← Merryn Talks Money
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- [00:00]
Monks Investment Trust Announcer
We don't just invest in cutting edge companies. We look at companies with a history of steady growth and companies whose growth cycle has come round again. Because in the real world you have to look at growth in three dimensions.
- [00:13]
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Maren Sumset Web (Podcast Host)
Bloomberg Audio Studios Podcasts
- [01:29]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Radio News it's easier to recognize that the regime is changing than to understand what it will change into. But if you think about all those things I mentioned there, which is globalization, the sort of frictionless movement of capital and labor and supply chains, I think those things are going into reverse and as they go into reverse it introduces more friction into the system. It requires, you know, national interest to be put at the sort of top of the priority list for governments. I think we're all going to get used to the idea of America first by British, by Canadian. The Italians have got their own version of it and these things are going to require more capital to be deployed at home. There's more sort of, you know, more demand on on the physical constraints of the world which gives rise to producer price inflation. All of these things are sort of more friction, probably stickier inflation.
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Maren Sumset Web (Podcast Host)
Welcome to Marion Talks Money, the podcast in which people who know the markets explain the markets. I am Maren Sumset web and this week I'm speaking with Ed Cole. Ed is head of Multi Strategy equities within solutions at Man Group and was last on the show back in April 2025. Then we spoke about the great rotation and why at the Chinese stocks looked like pretty good investments. Well Ed is back and on today's show. We talk about what, we talk about everything. We talk about AI bubble or not bubble. Is it a valuation bubble, is it an earnings bubble, or is it really absolutely fine? We talk about Japan, we talk about small caps, we talk about the end of the 6040 portfolio and how you should diversify from here. And we finish up with a really good sounding book for you to take to the beach. Ed, welcome back to marantalksmoney. Thank you very much for coming on again.
- [03:26]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Thanks for having me. Maren, Great pleasure to be here.
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Maren Sumset Web (Podcast Host)
Last time we spoke, we talked at length about the end of American exceptionalism. We talked about how we expected other markets to outperform or at least to perform better than the US and we talked at some length about Chinese equities and, you know, how they looked attractive and where investors should look at the moment. A lot has happened since then. We last spoke before the war in the Middle east, before the great AI bubble really got going. And a few other little bits and bobs have happened since then. So why don't we start with an update? How are you feeling now about our previous conversation about American exceptionalism, about the great rotation out of the U.S. well,
- [04:10]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
I marked my own homework actually in advance of this. So it was about little more than a year ago that we spoke and it was, it's always a little galling to have to go back and listen to yourself as a starting point and then listen to yourself and recognize the extent to which you've probably got things wrong. I was a bit surprised that I that some of what I said has actually played out reasonably well. I think you and I were probably both on the same page that nothing's particularly exceptional other than hype cycles. And we're certainly in a hype cycle now. But just looking back over sort of 52 weeks of returns and I put all this in constant currency. So the S and P and the Mag 7, which is I guess what people think of as exceptional, are both up about 20% in the last 12 months. Europe in dollars is up about 18. So that bit didn't really work out particularly well. Amazingly, inside the US the Russell 2000, which is the small cap index or smaller mid cap, has a bit more of a value tilt is up 38%. All that exceptionalism and all of that apparent leadership by the tech tech giants, it's actually been more cyclical, more value smaller cap companies that have not just outperformed but outperformed materially.
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Maren Sumset Web (Podcast Host)
I think we did, we did talk about that, didn't we?
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
We did talk about that part of
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Maren Sumset Web (Podcast Host)
the rotation would be into these smaller cap value names, not just in the us, but everywhere.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yes, but everywhere. Exactly. And then the other extraordinary one, a couple of other extraordinary ones, is that the emerging markets have had a phenomenal year in many ways, driven by the same thing that occupies the headlines everywhere in the world. So emerging markets up nearly 50% over the last 12 months.
- [05:53]
Maren Sumset Web (Podcast Host)
Yeah, but I think we have to stop and talk about that briefly before we move on and say that that is not emerging markets. That has got absolutely nothing whatsoever to do with emerging markets. That is three giant companies in Taiwan and Korea. And we've talked about that on this pod quite a lot. To say, you know, if you want emerging markets exposure, do not buy an emerging markets index because you're going to get an AI moment.
