely the disappointment for last year was housing wasn't as strong, particularly in the us, as I say what was interesting was the US was particularly bad in this. We had one share that genuinely disappointed us. And actually the good news is we are trying to be quite active in the portfolio at the moment. And that share we managed to have, I think on average about a quarter of the weighting we started the year with before. It's really sort of underperformed. So although we made a mistake, it
- [26:53]
Podcast Host
wasn't as bad as it could have been.
- [26:54]
Peter Davies
And I think it goes to a broad point which is we're quite patient with our themes at the moment, but actually the way we're running the portfolio is quite impatient to try and if we're going to make a mistake, it's probably from being too patient. And so what we're trying to do day in, day out is offset that by being quite active in the portfolio and more than we might normally be.
- [27:14]
Podcast Host
Well, that brings on to my next question, because being a slightly cynical investor, I mean, after return of 20, 25, I'd be thinking to myself, well, surely this portfolio, you know, has lost some of its freshness. Just answer that question in as simple way as you possibly can. Does it feel fresh or does it feel stale?
- [27:33]
Peter Davies
So we try and try to quantify this. So what we've tried to do and actually I think we give out some quite interesting detail is decompose the return into. And we do this very publicly, you know, your dividend yield, your earnings growth and do you think the end valuation will be higher or lower than where you're starting from? So I think clients can see what assumptions we're making. And interestingly, on that basis, without actually changing many of the assumptions, but adding a few new names and a few upgrades here and there, the expected return this time last year for the next four years was about 25, 26%. It's now 24, 25%. That is still miles higher than and miles higher than I think you could access in an index. So I think the basic assumptions still feel. And we can go through each name as each era, but so one, I think that I think cyclically there's a lot we still haven't seen. Our building theme, for instance, is premised off the idea that volume, if you take house building, for instance, that if we end the decade building fewer houses than we started the decade, almost every politician in the world, we've got 30 years to make up, we've assumed, not quite getting back to where we started the decade, it could easily be miles better than that, given what everyone needs. And something like, as we'll Come on to talk about and stuff like steel and cement. Our strong hope is that demand will be very strong this decade. In all our assumptions, we're assuming it just isn't very bad. So I think we've got, and it's reasonable to, as we talked about at the beginning, to assume for 26, for instance, the conditions are in place for that kind of increased demand to be more evident to people. So I think we haven't really seen the cyclical conditions that should cause the portfolio to prosper yet. The valuations remain very cheap. And then I guess the last way I look at it is this is slightly more instinctive, but it's nice that you echo it is, you know, you tend to look in these situations for how consensual your portfolio is. And I still feel our portfolio looks totally different from most other people. And then the last thing I'd say, perhaps, is if I take banks as an example, you know, the reality is we've now got a couple of years of seeing how returns develop with higher interest rates as the hedges unwind. And quite a lot of the big risks you would have worried about in terms of regulation, litigation, taxation, they're not going to disappear. But last year we tested most of those risks in different forms and broadly they didn't come through. And so I think what's interesting to me is for certain bits of our portfolio, I think we've got basically half the portfolio, I think is materially less risky than it was a year ago, because actually you've got a lot more evidence for it. Something like banks being the best example and it's still on a very low multiple, but the evidence is better. And I think for things like the building area, what's so exciting is the optionality in them, which won't come through in all of them. But I think we've got a lot of optionality in bits of the portfolio. And 2026 feels a good era for that kind of optionality to be manifested. And our job, actually, I think internally within the team is probably of the sort of 50% where you could make a lot of money out of them if X happens. I'm hoping the team can be quite active and insightful as to where that's happening, getting the evidence for it early and adjust the portfolio to mean that the base returns we're expecting actually turn out to be a bit better.
- [30:56]
Podcast Host
Better. So let's just put some numbers on the scorecard here to give listeners a feel for the portfolio. So a very basic level, what is the price Earnings ratio of the fund
- [31:09]
Peter Davies
versus the market, I think. I mean, it's going to be about two thirds of the market at Most it's about 12:30. I mean, each bit slightly different. Yes, 12, 13 times would be a good number to use versus the market on 21 times. I'm guessing slightly, but that order of magnitude is right.
- [31:28]
Podcast Host
It's pretty large. Does the fund have a dividend yield?
- [31:31]
Peter Davies
Yeah, the dividend yield from memory is about 3.7.
- [31:35]
Podcast Host
Okay, that's quite significant.
- [31:36]
Peter Davies
I mean, the most interesting thing, to be honest, is because it goes to a broader point is the portfolio is quite asset intensive actually. And the two common threads, I would say thematically is we're quite long assets and we're quite pro cyclical, albeit industrial cyclical, rather than think almost the most. And sure enough, because of that, our price to book of the fund is probably half of the market or something like that.
- [31:59]
Podcast Host
Okay, that is significant.
- [32:01]
Peter Davies
Yeah. But what's really interesting is the price to sales is also much lower than the markets, so probably again about half. Which is fascinating because normally you'd expect if you were very asset intensive, you only have a high margin and less sales. Which goes to the fact that I think for quite a lot of, and I think this is generically true, is not only are assets being cheaply valued relative to their replacement cost, but actually a lot of industries are seeing assets not yet generate the returns required in the profitability. And so I hope what you're going to get, and think what you're going to get in something like steel, for instance, is both, is that lovely combination of higher returns on the current asset base because unless you get higher returns, nobody's going to build any new ones and a higher valuation on those things at the same time. But it's very rare, I've never seen it, to have both a price to sales and a price to book discount, you wouldn't get it. So for instance, if you were owning a load of tech shares, you'd have very high price to book and very high price to sales.
- [32:59]
Podcast Host
And moving on to another yardstick, what's the free cash flow yield of the fund?
- [33:05]
Peter Davies
It's quite hard to tell because I'm not sure exactly how the banks get free cash flow. I would say they're very free cash flow generative, but if you strip out the banks, it's probably easier to talk through each individual position. I'd say some elements like TSMC would be on quite a low free cash flow yield because they're reinvesting it. I think Almost all of our lower multiple stocks would be on double digit free cash flow yields, as with the banks. So it's probably the fund and we'll come onto it in a sec. The mix of the fund, different parts of the fund, some like British Aerospace for instance, now will be on quite a low free cash flow yield because they're putting money in to grow their business. So I'm not sure I'd necessarily want to generalize. I'd probably better to look at the individual bits. And it goes to a broader point which is Y. Yes, we've got a bias towards asset intensive companies. We've got a bias slightly towards lower multiple companies, but given our stylists to find really interesting investments, some of which will be because they're growing very quickly. Looking at aggregate parts, with the exception of the asset commonality, I wouldn't necessarily look at averages of valuation.
