Charlie Parker of Citywire talks to David Kuo.
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David:
This is Money Talk, the weekly investment podcast from the Motley Fool. I'm David Kuo, and today I'm delighted to welcome to the studio a man who puts the fun into fund selection, he is Charlie Parker, editor of Citywire Wealth Manager.
Charlie:
Hi David.
David:
Welcome Charlie. Now, I see you on telly quite often these days, you are clearly a man much in demand, so I'm doubly delighted that you're able to join us here today. There are a number of things about fund managers, especially at this particular time, and one question that people are asking is, what kind of funds should I be investing in? We all know that we're in a very confusing time in the market, so what kind of funds should people be focusing on?
Charlie:
Well, if you're going to be putting money into the stock markets right now, it is, as you say, a very very difficult time to put money in, and that's because since we hit the low for shares in March, we have had an incredible rally, really huge amounts of money can be made in the last few months, as much as 50% quite easily, if you'd allocated your money reasonably sensibly, the same's true for bond funds, which have gone up an awful lot, some bond funds up 25% in three months, which is almost unheard of. So quite a lot of people are getting quite nervous now about investing in any of the big asset classes like bonds or shares, and I'm probably one of them, so if I was going to put any money into the markets right now, and to be honest, my money isn't, I'm taking it out, but if I was going to put any money in …
David:
Well that's a revelation, isn't it?
Charlie:
… well, let's be honest about this, I've made some good money in the last few months, and I'm getting very very nervous about markets, I want to protect myself from the possibility of a sell off this autumn, but if you are going to invest some money, if you've got a longer term view, you don't mind a short term fall in shares or bonds in the next few months, then you want to think about very very defensive managers, I think, so do not look for the managers who've made a lot of money in the last three months, because they're probably the people who've been investing in what we call the cyclical stocks, the stocks that are most exposed to improving economic environments. So you want to avoid people like Richard Buxton at Schroders, a very well-known manager, he's made very good money, but has made it through some quite cyclical bets, and you want to retrench to the much more defensive people, so people like Neil Woodford, who we've talked about a lot at Invesco Perpetual, his numbers don't look very good over the last few months, because he hasn't bet on those stocks that are exposed to an economic recovery, but as we move into more difficult times he's probably fairly defensively positioned.
David:
Now, you mentioned just a few minutes ago about coming out of the stock market?
Charlie:
Yes.
David:
Now, when I was out in Asia just a couple of weeks ago, I heard this story that a lot of the money that the government or central banks are pumping into the high street banks, a lot of this money is actually ending up in the stock market, in other words, this is money that they're using to speculate in the stock market – do you buy into that at all?
Charlie:
Well, I do to an extent, the process that I think is happening is the government is buying the debt of businesses, and they are then using that to pay off their debt, and they are issuing shares, so there's a sense in which, yes, government money is going to fuel the new issues in the stock market, but whether high street banks are using it to speculate in the stock market is much harder to prove, I mean the allegation is that the big banks that have got a retail presence back in the UK, people like Royal Bank of Scotland, but have also got an investment bank on the side, are speculating with that money – that's not necessarily true, they've made a lot of money in their investment banks in the last few months, but they've made that principally because share prices and bonds have been going up, and they've been involved in issuing shares and doing other transactions which have made them the money. So I don't think there's a necessary correlation between the billions coming in, and speculating on the stock markets – what there is is a correlation between the government money helping the banks, but not necessarily filtering through to the rest of us.
David:
So what kind of money is going into the stock market at the moment, to actually fuel this massive rise that we've seen since March?
Charlie:
Right, well I did a piece yesterday, and I called it, "The Dumb Money is Buying Shares", and the reason I did that was because there's a lot of measurements you can use to look at the type of people who are buying shares at the moment, and there's a blog online from a famous group of investors called Pimco, and it talks about this week how all the people you would expect to be buying at the wrong time are buying. There's various technical buyers that you would look for, the most obvious one though is American private investors, American private investors have an almost unbroken record of buying shares at the top and selling them at the bottom, and you can trace that back decades and decades, I hope your sister site in America won't be too offended by me saying that, but it's pretty easy to measure, and American private investors right now are really wanting to buy, they've extreme buy sentiment among them, for me that's a sale signal.
David:
That's very worrying, isn't it?