- [06:15]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Momentum trade, absolutely fair. And of course, EM has always been in many ways the factory for what the developed world is consuming. And the monetizing AI is still really a developed world story. And of course, those three companies are the picks and shovels that are manufacturing what it is that the Western world needs to consume for this particular growth cycle. The other surprising bit in it, though, is that onshore Chinese equities, there's been a massive bifurcation between offshore Chinese equities and onshore Chinese equities. Onshore Chinese equities are a really interesting market because they're super, super deep and super broad and quite lots of inefficiency, lots of opportunity to root out. Onshore Chinese equities are up nearly 30% in dollars over the last year. So you're absolutely right. In index terms, in em, there's something very much going on amongst those big semiconductor names in both memory and logic. But below the hood, there are many other stories going on as well. So I think we could probably take a step. I'm going to sort of probably mark my scorecard as could do better, but altogether not terrible, not terrible at all. But I think that, and I think probably we also talked about gold and bitcoin. We might come back to that.
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Maren Sumset Web (Podcast Host)
Yes, we do. We'll definitely come back to that.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
But look, I think, I suppose on the one hand, in sort of scores, it looks as though there has been some rotation. On the other hand, in terms of narrative, America probably would be patting itself on the back for looking more exceptional than ever in terms of having the companies that are absolutely at the tip of the spear in what's going on in AI and AI monetization. And there's a question mark in all of that, which I'm sure we're going to get onto about how sustainable it all is.
- [08:03]
Maren Sumset Web (Podcast Host)
Well, why don't we start with that? Well, actually we've started already. Why don't we move on to the AI hype cycle and how that is going? I mean we're talking in a very volatile week, 24th of June, by the way, and so there's been quite a lot going on. Tuesday this week was, was a slightly mad day with all sorts of movements in tech and the, the cost be the Korean index down nearly 10% in one day because of the. Again, because of these big AI names. Do you think we are reaching the top of the hype cycle? We're getting to the bit where everyone saying, okay, AI is great, we get that this is a marvelous technology, it can do fabulous things for us, but nonetheless it needs to be monetized. And that path is slightly less certain in particularly in terms of the volumes required. It's slightly less certain than we thought. We've seen quite a lot of companies begin to talk about something we've discussed on this podcast quite a lot, which is saying, well, is there a cheaper way to do this? And looking at some of the open source models that they can run on their own computers and own networks without recourse to the big expensive companies, et cetera.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
I suppose I hesitate to say yes, we're at the top. It's incredibly hard to know. It will be hard to know in some ways until we're quite a long way away from the top because tops are typically quite noisy. If I take a step back, my glass is half empty as a person, which is both good and bad in this business. But I think that if I just sort of force myself a little bit to listen to the other side, I would tend to agree with you in terms of hype cycle or bubble. But if I take a step back and listen to the other side, and we have quite lively debates in my company about this, the bulls will say right now that actually the market's derated this year. The earnings revisions have been so extreme and I've been extreme everywhere. It hasn't just been an AI story. You've seen it even in the Russell 2000 that I talked about enormous earnings revisions. On the positive side, that there is something going on in terms of a strong economy. And clearly the hype that we see in AI is this is the bull argument justified by what's happened in terms of earnings revisions. So unlike other bubbles, you can look at this right now, today and say the market's not that expensive. If the earnings estimates come through. That's something we talked about a year ago, you and I. If the earnings estimates come through, then the market doesn't look expensive. Now I would take a step back and say, and I think this gets exactly to your point about monetization, I would take a step back and say that those earnings revisions today are predicated on a and earnings estimates rather today are predicated on an assumption that COMPUTE is scarce. And that if you are an Asian semiconductor manufacturing company, your capacity to keep your price moving in a world where it previously was very deflationary is high. And therefore both volume and price are in your favor. And that's a phenomenal environment to be selling the hardware that people need. If we discover that COMPUTE is not scarce, then I think the picture will change pretty materially. Now, why would COMPUTE not be scarce? So I think the first thing is you've alluded to, it is actually an understanding that perhaps you just don't need these leading edge LLMs to perform the kind of tasks that we're performing. We use AI to an enormous extent at work. We have kind of coding co pilots all of us can use and it's incredibly powerful. But actually as a portfolio manager rather than a quant developer, I don't need to use the leading edge models. It's absolutely clear. And so you can do a very simple tweak which is just say, well, start moving away from the leading edge so we don't have to take up all of that capacity in the most expensive part of the stack. So that's one which is just not using the leading edge. The other is perhaps not using the LLMs at all. So small language models, ways of actually dealing with discrete tasks. The other angle is not using the US models that are the premium price. So of course we all know that the cost of a Chinese model is much, much closer to the cost of production of that model. And I think it's entirely conceivable that certain businesses and enterprises are going to carry on using the premium models all the time, but there will be other applications that don't. And then I think the other thing is actually fascinating news that came out overnight, which was the sort of world, world ranking of supercomputers. I don't know if you saw this, but there's a Chinese supercomputer called Line Shine in Shenzhen that's just won the crown of most powerful supercomputer and it's entirely powered by CPUs, not GPUs. Again demonstrating that actually it isn't all about how much compute you throw at something. It's often about the way that the thing's engineered and implemented. So there are enough reasons to think it's possible that we could end up with a serious headwind for this if the market continues to be driven by the idea that actually compute is scarce and therefore those names in Asia that we've talked about continue to be the leaders.