- [34:10]
Podcast Host
I think that's a fair call. And of course one thing we haven't touched on yet, which is to remind listeners how many stocks the fund has got in it. And I have no idea what number of stocks the benchmark World Index has these days.
- [34:28]
Peter Davies
Lots. I think we tend to run about 40 stocks as our norm.
- [34:33]
Podcast Host
40 stocks?
- [34:34]
Peter Davies
Yeah. I mean that. I've never seen it below 30. And if it gets above 50, we tend to think we're being a bit undisciplined. That's more a function of how many things we can research. Well, as much as anything else.
- [34:46]
Podcast Host
And the active share of the portfolio, 90 something. 90 something. So basically that's really saying that 90% of the portfolio is not reflected in the index at percentage weighting.
- [35:02]
Peter Davies
I mean, of course, better mathematicians than me would start saying, well, factors may be common and it's. If you're going to run a 40 stock portfolio, I don't think it's. I mean the key number probably is that within the tech side of things we don't have very much exposure. If, you know, we've got maybe 1% exposure to the people who are spending a lot of money on AI, we've got a lot of exposure to the things they're buying, but we have relatively little exposure to the people.
- [35:29]
Podcast Host
To the people who are spending.
- [35:31]
Peter Davies
Yeah. And actually in the case of Nvidia itself, we don't have any exposure to that either. So, you know, the obvious point is, and I think it's been one of the things that's been. I'm not sure we necessarily got paid for this yet, but from a risk perspective, I feel like we've done A good job of accessing the change in economic conditions without taking a load of risk on stuff that is very hard to know, namely where are the returns going to come from some of these things.
- [36:02]
Podcast Host
Well, just talking about risk, I know I'm going to be jumping around here a little bit, but you've got three big investment themes you've mentioned to me just now. Data plus building stuff, I think we'll call it stuff and banks. So why is it that I look at your portfolio and you've got 24% in three banks of the overall portfolio, four banks. Those weightings are so much bigger than a lot of your tech holdings. Why is it that you feel comfortable owning large positions in banks versus that must be a risk management decision.
- [36:39]
Peter Davies
Yeah, we've got a big weighting in tsmc, our TSMC weighting, certainly equivalent to our largest bank weight. Not far off our largest weighting. Yeah. So I don't think it's. And there that in turn perhaps has a constraint just given the binary risk of elements of Taiwan.
- [36:57]
Podcast Host
Are banks more volatile?
- [36:58]
Peter Davies
Well, the most interesting thing to me is the way, you know, the way we allocate capital is, you know, there'll be a limit to what we'd have in any theme. And you know, banks got towards the top end of that beginning of last year. They're now a bit more normal at 24, 25 compared to sort of 30 would probably be our max in anything. Yeah, 24. They're now 24, 25, which seems sensible given that they're very good investments, I think. But. So I think it's the rest of the board. I think at the beginning of last year, everything we were showing was them being such crazy. There was a step function between them and the other investments. Even though we thought the other investments were very good and obviously maximum weighting still. But that largely turned out to be the case last year. The thing that's fascinating though, given that our V on banks in the UK and Ireland is they're basically going back to normal. There's nothing particularly complicated or innovative. It's that banking's normally quite a good business after crises it looks like a very bad business. And often as an investor you get the opportunity that people who are used to banks being terrible take a long time to spot them going back to normal and forget what they can look like. So I think banks going back to normal and being a bit boring is kind of what we want them to be at the end of it because the risk premium will come down and the multiple go up and what was so interesting about last year was obviously the shares did very well, as did some of our tech shares but within our portfolio banks were the least volatile. They realized the lowest volatility of the portfolio whereas tech had lots of volatility and it did good returns. And a, that fascinates me in that normally when you see assets be less, when you want an asset to have a lower risk premium, the fact it's getting less volatile is normally a good sign. Very good sign and something we track across. There's often been a clue to re rating of shares in the past for us. And B, you know, you're not alone in saying you got such a lot in banks and not enough in tech. You know, at some level
- [39:00]
Podcast Host
I didn't say that.
- [39:01]
Peter Davies
I would say no, no, sorry, sorry, sorry. But actually weirdly in old fashioned terms of volatility, you know, certainly last year anyway we had less. You could argue the opposite that actually if banks, I think they're about a third as volatile as our tech names. And so you know, if you said look your weighting should be volatility adjusted, you would have, you would have been 90% of it.
- [39:22]
Podcast Host
You would be very popular data analytics team.
- [39:24]
Peter Davies
Yeah.
- [39:25]
Podcast Host
So let's just touch on data plus what percentage of the portfolio would be sort of prescribed as data plus.
- [39:32]
Peter Davies
It's a bit fluid but give or take 20, 20%, 25. 20 to 25. I mean I would say the three major themes that you've talked about, 25ish each. Okay, a bit just it's a good way to think about it.
- [39:45]
Podcast Host
And then you got very little exposure to the MAG7. Why do you have so little exposure to the MAG7?
- [39:50]
Peter Davies
I mean I think our thesis on tech is it's going and we had a lot of exposure to some of those companies a decade ago. I think a decade ago we felt what happened last decade was a bunch of non capital intensive, highly monopolistic businesses went from 25% penetration to 100% penetration which was both quite predictable and economically was a fantastic situation because returns on capital were sensational. I think what we feel is happening now is people are spending a ton of capital on a price that may be very large. Probably it's the same price they're all aiming for where the returns on that and we're going to keep looking for them. There'll be a point at which hopefully the price is obvious, in which case we may well, you know, the team is not, we're not bearish on AI at all. It's Just very hard. So I think it's basically a shift from you're shifting a set of companies from being non capital intensive monopolies to very capital intensive competitive businesses. And yet the multiple of earnings you're paying is kind of two or three times what it was a decade ago. And so our bias is just to buy the things that is trying to avoid risk, is trying to get exposure with avoiding risk. So for instance, to give you an example where we got that wrong, you know, we had a lot. So we've had TSMT pretty much throughout and saying look, we don't know what people are going to. But for instance, we've missed Nvidia probably forgot DRAM last year, which is probably an error in thing. You know, in the case of Nvidia, you know, we intellectually didn't get ourselves to the position that became evident over the last few years of they were going to dominate that particular area. We weren't 100% sure in our mind it was them. We were pretty sure and remained, we felt, we knew that with TSMT it didn't matter whether it was Nvidia Broadcom
- [41:37]
Podcast Host
because they just make the chips.