Charlie:
I think it's very worrying if you have made money in the last few months, and you're not going to look at the situation. For me, I believe in tactical investing, that's to say I believe that, I don't believe that if you just leave money in shares for years and years and years, you will necessarily make money, in fact shares haven't really made any money for ten or 15 years, the FTSE All-Share Index is about where it was in 1979. Now, you people have taken money out of dividends, that's all well and good, but just investing in shares and thinking you'll automatically make money, I just don't believe in that. So I think right now it's time for your professional investor, if you've got an advisor or a wealth manager, to be asking the question – should I take some of the profits I've made in the last few months out? If you're a private investor, then I think it's a good time to consider taking a bit of that profit back, putting it in the bank, putting it somewhere safe, and waiting to see what happens over the next weeks and months.
David:
But you're not going to be earning much interest on that money that you take out? Currently the best savings accounts are paying next to nothing?
Charlie:
No, you're not going to be earning much interest, but I'd rather earn very little interest than lose 30%, as we've been talking before we came on, some leading fund managers think you could in the rest of this year.
David:
So what about bond funds – what is your view about bond funds at the moment?
Charlie:
Well bond funds have taken in a huge amount of money over the last six to nine months. The two most popular bond funds, Invesco Perpetual corporate bond and M&G corporate bond, now have more than £4 billion each in assets, which is a massive massive amount of money going in, and you'll see them on the side of the taxis and everywhere else being advertised. Now, that always makes me nervous, whenever fund management groups have got that much money to try and sell something, it makes me a bit nervous, because really it shows that everyone thinks it's a good idea, and by and large in investing, when everyone thinks something's a good idea, it can create a bit of a bubble, so there's a risk there that there is a bubble in corporate bonds, it's a risk that makes me nervous, so much money is going into it that, as soon as that money stops going in, some of it could come out, and we could see some price falls. I'm more worried investing in government bonds right now than I am in corporate bonds.
David:
Why is that?
Charlie:
And the reason for that is that I just think the British government in particular is spending such a huge amount of money to try and stimulate an economic recovery, and they are funding that through debt, through the issue of gilts, government bonds, to such an extent that it's going to be very hard for the government to continue to issue bonds at a good rate going forward, because there simply isn't going to be the demand to support all the debt that Gordon Brown is getting us into. Now, that makes me nervous about gilts, because there's a chance that the price of gilts will go down when people start to doubt whether Gordon Brown can support all his spending through the gilt market, it's been propped up in the short term by the Bank of England buying these gilts through the quantitative easing process, but that's only going to last for two or three more months, even with the new money they're putting in. So I'm pretty nervous about gilts, I expect falls in the gilt market, and I think that that will gradually filter through to the bond market, but I don't think it's going to happen straight away.
So my advice would be, I don't think there's any reason to panic if you're holding a bond fund right now, but I certainly wouldn't be holding large amounts in gilts, if you're not willing to accept some price falls, and I wouldn't be adding to my bond holdings now, I think the time to take advantage of an extraordinary opportunity last year has passed.
David:
So don't panic now, just panic a little bit later, yeah?
Charlie:
Well, they're not going to lose 30%, he says, famous last words, but it's unlikely you're going to see anything too dramatic happening, it's just that the sort of performance that you've had over the last year, the sort of performance you might have come to expect, is unrealistic going forward, and I think there is a possibility of some small price falls in bonds as the demand to buy bonds comes off in the market.
David:
So what about funds that focus on the east – we're talking here about China and Asia, do you buy into the idea that China, Asia, India and those emerging economies will lead the rest of the world out of recession?
Charlie:
I do, but with the following caveat – that doesn't necessarily mean now is the time to buy an emerging market equity fund. Clearly China is recovering much faster than the rest of the world, it's hitting its 8% GDP targets, and that is spinning through to the rest of Asia, it's doing incredibly well, didn't come in to this with the same problems as us, the same amount of personal debt, and they've got a massive engine of growth. So that's all chugging away very nicely, but, for the past three or four months, investors have recognised that, and they have been buying emerging market shares, emerging market shares have gone up an awful lot, and quite honestly now the price probably doesn't justify the added growth you would get from investing in developed market shares.