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Maren Sumset Web (Podcast Host)
Can I enter?
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
I don't know when that happens.
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Maren Sumset Web (Podcast Host)
Please, please ask you to explain to our non AI literate listeners the difference between CPUs and GPUs.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yeah, so GPUs are called graphics processing units and those are kind of just much, much more advanced, much powerful, much more energy.
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Maren Sumset Web (Podcast Host)
Energy.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Energy intensive. Yeah, much more powerful logic semiconductor. So they do the thinking. That's the semiconductor that does the thinking. And a CPU is a much more basic version of it. It's what we all used to have in our home PCs before, you know, before there was a sort of step change in, in technology. In other words, it's a more basic function, more basic, less, less powered and requires less energy intensity to, to make it work. And I think it's, you know, there's been a story, you and I spoke last year not a million miles after the deep Seat news and in many ways it's a sort of continuation of the same thing that you don't have to keep throwing the most leading edge chip at everything in order to push things further. There's an awful lot about the way you engineer these processes and that leads
- [14:29]
Maren Sumset Web (Podcast Host)
on to two possibilities. One, that this is an earnings bubble more than a valuation bubble and obviously they're connected, but it's an earnings bubble first. And so that's the first thing. And the second thing is that it is possible that the huge amount of capex being thrown at data centers might turn out to be too much too soon.
- [14:54]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Absolutely agree. I think the argument, I said the sort of bull's argument that it's not a bubble because earnings revisions have been so powerful. If earnings collapse because monetization doesn't work, the market's going to look a hell of a lot more expensive. And I think a fascinating prism to look at this through is actually that those Korean semiconductor memory companies, those have historically been cyclical. And the way we treat a cyclical company, the orthodox way to treat a cyclical company is you sell it when it's cheap because its earnings revisions are sort of, you know, they're not going to stay up there.
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Maren Sumset Web (Podcast Host)
Right.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
You Grow up in this business learning to sell those things when they're cheap and buy them, they're very expensive. If in fact this is not a secular trend in earnings but a cyclical or a blow off moment or a bubble or as you call it, then actually what we're going to find is that the market's a hell of a lot more expensive than it looks.
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Maren Sumset Web (Podcast Host)
And this is just a normal cyclical.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yeah, and I think the other thing. Extreme, but normal extreme. Yeah, the other thing in all of that, which I think, you know, when it all happened a year ago, a bit sort of 10 months ago, everyone was perplexed and we've all moved on because we have short attention spans. We also have to go back to the realization that a lot of these earnings revisions are part of that incredible circularity of, you know, of vendor financing where, you know, where the customer invests in the invest stock in the company to place orders for the chips. And there was all those extraordinary diagrams that went round that showed this ecosystem where everyone was both customer and offtake for the same ecosystem. And there's this sort of multiplication of earnings revisions that's going through the system. So it isn't just the case that one company's order book suddenly looks different. It's that that has a ripple through effect from the company that's building the model through to the hyperscaler through to the company that's making the memory chip through to the company that's making the chick chip. So all of them are enormously interrelated. We all scratched our heads in September, October last year when all of those deals were announced and sort of laughed a bit and moved on. And now here we are with that being at least one factor that's contributed enormously to the growth in earnings expectations.