- [41:38]
Peter Davies
Yeah, Google, whatever.
- [41:41]
Podcast Host
And so what would Nvidia have to do now with its current valuation to be a great investment over the next five years?
- [41:52]
Peter Davies
I don't think it has to do a great deal, weirdly. I mean, I think I'll put another way. If you believe, and there's lots of different figures around, but broadly speaking, if you believe the aggregate spend in AI that their CEO talks about in about five years time and you assume that their market share is consistent with where it is today and the profits, you do a few other or something at some level it'll be on a single digit multiple, in which case it will be a very good investment. Yeah, okay, I think we would. So I think if the world pans out the way their CEO describes it, then their shareholders will do very well. I think we, A, we think we'll do very well out of TSMC as well at the same time. And B, the question of where Nvidia sits relative to some of its peers for us is still a bit hard relative to the question of where TSMT sits relative to its peers.
- [42:48]
Podcast Host
But just to be clear for listeners, of course TSMC actually manufactures the chips. The chips for Nvidia that have the unique knowledge.
- [43:00]
Peter Davies
Exactly.
- [43:01]
Podcast Host
So you've identified a whole stack of differentiated tech companies as I understand, that are playing this AI revolution, but they're the picks and shovel companies. Is that too that too brutal.
- [43:18]
Peter Davies
So I think the picks and shovels probably may even be outside of tech to some degree. I think they're, you know, because as we say Prismian within the electrification, there's lots of electrification areas we benefit from, Eaton Prismian, et cetera. You know, as we talked about it wouldn't surprise me at all if we weren't talking in a year's time about growth in demand for steel being a function of. I think where we're going now a bit is slightly different in that I think it's kind of stuff that AI existing creates more demand for rather than the supply side. So to give you two examples of things. One, we've got a very big position in one I would like to have a very big position in, but we don't at the moment. The one we do have a big position is analog semiconductors. So they make the sensors for objects and our contention would be that objects are going to get way more intelligent. This decade is just a given for us. It doesn't matter whether Nvidia make a ton of money, Deepsea power them. It's just, you know, the brain getting more intelligent is only going to be relevant if bodies also use that intelligence, I think is perhaps the way to put it. And in order for those bodies to get more intelligent, the thing we've seen with cars, we're now seeing with drones and autonomy and sensing they're going to consume a ton of. They're going to use a ton of analog semiconductors to get the data in and benefiting also from the power side of things as well. So I think in that case now there is the reason we've only just started investing in them aggressively has been a. There was a different set of cycles going on. You know, there's always going to be a bit of a lag between the capacity to do something and it coming through and things. And we were getting to know some of the companies making our, you know, work. Yeah. So I think that's more a case of. I think a. That's to the optionality point. I'm pretty confident that the chance of that's right over five years is quite high. You know, we clearly haven't seen it. You can't point to it yet. You can't see the revenues having gone up. I think the optionality we got for 26, which is really exciting, is I don't think many people are thinking about it particularly a lot and I think there's a decent chance it shows up at some stage this year. But I Think of that more as being a beneficiary of AI is what's beginning to come in where actually the benefit will be even greater. Ironically, if the returns or the cost of AI to the consumer goes down, the benefit may even be higher. Another one, which we haven't quite got to yet is if we think about which industries are going to be transformed by AI. And there's lots that we're thinking about and one of the things we're finding is that big companies often in quite boring industries like banks and insurance, the fact they've got access to data. Because one of the interesting things about AI is the likes of ChatGPT are not particularly trying to use your data in the way that Spotify. If you think about the moats that the likes of Spotify created, it was all personal personalization via use of data. And weirdly, not weirdly, but for privacy reasons. If anything, the large language models are going the other way in that. And so permission to use data is going to be quite important. And interestingly we're already seeing it in things like general insurance. With Aviva just being able to point to a profit improvement from personalized product offerings to consumers, we can begin to see it in banks as well. So I think the data getting, allowing companies to be to have a better proposition to their customers and create more value and therefore make more profit is beginning to come through. One of the ones we're really interested in is, is healthcare where it feels like the, the data creation, the, the sort of I think flywheel is, I never quite know what a flywheel is, but the flywheel of the data gets more valuable, therefore you create more data. It feels a very logical thing to do. You know, is we're looking at lots of areas like that and sort of is imaging for instance, some of the healthcare imaging companies, just because people can do more with the data, you have more, you use it more and that sort of thing. So I think I would describe it actually more as we're moving on to the part of AI which is what's it going to get used for? And can we find industries or companies that are going to benefit from that increased usage?
- [47:23]
Podcast Host
And slightly unfair question here, but what is the tech company inside your portfolio that you are most excited about at the moment?
- [47:29]
Peter Davies
I think TSMC is a bit like the banks actually. If they just keep doing what they're going to do a they can deliver a very, they're going to do 20, 25% earnings growth in normal circumstances and they're not starting on a High multiple
- [47:40]
Podcast Host
and is TSMC expensive or it's on
- [47:42]
Peter Davies
a multiple just above a market multiple.
- [47:43]
Podcast Host
Okay.
- [47:44]
Peter Davies
And you know, so I think the way within our framework of earnings growth plus RE rating we've assumed the multiples flat but it's going to grow earnings at a level that you know is more than enough for a good return. Yes. My hunch is there's more upside to the multiple than downside if they do those earnings. You know, if you've delivered many years of 20% earnings growth, a market multiple feels a bit churlish. Yes. So I think those ones are kind of quite not straightforward. But you don't need anything particularly new to happen and you should do really well out, which I think is true of the banks in the UK for instance. As long as they keep doing what they're doing, the multiple will catch up. I think something like the analog positions has the capacity to both deliver volume growth materially higher than people expect and consequently earnings but also get reappraised in terms of how important they are. And those reappraisals, they tend to be quite exciting when those two things happen at the same time. So I'm probably more excited by one of the things we've been debating about weightings is how do we balance predicted, especially given we still think the returns on things like TSMC and banks are pretty good. How do we balance predictable strong returns with the optionality of amazing returns and something like the analog stuff to which our answer is inevitably the portfolio is probably 50, 50 I would say. And then the key skill becomes knowing that if you've got optionality across quite a few different positions, the intensity of our work has to be spot which optionality is coming out and be willing to adapt those positions quickly as it becomes obvious.