Also, if we do see a sell off in the autumn, if shares fall in value again, as fear and worry about risk comes back, it's likely that emerging markets will fall further. So if you're a tactical investor, that's to say if you're somebody who's able to move their money around every few months or wants to do that, I would think now is probably the time to be reducing some of your exposure to emerging markets in the short term, and buying some developed market shares. Just one more point to make, and that is that if you're not someone like that, if you're investing for ten, 15, 20 years, probably the worst mistake in the world you could make is missing the growth of these places, but you have to be prepared to lose a bit of money in the short term, I think.
David:
OK, so staying in the east, I noticed on your website that Mark Mobius of Templeton is one of the most popular fund managers at the moment, but I also remember when I was out in Singapore an interview with Mark Mobius, and he said that it is quite likely that markets could fall 30% this year – do you think he's right, that markets could fall as much as 30% in one go?
Charlie:
Well, I think Mark Mobius is, he's a fantastic character by the way, Mark Mobius – the only man I know who has produced his own cartoon biography of his life, if your readers can get hold of any book, they should get hold of that book, he's completely bald and there's a wonderful moment in the cartoon where he tries to make us believe that he lost his hair because of a fire on his head, and that's how he went bald, but that's beside the point.
David:
How did he go bald?
Charlie:
Well, I expect he went bald like the rest of us go bald.
David:
Speak for yourself! I've still got a decent head of hair on me.
Charlie:
It's the hard work at Citywire, it's gradually going back, but back to his point – Mark Mobius is speaking to the same fear I was just expressing, that emerging market shares have risen so much that they might come back a bit. Now whether it falls 30% or not is really anyone's guess, he's basing that on his view of what he thinks a reasonable valuation of the shares would be, and he's saying that if we lost 30% of the value now, they would be back to fair value rather than over valued shares. That makes a lot of sense, except the stock markets don't always put a fair price on shares, because they're somewhat irrational beasts, so it's impossible to predict it to that sense of accuracy, but it's a reasonable best guess that you're going to lose some money in emerging markets in the short term – not necessarily a reason to panic and sell, but if you're a tactical investor, probably time to pull back a bit.
David:
OK, so looking beyond the follically-challenged Mark Mobius, and also Neil Woodford that we mentioned earlier on, who do you think are going to be the rising stars in the fund management sector?
Charlie:
Well, over the last year, the people who have done really particularly well are the people who are able to make bets on sectors and markets, because top markets have been driven so much by big waves of feelings among investors, so the sort of people who have come out of the woodwork are I think Neptune Investment Management, some of the very bright young stars there have done very well, people like Rob Burnett, Felix Wintle, they've done extremely well; looking further afield some of the young bond managers at M&G have really proved their mettle, people like Jim Leavis, so all these guys are coming through. Although I think it's great to see new talent come through, I'm not a big believer in private investors going round hunting for it, frankly I'd rather the institutional investors found the young talent, and when we know it really is talent, the rest of us pile in, because I don't want to lose my money on my ability to spot how somebody will develop as an investor, so although I understand the urge to look for new talent among private investors, my money's just too precious to try.
David:
So for those people who prefer passive investing, I mean fairly recently we had Tom Rampulla of Vanguard, now Vanguard have just launched a whole basket of cheap index trackers, stock market index trackers here in the UK, and one of the features of all those trackers is very very low management costs, exceedingly low, we're talking about 0.15% in some cases. Now, how much of an effect do you think these low cost index trackers will have on the rest of the fund management industry?
Charlie:
Well, I think they will have quite a big effect, one of the ways they will have a big effect is that there is a growing realisation in the investment management industry that, as I said earlier, you can't just sit on shares and hold them forever, because they don't necessarily go up...
David:
You don't believe in long term buy and hold then?
Charlie:
Not really, and I think that most people that did in the fund management industry are gradually – see, what you've got to understand about buy and hold is, it's an absolute brilliant line to sell if you're trying to sell a product, isn't it? I mean, it makes a huge amount of sense, and the fund management industry's a little community and it tends to reinforce its own prejudices and beliefs, and they've bought this idea that you should buy and hold, but they've bought it I think largely because they don't want you to sell the product that you've just sold them, so there's a huge vested interest in arguing for buy and hold, which we need to kind of cut through a bit, but the point I was making was that, if you don't believe in buy and hold, passive investment's a really good idea, because of course you can get in and out very very cheaply of different asset classes, you want to sell emerging markets, as I've been talking about, passive helps you do that a lot more easily than an active fund, which has a much higher cost of doing that.