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Maren Sumset Web (Podcast Host)
It's all quite fragile sounding.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yeah, it could be. Or we could find that actually the productivity gains are so extraordinary and that businesses learn quite quickly that they can't do without it, that their competitors are starting to make advances because they are being prepared to take on the cost of tokens and they make that part of their ongoing budget. So I look at this after 25 years in markets and think it looks in many ways like a bubble and it talks like a bubble and it walks like a bubble. But I also have to be open minded in a way that I probably wasn't when I was 25, that there are paths in, there are path dependencies, there are ways through this where actually perhaps it doesn't go pop.
- [17:55]
Maren Sumset Web (Podcast Host)
And either way this is Not Emperor's New Clothes. This technology is exciting and valid and either way leads to astonishing productivity gains. It's simply a matter of whether the valuations are right or wrong. So just be clear on that.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yeah, definitely. I think there's one really fascinating way to think about all bubbles is that actually the majority of them are productive.
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Maren Sumset Web (Podcast Host)
Yeah.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
In a sense that what they do is they suck capital into something that is ultimately enormously changing for society or changing for a political economy. You know, you can look at the, you know, the sort of nation building in the us, the railway bubble in the us you know, even parts of the Roaring twenties actually, which was sort of beginning of like domestic consumption taking off the dot com. The norm is that these bubbles bring capital into something. There's some malinvestment along the way, but the technology remains. What's not normal is something closer to the GFC or the kind of very tail end of the Roaring twenties when it's pure speculation. South Sea tulips where there is nothing transformational about it.
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Maren Sumset Web (Podcast Host)
I'm going to pick you up on tulips, actually.
- [19:12]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Interesting jobs.
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Maren Sumset Web (Podcast Host)
I mean, yes, always cited as an extraordinary bubble that left nothing behind. It, you know, exponential rises in the prices of tulip bulbs and then a collapse that leaves everyone destroyed, et cetera, et cetera. But you know, here we are and the Netherlands is still one of the greatest flower exporters in the world. Right. And where do you go when you want to buy amazing tulip bulbs? What do you buy when you go, when you go to Holland and you want to bring back a souvenir tulip bulbs. Right. It left an amazing legacy. Long term. Tulip bubble was ages ago and there it is. The legacy of the tulips is still there in the, in a huge industrial infrastructure, the production of these flowers, and in a massive tourist infrastructure. So I won't hear a word against the tulip bubble.
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Monks Investment Trust Announcer
No.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Okay, I stand corrected. And they are of course wonderfully beautiful. Yes, exactly.
- [20:07]
Monks Investment Trust Announcer
We don't just invest in cutting edge companies. We look at companies with a history of steady growth and companies whose growth cycle has come round again. Because in the real world you have to look at growth in three dimensions. Monks, investment trust.
- [20:22]
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- [20:51]
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- [21:48]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Investing Brokerage Services by Open to the Public Investing Inc.
- [21:52]
Monks Investment Trust Announcer
Member FINRA and SIPC Advisory Services by
- [21:55]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Public Advisors LLC, SEC registered advisor Complete disclosures available@public.com Disclosures.