- [49:23]
Podcast Host
So those small positions of the portfolio are more like a workbench, are they?
- [49:27]
Peter Davies
Yeah, I mean they're not that small. I mean, you know, the building stuff for instance. And normally I think we where as I think we do feel with the analog companies or with the building companies even without the optionality we can do 15, you know, high teens returns if they just so in the building companies generally we felt like we could do 15% just on a sluggish economy. But what's really exciting is what you
- [49:50]
Podcast Host
can do if the economy picks up.
- [49:52]
Peter Davies
And so it's more a case of that's lower than the bank and TSMC returns on a base case. But actually we're quite happy to say, well the optionality is so great that, you know, let's let's, you know, so the weightings are actually not that dissimilar.
- [50:04]
Podcast Host
And so we've spoken about the building companies a little bit. We've spoken about tangible fixed assets. On the other side of the coin, are you saying looking at your portfolio, you were also saying that intangible assets, global brands are just too expensive at this point?
- [50:25]
Peter Davies
Strangely I would say I don't think many equities are too expensive. I could possibly point to a few really extreme things in the US but actually finding really egregious multiples even in tech. It's not that I think it's the challenge and I think this does apply to some of those companies you described. Is Antec is that the risk around. The reason these things got onto quite high multiples was they were perceived to be very predictable. Definitely true for the tech companies last decade. And I think my worry is less the multiple and more the earnings risk on these companies. It's more that in a de globalizing world with brand proliferation a similar dynamic to what we described in tech, namely you just don't. I just think it's really hard to predict what's going to happen in some of those things in five years time.
- [51:17]
Podcast Host
And historically do you think you and your team are pretty good at projecting earnings growth on a three year view?
- [51:26]
Peter Davies
Yeah, I think we're. I mean what we try to do is ensure that the models understand where we could be wrong such that something like housing, you know a. It helps us calibrate the risks and balance. You know you should never. No model I think should ever. A model should be a dynamic thing which is helping you understand how right you are as it goes on. You know something like on the banks when we were modeling how the hedges unwound. You know it's there as a hypothesis and then when you see it being borne out through the earnings you get a lot more confident and that that allows you to do it. So yeah, I think, I think, I think we do very good detailed work. Obviously we're not always right but I think it helps us know when we're not right, if you know what I mean. We would always use our own models by the way. I mean I don't know what other
- [52:07]
Podcast Host
people you never third party models.
- [52:10]
Peter Davies
I think there's a value to building a model of a company that is about understanding what the genuine inputs are as opposed to.
- [52:17]
Podcast Host
And you trust your own numbers?
- [52:18]
Peter Davies
Well, no, I trust because we've had the examples of this where I trust the fact that when our numbers don't work, that means I've got to find out something that I don't know. They often don't work. But unless you go through the process of coming up with that, you don't really know where to look when things go wrong. And also, I mean, give you an example the other way around, if I can't do that, I think so. Two businesses, for instance, that I never. So investment bank versus retail banking, for instance. I can do great models of retail banks because I understand the balance sheets. I roughly understand it's almost impossible from the outside to do a model of an investment bank. You just genuinely start with a revenue number. You might say the revenues came in this division, but you've got no visibility from the outside. That, to me is an important fact. If I can't do that, I mean, sometimes it's been right, sometimes it's been wrong. The fact that I know I can't do that for investment banking has always made me reluctant to confidently assert the value proposition of some of those companies.
- [53:19]
Podcast Host
And when you've been looking at your retail banks, I remember you always used to say that it's all about deposit growth. Are the UK retail banks still benefiting from positive deposit growth at the moment?
- [53:34]
Peter Davies
Yeah, yeah. In fact, what happened with deposits? So I'd say it's all the values in deposits, I think is probably what I would say. And therefore deposits growing. You know, anyone can lend money to someone. It's not hard lending money to people, it's hard persuading getting it back. Yeah, exactly. So, and this isn't always true, there'll be points in time where you can. But you know, the unique thing about banks is their access to deposits at a price that's for a service, but at a price it's lower than most people can secure funding for things. So no, deposit growth looks pretty healthy at the moment. It went through a period, again, going to Warra models, Right. Over many, many years, deposits have always grown above GDP and they tend to consolidate market shares just because there are economies of scale. So contrary to what most people think about banks, we do think they are natural growers above gdp. One of the interesting facets, if you think about the challenge, particularly in the UK in 2223, obviously in Europe the value of deposits went negative because you had negative interest rates, which obscured it. And so we started buying when rates went positive in the UK, that deposit growth and the US to a degree. But the UK in 2023 or whenever it was, I'll get the dates from deposits. I don't think they ever quite went negative but they certainly slowed down a lot because people were locking in investment products that were outside the deposit locking in that when the rates moved a long way there was some flight of deposits into other vehicles going back to. And that wasn't. We knew to model it. We just didn't know quite how to model it in terms of. And you could definitely. People did get a bit scared about what that meant for margins and for volumes. And the good thing as you in the last couple of years, the other thing that's become more comforting from a bank's perspective is one seen that go back to normal and deposit growth go through. But yeah, and then what's of course interesting is loan growth. There's clearly an underlevered private sector out there, particularly the consumer as the reciprocal of an over levered public sector. Certainly if I was a government I'd be trying to encourage private sector lending growth as one of the ways in which one generates overall growth and productivity. One of the fascinating things about private sector lending growth is it tends to create deposits. The miracle of fiat money is that deposit growth tends to be positively correlated with or should be positively correlated with lending growth. And lending today is at pretty much an all time low situation. So I think we'll see.
- [56:08]
Podcast Host
Let's touch on the businesses that have got attractive tangible assets. Can you give me an example of a company in your portfolio that's got highly attractive tangible assets but is in your eyes servicely underappreciated by the market?
- [56:28]
Peter Davies
Yeah, I'll give you two.
- [56:30]
Podcast Host
What's the first one banks would be
- [56:32]
Peter Davies
the other one banks deposit.
- [56:34]
Podcast Host
We're done there.