In the last few months in the fund management industry, we've seen quite a few former protagonists of active fund management say, "I do believe in active fund management in the sense of I believe in getting in and out of things, but I don't necessarily think I need an active stock picking fund manager to do it." Most famously, Alan Miller, who was the Chief Investment Officer of New Star Asset Management and most famous for having, I think, the largest divorce settlement in British history, a few months ago it made the front pages of all the papers. He set up a new investment company, he says, "I'm purely going to buy exchange-traded funds, a form of passive investment, because I just think you get more value in getting in and out of things than you do in staying in things and trusting the stock picker". So I think there is a move towards that, and I think you can see that among the whole, where all the wealth managers in Britain, all the financial advisers, it's people saying, "I'm still going to use Neil Woodford, because I know he's really good, but perhaps in some areas I'm going to blend with that some passive investing as well". So I think that's where we're going, I don't think we're going towards the sort of philosophy where you just buy passive funds and leave them alone, but I think we are going towards a philosophy where we recognise that moving in and out of assets, asset allocation, is very much in vogue, and people are going to use these very cheap passive funds to do that.
David:
Right, one of the big criticisms of active fund managers is something called "window dressing", I get emails about this quite regularly, where people say, "David, can you explain to me what window dressing is?" – what do you understand by window dressing by an active fund manager, Charlie?
Charlie:
Well I think there we're talking about the idea that really you might want your fund manager to be doing a very specific job, investing in a very specific type of shares, for example, you might buy a UK equity fund, and you might be hoping he's investing in the FTSE 100 stocks, but you discover, if you ever actually manage to look inside the whole of his portfolio, that he's got a couple of mates that are setting up an Aim oil mining company in Belize, and he's got another guy that's got this cast iron plan for a new racecourse in Inverness or whatever, and so he's invested a little bit in those two, and they're saying, well, this isn't really what I wanted my money to do, and that does happen to an extent, actually it happens often with more successful fund managers than less successful fund managers, because the more successful fund managers are given more leeway by their companies, because they generally get these punts right more often than the less successful ones.
You should demand from your fund manager a good level of transparency about what's going on in that portfolio, they can't show you everything, the competition could copy it, but you should demand a lot of transparency, and particularly if you're investing through a financial advisor or a wealth manager who's got a bit more clout with their fund management firm, you need to make sure that they're getting the access they need to go and ask the questions, and if they're not, don't give them your money, don't give your money to somebody who won't tell you what he's going to do with it, that's a pretty basic rule, and it's one that we need to apply.
David:
If the fund manager is designed, or rather the fund is set up to invest in emerging markets, you don't really want them to invest in things other than that, do you?
Charlie:
No, I mean you might find that, sometimes emerging markets managers will buy stocks that are listed on the London stock exchange but all of their business is in emerging markets, that's actually often quite a good way to reduce risks and to buy shares that are trading more cheaply, but they need to do what is the criteria of their fund; by and large the law only forces them, well not so much the law, but the regulators that govern fund management from the Investment Management Association, only force fund managers to invest 80% of their assets into the area you would expect them to, so they've got quite a lot of freedom to go elsewhere, and the problem is that can hide their performance – if you've got a UK fund, but actually 20% of it's in China when China's going up, the performance looks great, it doesn't necessarily mean the guy's a genius at investing in UK shares, does it? So there's a lot of tricks here, the thing for us as investors is, demand transparency, demand answers, and if you don't get it, go elsewhere – there's lots of other fish in the sea.
David:
OK, now I'm going to end on a slightly political question, and it is one that's quite topical at the moment – I want to know if you have a view about whether it is right for the government to step in to introducing this maximum wage for people who work in the City?
Charlie:
This is a very very difficult one, I think a lot of us feel a sense of moral revulsion with some of the money that's been earned in the City …
David:
Unless you're earning it yourself?
Charlie:
… exactly, well I'm not, and I think, feel that perhaps it's got completely out of kilter with other professions in life, is it right that a doctor is earning £80,000 after ten years' training, and a banker's earning £200,000 or more.
David:
But is it right for a footballer to earn £150,000 a week?