- [22:05]
Maren Sumset Web (Podcast Host)
Right, let's move on from bubbles to a paper that you wrote recently that I'm interested in. I know our listeners will be interested in about diversification in an age of inflation and the change that has come there. I know that you think that we're moving into what we're in and staying in a more inflationary environment than we've been used to over the last 40 years. Pre Covid. Of course, yeah.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
I mean we do. I think actually this is in some way informed by the kind of conversations we have with many of our largest clients. And it's really interesting to us how there are many, many different conversations coming from asset allocation teams in these big institutional businesses which are all touching on the fact, on the sort of realization that the world is changing, that the presets that we lived through from the sort of mid-90s onwards, probably until the Brexit referendum ten years ago this week, there was a set of characteristics that were pretty stable and those characteristics were the kind of primacy of globalization, the optimization of supply chain stability in western politics, low inflation, financialization of everything because low inflation allowed for that, and this wonderful kind of basis for multi asset investing which was that stocks and bonds were negatively correlated, meaning that when your bond port, when your stock portfolio hit the skids, your bond portfolio would typically partially bail you out which happened earlier
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Maren Sumset Web (Podcast Host)
this week by the way. I mean that, that happened on, on Tuesday. Old fashioned stuff. But it did happen.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yeah, it did happen. I mean, I think what we're really thinking about here is what happens on more than a day and it certainly didn't happen in March where stocks got hit very hard and so did bonds and so did gold. So I think the way we recognize, it's easier to recognize that the regime is changing than to understand what it will change into. But if you think about all those things I mentioned there, which is globalization, the sort of frictionless movement of capital and labor and supply chains, I think those things are going into reverse. And as they go into reverse, it introduces more friction into the system. It requires national interest to be put at the sort of top of the priority list for governments. I think we all going to get used to the idea of America first by British, by Canadian, the Italians have got their own version of it. And these things are going to require more capital to be deployed de deployed at home. There's more sort of more demand on the physical constraints of the world which gives rise to producer price inflation. All of these things are sort of more friction, probably stickier inflation.
- [25:05]
Maren Sumset Web (Podcast Host)
There's also conversations about, we've talked, I think we might have talked previously about capital controls and the odds of finding that your money is confined within a country or appropriated for your pension. Pension in particular appropriated for domestic domestic infrastructure needs, et cetera. And one of the conversations in the UK at the moment, endless leaking of possible tax things. Right. But one of them is the introduction of an exit tax. So if you do want to leave the UK to escape an oppressive tax regime, you get to pay a pile of taxes on the way out. So you know, that's another bizarre thing in this new world of ours, isn't it?
- [25:40]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Absolutely right. It's exactly so. I mean, you know, a hallmark of neoliberalism and globalization was the liberalization of capitalism accounts. And this is sort of the opposite of that, which is that the capital resources of economy are required at home. Japan will be really interesting to watch in that respect. I mean they've now got interest rates at 1%. Inflation is certainly high. In their own context, the yen is extraordinarily weak. They're finding it difficult to work out how to cap that. My take on it, purely personal view, is that at some point, you know, if you go back, gosh, is it 12, 13 years to Abe. Part of Abe's plan in Japan was to depreciate the yen to get to sort of try and move away from disinflation, deflation. And one of the things they did in that respect was they changed the ratios of onshore and offshore investment for the pension funds in Japan. The pension fund system in Japan is absolutely enormous. And, you know, I think it's entirely possible that at some point that what they'll do is reverse that as they'll start requiring Japanese pension funds to start buying more Japanese assets. But I think the critical thing when you think about investing, whether you're investing your ISA or investing the assets of a sovereign wealth fund, is that the approach that we've all typically used is changing enormously. You know, the 6040 is the sort of mainstay of wealth investing and has been for all of our lifetimes. And it rests on the assumption, as I said already, that bonds and equities are negatively correlated. We've done some work at looking at what happens in similar drawdowns in environments where bonds are negatively correlated versus positively correlated. In 1974, the equity drawdown was the same size as it was in 2008. So you lost about 40% in world equities in both 1974 and 2008. In 1974, which was obviously an inflationary environment, stocks and bonds were positively correlated, and you lost, I think, something close to 30% in a 6040 portfolio. In 2008, it was a much, much smaller loss because bonds really, really kicked in. And I think the point is that what we worry about is not runaway inflation, but rather, once the genie's out of the bottle with respect to inflation targets, it's very hard to get it back in again. And I think you can see that. You can see that kind of. I mean, you can see that in the uk, where we don't have very strong real growth. But, you know, in the UK, CPI is running at close to 3% services, CPI is at 3.8% and is moving higher. And that's an economy where real GDP growth is about 1%. So this isn't a function of a runaway demand. The us, which is obviously growing at a much more rapid clip, there's a terrific inflation series run by the San Francisco Fed, and they break down pce, which is the Fed's preferred measure of inflation, at least before wash. We'll see if it changes. But they break down PCE into what they call cyclical components. So those that are sensitive to the economy and acyclical components, core PCE is running about 3.3% as of the last data for April, about 60% of that comes from the acyclical components. And that's been accelerating over the last two or three years. So you're in an environment in the US where this is this thing about sticky inflation. Once the genie's out of the bottle, it becomes sticky, it starts to feed inflation expectations and it's very, very hard to get it down again. That doesn't mean, you know, that what we saw in 2022, inflation was high single digit. Doesn't mean that's what we're going to have. But what it does mean is that what we're used to, which is inflation being at or around the targets of all central banks at about 2%, that looks increasingly unlikely. And the reason we would then worry about that is it means that you can have environments where the hands of central banks can be more tied in terms of their response to a crisis. If they're faced with a crisis that's driven by inflation, they may well be raising rates into that, which is what we saw in 2022. And if they're faced with a crisis where the inflation is very sticky and they don't have enough conviction that it's going to roll over, they may not be able to provide what in markets we call the central bank put the protection that we're used to. And so that can mean that all of the reaction functions and interactions that we've seen over the last 30 years can start to change.