- [56:35]
Peter Davies
What is interesting is it's not a coincidence that is the same point but I think to give you two themes that are going on. So within building we own a lot of Mital and a lot of Heidelberg. You know Mital the steel producer and Heidelberg the cement company. Yeah. And what's interesting of course is they are very local. They're not asset. They're, you know, they're very asset intensive businesses and interestingly they're local assets typically rather than big mines in the middle of. They're not that, you know and what's happening there, which is really interesting is de globalization and tariffs is actually protection of local assets. You know, actually what you're seeing in the EU is just doing it with, you know, you saw the US do it, India's done it before. The people who benefit from tariffs tends to be the local producers. You know, if you go back 150 years in the UK and go back to the tariff versus free trade debates. It was a debate between local producers and consumers. You know, consumers wanted low prices, local producers wanted supply to be constrained. And so what you've got in areas like steel and cement is, you know, as the work. Whereas for 30 years basically Chinese new supply just got rid of the economics for local producers in other parts of the world. To the extent that a range of reasons including tariffs is kind of reversing that, it's not surprising to our minds that the benefit is accruing those assets are getting more valuable. And the fascinating thing is as yet I personally think that's going to happen at the same time as demand goes up for all the reasons we've talked about of needing to build all these things to be fair, we haven't yet seen that going back to what 26 might bring compared to that if you get local, you know, imports getting less competitive at the same time as demand goes up. And it's non. I mean we estimate for steel for instance, so what the EU's just announced will take local capacity utilization 60 odd percent to 80 odd percent. It's literally going from load up. It's literally going from the lowest it's ever been to the highest it's ever been. And you know, if I look at it the other way around and say okay, that's roughly the equivalent of a 30% demand improvement. If you imagine the economic conditions required to get 30% increase in every steel company would have gone up three or four fold if that had happened from a demand perspective. And yet arguably it's more important if it happens from a supply perspective.
- [59:09]
Podcast Host
What does that do to your model for metal?
- [59:12]
Peter Davies
Well, so what becomes interesting is various other things going on with the steel industry that a particularly attractive Mittal to its credit has managed to retain a European steel business despite all those negative things, mainly because their assets have. One of the nice things you get after a period of really intense challenges for industries is those assets that are left tend to be pretty good assets now. And so the cost curve has got a lot steeper in Europe. But what's really interesting is that and been enhanced by share buybacks because they've been buying back shares throughout the last few years. One of the attractions we had for these kind of companies is the balance sheets were so strong that any cash flow came back in market and so Mital's. So I think the way I think about it a bit is the book value becomes a relevant metric. Book value is irrelevant if the Assets are not needed. And what's so interesting about Mital today, a bit like banks were two years ago, where you could have made the same argument is trades on, give or take, 0.5 times book value. The book value has basically doubled in the last five years because of the buybacks. 0.5 times book value gets really interesting if you presume that even if you say worst case, it's a commoditized industry, but it is a commoditized industry where you need the assets. That gives you some concept of what the valuation might do. Where it gets really exciting I think is obviously if you go through a period where there aren't enough of the assets around, returns on book value should be well above yours. And if you say what's replacement cost to the assets? Because these assets are all typically built many, many years ago. If you wanted to replace it would be. I mean we've done an estimate but it would be sort of on the Europe. Well, I think it's probably true for the whole lot, except for India, that it'll cost you three or four times the book value to replace most of these assets. Now that's not quite the same as saying today's assets are worth that because you'd get new kit and stuff like that. But anyway. So I think the way we think about it is this is assets going from a situation where they were kind of almost unanchored because they just weren't useful to being useful. It's like when shares go from being uninvestable from a balance sheet perspective to investable. You can make some really crazy returns in that situation.
- [61:19]
Podcast Host
I remember that very well and I think we should move on now to the portfolio management of the team. So it's yourself and Jonathan as joint team heads of team.
- [61:30]
Peter Davies
Yeah. And Nigel Hickmet's very involved with the UCITS portfolio in particular. And then we've got Melissa, Greg, Ellie who help who do various parts of the research process and different products within the team. So it's a very. I mean the team's broadly been pretty similar for the last. I mean Jonathan and I have worked together for nearly 25 years, long time, you know, Nigel, Melissa and most of the. I don't think it's a very well established team where you kind of know that what you're trying to do across the team is get different perspectives, you know, engage a debate where different people are good at different things. And the skill of the portfolio managers or the skill of anyone is of running the team is just make sure you Hear from the right person at the right time and listen to them.
- [62:12]
Podcast Host
So what does a team make you better at? That you couldn't be without them? Because we all have our strengths and weaknesses.
- [62:21]
Peter Davies
Yeah. I mean, I would view myself as a component of the team rather than the other way around. So it's almost the other way around, which is what do I add to the team rather than what they add to me, which is probably very little. Yeah, I mean, it's more when we're having a debate on a share. Probably two things, isn't it, that when we're debating a share. I mean, I'm not a great fan of voting on shares. I've never seen any. Almost invariably if we vote on something, we'll get the wrong answer. So the key of any investment debate is to draw out the person who's likely to be right about the particular subject. And what you'd get over a period with the team is two things. One is some degree of specialist knowledge. And so, you know, for instance, you know, banks, you know, Jonathan, I probably the rest of the team might think we might have a view if we thought there was something really interesting happening in the hedge. That would probably be Jonathan or I spotting that rather than some other members of the team different on different things. But then you have character traits. You know, what you want to do on a team is get people who you know. So, for instance, I get most. I think Jonathan would say I or the team probably say if, for instance, I decided I wanted to sell a few banks, I think the team would. The very quick reaction from the team, given my natural comp, which I'm definitely not saying, by the way, I think they're going to. But the way the team would probably work is if I was just humming and haing about our bank a bit, I would. Jonathan and the rest of the team would immediately say, hold on a minute. You've never hummed and hawed on these things for the last forever. Doesn't that mean we should halve the waiting?
- [63:49]
Podcast Host
Yeah.
- [63:49]
Peter Davies
And that question. So it's a way of, you know, when you work with people for a long time, you know, when they're doing
- [63:54]
Podcast Host
things, they read each other.
- [63:56]
Peter Davies
Yeah, exactly.
- [63:57]
Podcast Host
And do you think we're better at picking stocks or themes?