Charlie:
This is the problem, there's this moral question – now, the issue is whether that moral problem should be put into law. I don't think it should be applied by the regulator, the FSA, I don't think it's their job to do it; really if it's going to be done, it needs to be done by politicians, and I just feel it's a very slippery slope, because while it offends me too, these bonuses, are we going to live in a society where we limit the amount of money people can earn? – because you can't limit it in one industry and not in another, I mean it's just inconsistent – are we going to live with a society where we limit the amount people earn? Of course, if we do that, you'll see wealthy people go abroad, but I think there are bigger questions, really about human rights almost – do you not have a right to try and succeed up to the level which you think is acceptable, does the government have a right to penalise that? Now obviously, the way they would limit it would be through taxation, they're doing quite a lot, they're taxing 50% of high earners' pay already, I think anything beyond that, it really starts to look almost like prejudice against wealth.
David:
Well, it's jealousy, isn't it?
Charlie:
Well, there is an element of that, isn't there? And this would never happen in America, this would never happen in a place where they have the American, let's succeed spirit, where people are more comfortable with success. We shouldn't be embarrassed about success in Britain, if we want to be competitive in the world, and I think some of the newspaper coverage, it's the easiest story to write at the moment, is anger over bank bonuses. Some of it's getting a bit out of hand, and we should probably back away a bit now, and just remember that we get successful by being entrepreneurial, we get successful by being capitalists, and trying to succeed and trying to beat the competition, and that's going to involve rewarding successful people with large amounts of money sometimes, as unpleasant at that may seem to us.
David:
So looking in your crystal ball, do you think it is likely that the government will step in and cap the amount of money that these fund managers are likely to earn?
Charlie:
No, I don't, well I mean I think you might see some more policies aiming to tax income tax, but there's an enormous amount of people in the City, particularly the lawyers, getting very very rich, but showing investors how they can convert an income tax problem into a capital gains tax problem, which is taxed at a much lower rate, but they're not going to get the money either way, but even if they try and get it with some law, I think that's very unlikely, the Tories aren't going to do it, it's absolutely completely counter to the whole culture of the Tory party and their whole belief in the free market, and Labour might try and do something as an election grabbing tactic in the next few months, but I don't think it's Peter Mandelson's instinct and I think he seems to be running the show as far as business goes at the moment, doesn't he? I saw him, by the way, last week, for the first time …
David:
On a yacht somewhere?
Charlie:
… no, I wasn't in a yacht, I passed him in a waiting room at the BBC studios in Millbank, and I got the look, I got the Peter Mandelson look of, it's a look which said, "I could control you if I wanted to, but I'll just walk past", it was quite frightening.
David:
I said that was my final question, I do have a final question, and I want you to look in that crystal ball again – when do we come out of recession, Charlie?
Charlie:
We might be out of technical recession already, there's a very good chance in the third-quarter numbers this year, the third three-month period that we measure this by will be out of a technical recession, but I think we're set for a year, two years of very very slow growth, because I just don't think we've seen in any of these green shoots we talk about any real evidence that end demand is increasing, and I think that that is evidence of the fact that people are trying to pay down their debts at the moment, businesses are trying to be very very cautious and they continue to be, they know they're not out of the woods yet, and it's going to be a long, slow hunt.
For me, what's it about? – what's the recession really about? – is it about the GDP numbers? – I don't think so, I think it's about unemployment, I think at the end of the day, if you're losing your job, you blooming well feel like you're in a recession, whatever the numbers say, and if you're friends are losing their jobs, that's how you feel, and the unemployment numbers are still getting higher and higher and higher, so let's not talk about the good days returning until people start finding jobs again.
David:
So where should people be putting their money today then?
Charlie:
I think in the bank, and wait to see what happens for a month or two.
David:
That is actually quite sobering from somebody who is in the fund management industry.
Charlie:
Well, I don't know about – I'm a journalist, David, I'm in journalism, and I'm trying to come up with honest answers, and my honest answer is that I wouldn't invest any of my money today, and so I wouldn't tell anyone else to either.
David:
OK, so everybody sell what they've got, yeah?
Charlie:
Well – how to make friends in the City.
David:
Thank you very much for coming in today, Charlie.
Charlie:
Thank you very much.
David:
And as you know from previous podcasts, I always end each podcast with a quote. Today's quote comes from the management guru, Tom Peters, who said, "If you are not confused, you're not paying attention".
Charlie:
Very good.
David:
I thought it was very good. Now, if you have a comment about today's show, you can post it on the MoneyTalk blog, which you can find at fool.co.uk. If you have a suggestion about future topics, you can email me at moneytalk@fool.co.uk, and finally have a great week.
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