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Maren Sumset Web (Podcast Host)
Yeah. So we've been used constantly to every time something goes wrong, central banks step in, slash rates and everything's just fine again somehow.
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Public.com Advertiser
Yeah.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
And again have to be humble. That could be the case. But I think it becomes more difficult when inflation remains stickier.
- [30:39]
Maren Sumset Web (Podcast Host)
But the core difference then being that previously most of these crises could be put down, put at the door of demand. These are demand related crises. And so you slash interest rate gen, you're off to the races again. But if they are supply created, crazy is you can't do the same, it doesn't work in the same way.
- [30:56]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yeah. And then you have to ask how robust is the portfolio that you're sitting with? How much is it an artifact of the old regime? And how much is it something that's actually robust to a changing world where we don't entirely understand where all the risks are coming from?
- [31:13]
Maren Sumset Web (Podcast Host)
But how do you, how do you shift your portfolio? What do you do? Where is your diversifier now? And we're not going to get listeners out of equities. That's never going to happen. Well, not yet anyway. What do we do.
- [31:24]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
We can go a bit back to the conversation we had a year ago, which is you diversify where your equities are.
- [31:30]
Maren Sumset Web (Podcast Host)
I mean, last time, as I said at the beginning, we talked quite a lot about China. Where would you look now?
- [31:35]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
I think if I sort of think about it in terms of styles, I think higher inflation plus greater fixed capital investment in economies and that fixed capital investment is capex. That's a function of all of the reshoring or energy expansion, all of these sorts of things. The combination of inflation plus that tendency suggests to me that you want to be in what we call shorter duration cash flows. So things that have a real fixed capital base rather than the intangible assets of the last cycle.
- [32:08]
Maren Sumset Web (Podcast Host)
Okay, so it's the halo trade, hard assets, low obsolescence.
- [32:12]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yes, exactly. Yes. I think there's an awful lot of value in, in that. I think that you know that you will find a lot of those companies outside of large caps. I'm sort of repeating what I said again last year, but I think these
- [32:25]
Maren Sumset Web (Podcast Host)
are still value in the small caps.
- [32:27]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yeah, smaller caps for sure. I have to say I, and this is a personal, everything I'm saying is a personal view, but I think that, you know, I think we, we had a very weak dollar which helped a lot of the rest of the world. The dollar then got a bit bid again around Iran. Most recently in the last week it's been bid again because the markets. Read on Warsh was that he's hawkish. My take is really what Warsh is doing, personal view is that he's guiding us towards a different type of guidance. He's essentially saying forward guidance is finished and we're going to be a bit less data dependent. I don't think that means he's extremely hawkish. I tend to think it probably means the dollar's going to be a bit weaker and there are dollar beneficiaries out there to be had in equities. So equities I think you can continue to diversify, continue to look for, as you say, halo is a good way to think about it. I think then you have to question, well, what role do bonds have in your portfolio? Bonds still have a fantastic role in the portfolio. I think particularly for us in the UK you get this opportunity from time to time to buy a low coupon bond with a discount to par and you don't pay capital gains tax on that if you can hold it to maturity. So you know, these are still really excellent ways to, to get a kind of guaranteed return with A tax efficient approach. But what I think what we. The way we think about that is bonds have many uses, but it may not be that they are reliably diversifiers. You know, we think that this is actually a golden age for alternative investing, to be frank, that alternative assets, alternative investments have been quite out of fashion for a long time. They haven't been required because it's been an environment where the returns you got from equities were so fantastic that you just didn't need to bother thinking about diversifying any away to things that are lower return and lower volume volatility. But liquid alternatives that have little or no beta to the market, that are genuinely diversifying and are liquid.