- [64:00]
Peter Davies
Well, the way we think about it is we pick stocks and allow the themes to materialize. And when I look back at something like mining, for instance, in the 2000s that we were very good at, invariably if we were doing something like this, we'd talk about China et CETERA et cetera, but always in the portfolio as we own Xtrata or something. And when we look back on it, it was kind of interesting that we made more money. The delta between our mining shares and the mining sector was greater than the mining sector and the market. So actually I think what we get is two really nice things from doing it like that. One is, I think our way in which we come up with themes is differentiated. Something like I was just describing with Mittal, that's us working on Mittal and then going, hold on a minute, isn't that what should happen with Terrace? That's kind of. It's that way around, not the other way around. It's not starting with Darius. So I think our themes tend to be more differentiated because they're coming out of bottom up work, whereas most people are doing themes are perhaps coming top down. And then secondly in terms of implementing themes, I hope, and certainly lots of evidence to this effect, the stock selection should, whether it's mitigate the risk or add to the returns, should mean that any thematic exposure we have should come with a premium return for our clients and allow them to access, compared to a sort of quantitative model should allow them to access those returns with a premium.
- [65:16]
Podcast Host
And I got a sniff that defense is a bit of a theme for you. Is that right or wrong?
- [65:22]
Peter Davies
Yeah, no, no. So 18 months ago, two years ago we sort of. Two years ago we kind of, I mean it was interesting post Ukraine, we kind of, it was all, you know, I think we had candidate of is energy going to change or is defense going to change? And at the time I think probably would have taken the view that the effect on energy might last longer and there was different things and kind of to the flexibility point. As time progressed, you know, we did. As time progressed, it became obvious you were in a very long cycle for defense.
- [65:51]
Podcast Host
And are we talking about Rolls Royce BAE systems?
- [65:54]
Peter Davies
So we own a lot of BAE systems, which I think we feel is in a very interesting position, not so much for European defense, but for, you know, particularly areas like Japan. You know, I think what became obvious to us as we bought and again through getting to know the company better.
- [66:06]
Podcast Host
Yeah.
- [66:07]
Peter Davies
Was that the defence team was a lot more elongated and broader than perhaps just Germany's going to buy a few tanks because. And I think that was a real insight that in our minds what we were saying is the multiple of this should go up because it's going to take is 20 years of growth, not one year. And so we bought a lot of defense, a lot of British Aerospace two years ago, I think it probably was, did phenomenally well for us, especially last year.
- [66:32]
Podcast Host
Is it still in the portfolio?
- [66:33]
Peter Davies
Yeah, it's still in the portfolios. It's, you know, it's, you know it's doubled since we've owned it. So you would expect us to have. But and then, and then I think one of the challenges with defense going back to the other side of it going to be really interesting. So within our unlisted space we were one of the first investors in company called Helsing which has become one of the largest sort of new defense companies in Europe. And of course with going to the perspective point, the fact we're talking to both British Aerospace and Helsing, I mean Defence is definitely going to be an industry where the biggest question for people is not is there going to be demand? Is the demand going to be in the same stuff that you built 20 years ago? Yes, that's definitely changed. It feels like it. And yeah, if you look at again to your point about general listed analysis, there's very little out there. Yeah. And to be fair, the companies like British Aerospace are going to do really well out of that because they're intelligent tech heavy companies. But I think the calibration for us going forward is going to be which of the, which of the defence companies are going to win in new defence as much as, and I feel very comfortable, don't know the answer yet because it's, you know, the fact that we understand both the listed and the unlisted I hope makes us better at both of them.
- [67:43]
Podcast Host
Yeah, that's a very good example of that actually. What should a truly active fund manager do to, to be justifying their, their fees? So I suppose what I'm really saying is what does active really mean to you?
- [67:56]
Peter Davies
I definitely wouldn't prescribe what other people do very much. I sort of, nor would I say look, passive is 100% wrong. I think what I feel very confident about today is our particular activity. You know, I kind of look at the risk premium and the growth opportunities within our fund today relative to the market. So when we first started doing long only rather than just hedge funds, part of the attraction of it was the whole market had an exceptional risk premium that we said, look, we can buy Mega Cap shares in the US and interestingly with those institutional grants where you have some debate on these things, we didn't even talk about, we said we didn't really want a performance fee. We just thought the logic for doing this is you're going to make A load of money out of it. And yes, we'll choose our names within the mega cap area. I think this decade the opposite is true. I think this decade you will get rewarded a lot for not doing the same thing as the index everybody else and you've done it. There are periods where the index is
- [68:59]
Podcast Host
very hard, it's really hard to outperform
- [69:02]
Peter Davies
and there's periods where it's very easy to outperform. And normally those periods are inversely correlated to how much money goes into at the moment. I would say the fact that we think we've got a very strong opportunity to differentiate at a point where people are very bearish about active managers, it's a consistent picture at least.
- [69:21]
Podcast Host
And do you use cash as an investment tool?
- [69:23]
Peter Davies
We try not to. I mean one of the reasons we didn't, I mean I took the view that we just, we took the view that the attraction this decade was a bunch of really cheap shares, you know, that we wanted to get exposure to. And actually managing short dated volatility was what we wanted to get away from. And partly because we thought we'd get it wrong most of the time. I think consistent with that, I think that's very honest. I think consistent with that there's gotta be a maximum cash that shouldn't be much more than 5 or 6% against which I also do think you shouldn't always have something. You know, there are points where we should. We are trying to trade the names in a way that creates challenge for the portfolio and ers on the side of assuming we're going to be wrong rather than right. And so and we had this a bit February, I think it was last year where we ended up getting nervous about enough of our names that we ended up with 8 or 9% cash. And the good news about that I think is not that we necessarily happen to be an okay time to have 8 or 9% cash but in truth the probability you reinvest that all at the bottom is it just doesn't happen, it just never happens. But what was interesting was that we came out, when I look back at it now, the alpha we generated from the new names, just which ones are you going to buy versus which ones did you sell? I talked to you earlier about having less in the main mistake we made that was when that happened we sold a load of it. And when we came to buy back stuff it was different stuff that we bought back. And I think it was a lot easier to get there through being generally active, being willing to hold a bit of cash at times and seeing which name you prefer at a point in time than had we gone through a massive internal debate saying should we cut this name from eight? It's just really hard to put yourself in that mind.
- [71:06]
Podcast Host
It's really tough. That is really tough. And then you've got quite a lot of money in the strategy. As I remember it was well over $7 billion. But you've got 800 million in the developed markets. Use it. What is the percentage that you have in the uk, in Europe and in the States?
- [71:30]
Peter Davies
So give or take, it's about 40, 40, 20, I think about 14 across to check the number. Is that roughly right?
