I sometimes get asked “How big a team do you have in investment research at Tideway James?”
The quick answer is of course it is relatively small in terms of Tideway employees. We have Nick Gait a CFA Charter holder who has now been working for Tideway for over ten years and Costa Michaelides, who has passed level 1 of the CFA and is a CFA level II Candidate. Nick and Costa are responsible for day-to-day asset allocation and fund manager research who then present their findings to Tideway’s Investment Committee.
Additional committee members comprise of Ben Klein, Senior Wealth Manager who joins us with more than 20 years private client wealth management experience, Neil Croxford our COO with his experience from Rathbones and Kleinwort Benson and Seymour Banks who has 25 years of Investment Management experience after qualifying as a Chartered Accountant in 1994. Tideway’s independent member is TS Lombard’s Martin Shenfield, who has 34 years of broad international fund management experience managing various long-only institutional, mutual and absolute return and hedge funds as well as undertaking CIO & global asset allocation responsibilities.
Other inputs into Tideway’s process include Bloomberg and FE Analytics for pricing data which forms the basis of Tideway’s internal proprietary models, Asset Q (the world’s largest fund due diligence platform) for customised operational manager due diligence and finally TS Lombard for macro-economic research.
After that you get into the funds, which are all actively managed with each fund typically having a team of at least two dedicated managers (we have counted our multi-asset portfolios contain a total of forty-four individual managers). This is before including the team of analysts which provide research reports for these managers to construct their research. It’s a big team!
Last night we (some of the Tideway team, some Tideway clients and one of our fixed income fund managers) spent a very pleasant evening with Freya Beamish, TS Lombard’s Head of Macro Economics, talking macro-economics. This is a heady subject that covers politics, economics and investment markets. Three hours went by in a flash.
So, what do the great minds at TS Lombard think? Here is a quote from Dario Perkins, Managing Director Global Macro who works alongside Freya:
The next decade will provide a more challenging environment for investors. Without the secular bull market in bonds – which caused all long duration assets to “rerate” – investors will need to identify the specific macro themes of the 2020s. We see opportunities in commodities, “value” stocks and real (tangible) assets. Intangibles will be the big losers, especially “growth” stocks.
The first thing to note is that macro economists speak their own language and Ursula and I have had fun this morning dissecting this. I will attempt to translate;
- Secular in this context does not mean irreligious! It means a trend that has endured for a very long time and did not swing back and forth but trended one way. He is talking about interest rates. For those old enough to have had a mortgage in the 1980s, we paid 15% interest, yes that’s 15% for our loans. Mind you, our first flat in Barnes doubled in value in 18 months so no one cared too much about the interest (oh and it only cost £44,000!), we cared more about George Michael and Boy George in those days… but best not go there. That is 30+ years ago and throughout that period bond yields and interest rates went one way ….down ….and all the way to zero in many countries.
- Rerate this is nothing to do with the local council. It means that when an investment analyst fresh out of college (no offence Costa) gets their calculator out and tries to put a value on an investment, one calculation they can do is look at the future income the investment will generate and discount back into a present value based on the cost of money. As the cost of money falls the value of investments rated on this basis goes up. When the cost of money is effectively zero, or even negative once you account for inflation, really weird answers start to come out of the calculator! Think Crypto, Peloton, Netflix in 2020.
- Long Duration this is not a World Cup match that goes to penalties. The context here is years, think 20 years if you are in the bond market that’s long duration, or a company whose business plan makes no money for 10 years and then miraculously turns into a cash cow in year 11, that’s long duration for a business plan.
- Tangible and intangibles think Eddie Murphy in Trading Places (back to the 80’s) being explained what a gold bar is, coffee beans, pork bellies and of course frozen orange juice. These are your tangible commodities along with say a credit card, a life assurance policy, a home to live in …..they are must haves. Intangibles I will leave to Nick, but NFTs (non fungible tokens) might fit the description nicely. I’m still not entirely sure what they are.
Value and Growth as descriptions of company shares you will understand if you are a regular reader of this update and Nick’s work in particular. Value generally describes a company that is already profitable, pays a healthy dividend and is undervalued by investors. Growth describes a company with big ambition, promises of profits in the future and where investors are prepared to pay a high price for shares relative to current earnings, or sometimes even current losses.
Now you will be pleased to hear no one thinks we are going back to the 80’s anytime soon but there is a growing sense that there has been a seismic shift in 2022 towards higher inflation, higher interest rates and a higher cost of money when valuing anything in the future.
Quoting Dario again:
The important point, however, is that we do not believe the current period of cyclical weakness in the global economy will derail the new supercycle. The inflation-recession pendulum will continue to swing, but the prevailing tendency of inflation has shifted, from a world where inflation was always threatening to drop too low, to a world where it will mostly be threatening to break too high.
Here he is saying that whilst we currently face the threat of recession, recessions have come and gone in the last 30 years and will continue to do so but he is predicting that interest rates are not going back to zero, that there has been a turning point.
I would say that this is a learned opinion only. Only time will tell and I have met one fixed income manager in the last few weeks that did not subscribe to this theory and predicted that we are all heading ultimately to be like Japan where 20 year government bond yields are up but only from 0.5% to 1% and base interest rates are still -0.1%.
As investors in the real world, we have to work through the current headlines and macro-economic predictions and make decisions in the here and now as to how to invest your money.
What we see happening today:
- Inflation remains stubbornly high
- The job market is tight in Europe and the US, those who want work can get it and workers appear to be in the ascendence, demanding and getting big pay rises, certainly in the private sector
- Speculative investments continue to fall. The short term (12 months) trend in the shares of Tesla, Meta and even Amazon is still down along with the value of a Bitcoin.
- An optimist might see a recent bounce in the value of Microsoft shares from an end of October low
- The trend in energy and commodity stocks is up and has been all year, financials are also looking stronger more recently.
- Fixed income investments are recovering nicely from the low following the mini budget debacle and the forward returns look very attractive on a 2-3 year view, though will not be without volatility as they respond to central bank sentiment and forecast changes in interest rates
- We note the risks of further collapses in the near term in areas of finance that became too bloated in the era of cheap money. Crypto, private equity and the housing market were all noted last night as still having the potential to shock as the tide goes out.
We are significantly overweight fixed income compared to our peers and tilted towards financials and higher yields and we are underweight growth and overweight value, compared to the global index. We are fully actively invested with managers who are able to take advantage of the big shifts. We are fully invested and rather than holding more cash, we have been building holdings in Ruffer Diversified return, which hedges against tail risk events as described above, as some insurance.
Generally, we feel good about where we are invested and I don’t think we heard anything last night around what may or may not happen in the future that changes our view on how to invest today.
However, we will always keep listening.
- The content of this document is for information purposes only and should not be construed as financial advice.
- Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise
- We always recommend that you seek professional regulated financial advice before investing