- [34:35]
Maren Sumset Web (Podcast Host)
What is a liquid alternative asset?
- [34:37]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Liquid alternatives are funds that are not directional. So hedge funds in old nomenclature, but they are in our world extremely diversified. They combine many different approaches to capturing different risk premium markets. They're not directional, they may be market neutral. And they're ways to essentially extract returns out of the market that don't rely on what's happening in beta. They don't rely on market direction. It's interesting that you know that these have been very out of fashion for a long time, both institutions.
- [35:09]
Maren Sumset Web (Podcast Host)
Well, you don't need them if you can be long only at 10, 15% a year. You don't need somebody that's going to go market neutral for you.
- [35:15]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Exactly right. And actually, but in the institutional case, so with our biggest investors, it wasn't so much we'll just have more public equities, it's that we'll have more privates. And that decision is starting to be reframed again. And the interesting thing about actually a lot of liquid alternatives, hedge funds, is that many of them in fact benefit from higher inflation. I mean, we've done quite a lot of work at looking at equity long short in different inflationary regimes. Equity long short tends to do better when inflation's high. I think the reason for that is because as interest rates move higher, as the refinancing of debt becomes more expensive, companies are required to do more idiosyncratic remedial work to keep their head above water. But we think that as inflation moves higher and as interest rates move higher and the cost of debt moves higher, it forces companies to do more. And that means you get more dispersion and that makes a greater opportunity for stock picking, selecting good from bad. And so returns to equity market neutral or equity long short strategies get better as inflation goes up. So that's quite an interesting diversifier. I think the trick in all this is diversify your diversifiers. In the past, we didn't need to. You just bought bonds. Today, you need to have a much, much broader toolkit.
- [36:33]
Maren Sumset Web (Podcast Host)
Explain to me. I really enjoyed your euphemism about decisions about privates being reframed.
- [36:40]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
I think that you go back to the 1980s when the endowment model emerged, which was the sort of bible of investing in investing across a much broader pool of assets and including privates in it, there was an illiquidity premium. If you were able. If you were an endowment or an asset owner that had a very, very long timeframe for your liabilities, if you required your money over very long periods of time, there was a illiquidity premium that you could harvest, which was, if I'm prepared to lock my money up, I will be rewarded for that. And there was, you know, the cohort of managers providing those services was much smaller. Today, the universe has grown enormously. Many people with much shorter liabilities have been pushed into it. And we can see that the exits for many private companies in the equity space are much more challenged and the returns are diminishing over time. And I think what we certainly see among not all of our institutional clients, but certainly some of them, is that the returns are starting to become a bit underwhelming. There is probably more risk that they have in their private equity portfolio that looks comparable to their public equity portfolio. It may be in both VC and PE and private credit. There's more of the AI ecosystem in there than, you know, than they previously was the case. So it's less diversifying. And in many ways, you know, in the next cycle, if there's a down leg, there will be the same downward vulnerability in these assets that there is in their public portfolio. So I think, you know, certainly the conversation among some of our institutional investors is moving on to thinking, well, these are probably not going to be diversifying for us now.
- [38:25]
Maren Sumset Web (Podcast Host)
Yeah. So we're moving to the bit where lack of liquidity will come with a discount rather than a premium, which makes more logical sense.
- [38:32]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
It may well be that case. Exactly right.
- [38:34]
HEX Data Platform Advertiser
Yeah.
- [38:34]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yeah. So, yeah, I think everyone, in essence, whether you're a CIO of a sovereign wealth fund managing half a trillion dollars or someone making decisions about their isa, we're all faced with the same question today about how you achieve diversification from this great big common factor, which is, you know, concentration in markets and beta and expensive valuation.
- [38:57]
Maren Sumset Web (Podcast Host)
Might we do some of that diversification with gold? So pretty horrible few months.