- [71:37]
Podcast Host
Yeah, yeah, that's 44 to 20.
- [71:40]
Peter Davies
But. But in a way the good news, two things I would say, one, it's not the way, it's definitely not a top down, it's an output on any.
- [71:48]
Podcast Host
It's an output.
- [71:49]
Peter Davies
And. And two, in terms of last year, you know, I think last year was a good guide. We have a lot of exposure to the US economy within that as well. And three, I think last year, one of the nice things about last year in a way is with that and what was again a pretty rubbish economy. It wasn't like last year was a great year for European or UK economies. It's fine, we can find, as long as we get the pricing right. And we think there is this massive opportunity where you can often buy the same exposure at a very different multiple. I actually think weirdly that the two exposures for this year that are going to be most important to us are being somewhat more pro cyclical than most people at an industrial level rather than a consumer level. And having the asset backing being much very. It goes across a large chunk of the portfolio. In a way, banks are asset backed. You know, in tech we're kind of biased towards people who create the assets rather than things. So I think those. Interestingly, we always get asked about the geography and it's fine. It's important there are some exposures to the economic. If European economic conditions are better, it'll be much better for us. But I think last year proved that it wasn't the sole risk in the portfolio. And the other ones I think are really quite important.
- [73:06]
Podcast Host
When you're interviewing company management teams, how much of your meeting time, what percentage of that time is spent talking about their future plans outside of the earnings they're reporting?
- [73:24]
Peter Davies
I think most. I don't know. I think this is definitely me thinking aloud about and trying to generalize across things that perhaps can't but in general, I would say before we buy anything, we'll go along to see a company. If we don't own a company, it's usually because the first meeting is this might be interesting. And so I would say most of the time we would often with the IR team actually not necessarily the CEO, just say, you know, give us the 30 minute elevate. You know, we think this might be interesting because of X.
- [74:01]
Podcast Host
Yes.
- [74:02]
Peter Davies
Tell us whether we're wrong or not. You know, I remember British Aerospace being a great example where pretty much at the end of our meeting I knew the shares were by. I mean, you know, that was all I needed. I felt, you know, when I started. And that was in part because there are within that you're also learning. Is it obvious within a company what our value add is? Because if the IR person effortlessly explains the investment story to you, you probably feel like the company knows which way it's going as well, which was definitely the case in British Aerospace. Then you would do a ton of work, which would be very forward looking, very. And then I think somebody said we'd had 100 meetings with Lloyds in the last 10 years. You know, our meetings there will be. That's a completely unverified figure, but it's going to be roughly right. You know, the meetings now we would have with them will be is that, you know, we don't need to know. It's interesting we have different types of meetings. So actually most of the time in the last couple of years, it's been certainly a couple of years ago was do we really understand this hedge properly? And every quarter we'd have gone through some really micro things where it was do we understand how this hedge is going to play out? And this thing now we're actually having some quite interesting conversations which are, how is AI going to affect your cost base? What are you learning from these things? And so it varies a lot. But I would say in general, once you've known a company for a long time, you're more just trying to check what's changed since you last spoke to them, whether that's forward or past fairies. But definitely when you start, almost all of it should be about. If you don't own it, it should be about the future.
- [75:39]
Podcast Host
And what about the quality of CEOs who are the most outstanding CEOs in your portfolio at the moment? Which companies do they work for?
- [75:48]
Peter Davies
I think actually to be honest, if, if I say the one who most recently. So there are lots of very good CEOs I think for me A differentiated. If I perhaps frame it on the most differentiated. That is listening to them, I learn more about. Yeah, I felt if they hadn't been there, the company wouldn't be in that position, which I think is probably.
- [76:08]
Podcast Host
That's really what we're talking about.
- [76:09]
Peter Davies
Yeah. So Damian de Blanc, or blank, I never quite know how to pronounce it. Definitely having spent an hour with her, I felt like that company is very, very fortunate and have much, much better investment for what she's done and what she's going to do in conjunction, I'm sure she would say, with her team, which are. And also the other thing you learn from good CEOs is probably the best guide to a good CEO is often the people they employ. And yeah, I would hope. And that's interesting for that company as well. Definitely.
- [76:40]
Podcast Host
What was the name of the company?
- [76:41]
Peter Davies
Aviva. She's Aviva CEO. And Aviva, I think, is potentially a really interesting company where an industry that historically has been commoditized because of the use of technology, that is general insurance and actually which in the first wave of technology lost its competitive edge because, you know, the first wave of technology and insurance was compare the market.
- [77:01]
Podcast Host
Yeah.
- [77:01]
Peter Davies
And any new entrant could. Someone, you know, any new entrant can access the consumer. I think. I think what you'll find, you'll find is she. They may well be a company whose moat is growing because the second wave of technology involves, you know, incumbency using their data intelligently to create a barrier to entry that other companies can't.
- [77:23]
Podcast Host
Yes.
- [77:24]
Peter Davies
And really transform the returns. To your point about assets, turn it from a business that shouldn't have much franchise premium to asset value to one that should have a massive one because the intangible assets are great.
- [77:35]
Podcast Host
And chief executives, can they make a real difference to the return for shareholders?
- [77:40]
Peter Davies
Yeah, certainly to the downside, they can, I think. No, listen, I do. And especially now, weirdly, because I think as AI or I mean, why we call it Data plus is I don't like just using the term AI. But, you know, even with our business, I see it that, you know, I think understanding how there is so much change. I mean, look, it's a bit like what we were saying with active managers. There's so much change going on that understanding and interpreting that change from the position of any company almost. There'll be very few companies whose market structure isn't radically different if we're right. And I think the CEO's job, a CEO's job of interpreting that change and Implementing a strategy creatively to do that probably, you know, there will definitely be a big margin for error, I think. Probably bigger than usual, I'd say.
- [78:27]
Podcast Host
So I'm now going to ask you a curveball question, which is, you know, we spent a lot of time today talking about AI. Yeah, but how powerful and energy efficient is the human brain versus AI?
- [78:42]
Peter Davies
Well, it broadly, I'll get the numbers slightly wrong, but it broadly has about 5,000 times the number of connections which you need to scale geometrically in terms of its capacity. And yet his runoff uses the power of a light bulb to run itself. So, you know, it's simultaneous, it's pretty efficient. It's incredibly efficient. And the, and the flip side of that, of course, is a frog has the same number of connections as the large language model, but couldn't do your homework, so. Or if it started doing DPhil, PhD, theses, you'd be pretty surprised. So the more we've looked at this, and we have looked at it a lot, is to less think of it as, I mean, a. To be awed by human evolution and to look really hard at. I mean, the same applies to robots versus, you know, hands versus where robots are in terms of dexterity versus human hands is. You'll come to similar conclusions of awe. But I think the right way for investors to think about this is not to try to get too absorbed with some sort of superiority of computers to humans, but to understand what functions are likely to be well disposed to the way computers think and which ones are likely to, you know, remain difficult for
- [79:58]
Podcast Host
computers to replicate what humans do.
- [80:00]
Peter Davies
Yeah, what is it?
- [80:01]
Podcast Host
I mean, Moravech.
- [80:02]
Peter Davies
Moravech, that's odk. He had a paradox which is all the things that computers find easy, humans find hard and vice versa. And you know, for instance, my one year old can tell his mother's face from when my children were one. They could tell their mother's face from any other woman to a degree of precision that no computer could emulate. But a computer can do infinite calculations that we'd, all, even with our mathematical genes, would struggle with.
- [80:33]
Podcast Host
So how many stocks in your portfolio got the potential to double over the next three years?
- [80:38]
Peter Davies
I think, I mean, if you accept. So we run out, as I said earlier, the earnings growth, et cetera, et cetera. And that kind of talks to most of the portfolio, I mean, that talks to a threshold for the current portfolio of a reasonable estimate of it doubling within four years for most of it. As we said earlier and was shown last year on the one Hand, not all of them will do that. So the returns in aggregate might be lower than that. On the flip side of that though is they may happen in different order and if we're good at sequencing them, you can preserve your, your long term earnings power without for much longer than that would imply. So I think all of them could, I think, as I said earlier, that there are some elements where I'd be surprised if they don't and there's some where I think they could do far better than that if certain things happen. And balancing. Yeah, and I would say probably about 50, 50 is 50%, I think almost definitely will unless something goes wrong. And 50%, I think could do miles better than that if something goes right.
- [81:34]
Podcast Host
And you've been in business now for whatever, 35 years, haven't you?
- [81:38]
Peter Davies
Oh, can we edit out that in a bit? 32.
- [81:43]
Podcast Host
32. Okay, okay. 32. Do you, do you still find the challenge of managing risk and reward for investors as stimulating as you ever, ever did?
- [81:55]
Peter Davies
Oh, totally. I mean, I mean, but also one of the virtues of it, it changes. I'm going back to my. The very first point we made about change. A. The individual challenge we have on any one day is completely unique and one we've never seen before. And you know, Whether we're debating AI or debating, you know, free serve 30, 20 odd years ago, you know, the challenge, the analytic challenge has a different content to it. And then the second bit, which I really enjoy is, you know, the personal challenge of adapting oneself to one's own career brings with it. We talked earlier about being more active in the portfolio. To me, partly as me just on the one hand thinking, knowing myself well enough and knowing us well enough. On the one hand, I want to be more patient than other people because I think the opportunity's there and I'm accurate in that. On the other hand, I've got to be really careful not to get stubborn about these things because I know myself a bit and it's, it's not like, you know, I'm probably not going to panic given where I am in my career in the way that I might have done when I was 21, 22.
- [83:01]
Podcast Host
And I think that's really reassuring for investors to know. And actually one of the things I do very much like about Lansdowne is that you've been brave and being prepared to press the reset button when you realize that there's a different way that you need to go about making money for your investors and to be prepared to close a hedge fund down. To start up a long only fund management business which you know in the short term is going to be a little bit of pain for the profitability of the business but for the outcome for the investor it is second to none. So my last question today is a little cheeky one but I remember years ago you invested in, in marsat and if Starlink was to come to the market later on this year, do you think it's an IPO you might get involved in?
- [83:59]
Peter Davies
I definitely might, yeah. I mean and interestingly going to where the mistake into the point about mistakes, you know, the reality is, I mean I don't know enough about how under its new ownership in Mossats are doing but you know, definitely to the, to the kind of mistakes one makes and also guidance frankly to why our investment timeframe is three to five years. One thing I hopefully you'll never hear me say is, and in myself a great example of this is feeling confident. I know that the longer the timeframe the more confident I get. And one thing I've learned many, many times looking back at the portfolios we have had is sort of knowing what's going to happen to a company in 10 years is very, very hard I think. And imar is fascinating in that in practice I suspect they have evolved anyway because there are lots of opportunities in satellite, that Starling thing. But the basic point that we were assuming that people wouldn't, you know, our presumption at the time was this was a quasi monopolistic position and suddenly there's a gazillion new satellites up there. It's a really good indication of kind of why three to five years is about the most you should be forming an investment view on. For us anyway there'll be people who are better than we are I think. And then to your starting question, I mean the other thing again is there are some really interesting quotes. I mean there's a really interesting ecosystem building up around the sort of space in space in Oxfordshire, not in the university, including some really strong satellite companies, new satellite companies emerging. I mean somebody told me there are 200 space companies in, in culling now.
- [85:30]
Podcast Host
Really.
- [85:30]
Peter Davies
I mean it's a real center of excellence in the uk built around anyway, but it's a real center of excellence anyway. The reason I bring it up now is the fascinating thing about Starlink is that actually Europe more so in continental than the uk but it's pretty clear there'll be some competitor. The question I will have with Starlink is kind of how unique is their market position given certainly on the one hand, certainly in Europe. It's pretty clear that Continental Europe is buying non starlink. It wants very hard to build non starlink things, but I haven't done enough work on it yet.
- [86:10]
Podcast Host
I'm very grateful because today I think we really have gone into quite a
- [86:14]
Peter Davies
lot of detail, probably too much.
- [86:16]
Podcast Host
Why say some people might think that, but I don't. I think it's the purest. I think it's one for the purists. And thank you very much for being so clear and explaining so much to a bear with a small brain.
- [86:30]
Peter Davies
Well, apologies for the. Apologies for those who yeah, we have gone through a lot, haven't we? Thank you very much for having you. It's a huge pleasure. Thanks. Thank you all.
- [86:38]
Podcast Host
Content on the Algies Investment Podcast is for your general information and use only and is not intended to address your particular requirements. In particular, the content does not constitute any form of advice, recommendation, representation, endorsement or arrangement, and is not intended to be relied upon by users in making or refraining from making any specific investment or other decisions. Guests and presenters may have positions in any of the investments discussed.