- [39:01]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Yeah. I mean, look, I think I Think gold still is a, is a, is a very interesting asset. I have to say right now, based on what I've just said about the dollar, I quite like it, personally. I think that actually, you know, if we, if we start to work out over coming weeks and months that what Walsh has said is not explicitly hawkish but more giving himself the flexibility to respond to a changing outlook as he sees it. And I think he will be less data dependent and more dependent on his expectation for what's happening in the economy. So it's a bit more opaque. But I think if that's the case, and a lot of people who know Walsh say that's how he thinks, then it's a weak dollar. And I think if it's a weak dollar, we're probably going to see some support coming back under gold. I don't think that the demand from rest of the world's central banks for gold has changed. Part of fragmentation deglobalization is that people are looking for other reserve assets other than the dollar. So I don't think that's changed. So, yeah, I think there's some.
- [39:58]
Maren Sumset Web (Podcast Host)
So that backdrop of demand from the central banks remains weak dollar gives it
- [40:03]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
some floor and some impetus to move higher. Maybe the way to question the role of gold is, as we saw in March, is that it, at various points in time can become a risk on asset rather than a diversifying asset. So I think it's an interesting asset to have in your portfolio, but it isn't necessarily something reliably that you want to bank on to bail you out when equities are doing badly.
- [40:26]
Maren Sumset Web (Podcast Host)
We talked last time when we were talking about gold. Well, we always do this. We talked about gold. We also talked about cryptocurrencies and in particular we talked about bitcoin, which obviously a slightly separate asset to other crypto. Any change in your views there?
- [40:39]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
I mean, no, other than that. I'm really, really amazed that the amount of policy support crypto has had in the last 16 months. Never in my imagination would have I conceived of the possibility that it could have that much policy support in terms of sort of legitimization and regulation and do as badly as it has. So I think we're sitting here today scratching our head and wondering what the utility of crypto is. I mean, maybe that just makes it the very best time to buy it because everyone hates it. But, you know, I think you asked me the question last time, gold or crypto. And I, I think, or I hope I said gold.
- [41:23]
Maren Sumset Web (Podcast Host)
You did, you did.
- [41:25]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
And I would still say the same today.
- [41:26]
Maren Sumset Web (Podcast Host)
Yeah, it's difficult, isn't it? And we, we on and on and on we go about the use case. The use case, the use case. And we never really quite get a compelling enough answer.
- [41:38]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
No, I think that's right.
- [41:39]
Maren Sumset Web (Podcast Host)
Okay, last question, last question, onto the fun bit. What are you gonna take to the beach with you, book wise? Book wise. I don't want to hear about your towel and your suntan lotion. What book are you gonna take on holiday?
- [41:52]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
I would recommend if people are going to the beach and they want a really inspiring book. I don't normally read nonfiction and I've just read a book called the Wide Wide Sea, which came out a couple of years ago and is an account of Captain Cook's last circumnavigation of the world. And it's a really extraordinary story, both how meticulously it's been put together from historical record of the time. But actually the thing that I found overwhelming at times was that it is only 250 years ago. And it's extraordinary to remind ourselves at this pace of sort of acceleration in progress all the time how young modernity is that only 250 years ago cook was meeting people that had never encountered outsiders before and was exploring parts of the world that weren't charted. And I think it's so easy to sort of sit in the moment we're in and assume that, you know, that things will progress sort of forever along a path. But it's only 250 years ago that we didn't even know what our own world looked like.
- [43:02]
Maren Sumset Web (Podcast Host)
Excellent. I'm sold. I'm ordering it right now. Thank you, Ed. And thank you so much for joining us today.
- [43:09]
Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
Thank you.
- [43:18]
Maren Sumset Web (Podcast Host)
Thank you. Thanks for listening to this week's Maryn Talks Money. If you like our show, rate, review and subscribe wherever you listen to podcasts and keep sending your questions or comments to marinmoneyloomburg.net you can also follow me and John on Twitter or x. I'm erinursw and John is johnstaffe. This episode was hosted by me marisamset Web. It was produced by Sam Asadi and Moses Andam Sound designed by Blake Maples and Aaron Kaspers. Special thanks to Edco.
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
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Maren Sumset Web (Podcast Host)
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Ed Cole (Guest, Head of Multi Strategy Equities at Man Group)
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Maren Sumset Web (Podcast Host)
Okay.
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