If you were thinking of investing your money in 2012 it may not seem, at first, like the most vintage of years, with continued fear in the markets and the crisis in the Eurozone, it leaves us asking the question, is there anywhere safe left to invest our money? Well here to answer that question is Chief Investment Officer of Thurleigh Investment Managers, Charles MacKinnon.
Charles, thanks for joining us, as we said the first half of 2012 has been an extremely challenging one. Where are we now?
Well, we're still in the middle of an unfolding crisis, this is a long term crisis, this isn't going to happen in a hurry. Despite endless government meetings it's not going to get over in a hurry. We've had a decade, probably twenty years of spending too much and it's going to take a long time to reign that back.
And with this in mind, how are the markets and nation states actually working to resolve this?
Badly. Remember we have a political system which means that people have a term for 2, 3, 4 years and so every politician merely wants to do what they would do to get re-elected. And what we're seeing in Europe is a perfect example of that. The Greeks elect the person that they think will solve the problem for the next six months, not the next six years. So the problem you've got there - politicians are short dated animals.
And with this in mind, the counter investor trying to put their money somewhere, at this time, is understandably spooked - there's a lot of fear around at the moment. How do you mitigate these fears?
The most important thing - we've talked about the hierarchy of things, first we need somewhere to live, you need to have somewhere over your head, you need physical security and you need to have a job. And I think that the first thing that investors, anybody with money, it doesn't matter if you have a pound to invest or a million to invest, is make sure you are secure - you've got money to come in. Then it's a question of saying, what is safe. And safety means different things for different people. So, what are you afraid of?
My fears are actually about what I leave as a legacy, I want to finish a book that I'm writing and I don't know how I'm going get to the end of it. And the easiest thing for me to do, would be to take a position to write.
So you're, right where most investors are. They're frightened as to what to do, so they do nothing. But you know, intellectually, that you've got to do something because otherwise you will starve. And I think that's really the important point for now - because going back to the investment question, 'what should people do now'? Well the point is, they've got to do something - now that doesn't mean they've got to do something big, but ultimately they've got to do the first steps. And I think the most important thing I try to get over to people is to have a plan. Work out where you are, what you're trying to do with the money, and then just start doing it. If you've got £100,000 to spend well don't spend it all today, but spend £10,000 today, and spend £10,000 in six months. And once you start doing that, it becomes much easier. It's like for you, writing a word. So I think that that's the key message that I would want people to get into is - work out a plan, and then stick to it for a number of years, not days. That makes investing, much much more manageable for yourself.
Isn't it understandable, that at a time like this, people's natural instinct is to essentially step away - to limit their exposure?
Your natural instinct is to go back to stuffing money under the mattress, the hard part is working out what that mattress is these days. Because traditional safe heavens; gold, government bonds have become very different assets. Gold is owned by hedge funds in odd size, governments have started manipulating the price of government bonds. So what you used to feel was safe, isn't any more. So what you've got to look for, and what we're trying to look for, essentially is very large global companies with secure earnings, and that's really, I think, the only safe, safe-haven. What Bill Gross at Pimco calls "the least dirty shirt".
So to the casual investor is there anywhere, that you would say is safe left, is there the equivalent of a mattress? Or are there no mattresses?
Is there anywhere safe? Well, if I can I buy national savings certificates, some government guaranteed 5 year bonds, but they've taken them away from sale. No - right now there is no safe, real safe haven. Because everything is muddled, so what you want is to have the least dirty shirt rather than something that is safe.
When somebody calls you and says, 'I would like to invest with you' what happens, what's the conversation that you have when things go wrong? Especially in difficult times like this?
Well we have these conversations all the time. My first question is, what's the money for? Is this money for your grandchild to help put them through university, is this money for your retirement in two years time, or is this money that's a flutter? Now people need to work out what the money is for. Now obviously a ten pound note, is a ten pound note, is a ten pound note. It doesn't know what it's for, but you know what it's for. So the first question, the beginning, middle and end is - what are you trying to do with this money? What are you trying to achieve? Once you've worked that out then it's much easier to work out how you can invest that in a sensible manner. For many people right now, significant amounts of cash held in the bank, even though it's earning nothing, is a better place, because they won't worry. The absence of worry is a very positive return.
Absolutely, but how easy is it for people to actually understand these investments, I mean traditionally this is a very esoteric market place. Is this something that people can easily understand?
I think many people in our industry have sought to make things look very complicated, really to cover their own confusion. I think they're just trying to hide behind a fog of words and smoke screens and snazzy pictures. No, investing is very simple. You want to buy something that's going to pay you a dividend, or that other people are going to want more than you do, at some point in the future. Investing is not complicated, doesn't mean to say it's easy, but it's not complicated.
Going into detail then, looking at the last year, and the indexes - you sold the majority I believe of your FTSE holdings and had no ostensible plans then of buying back into the market. What's your view now has anything changed for you here?
I think that what's really changed is that simple survival means that some assets are much much cheaper now than they were last year. Certainly, than they were this time last year. In early summer 2011 markets were basically thinking that the story was over. We then had an extremely poor autumn. Our real change has been over the last three months is that we're much more focused on growth companies, rather than growth countries. We think that the new vehicles for making money going forward are going to be very large multinational companies, because they will be able to take growth from Brazil, from China from America from England, depending on where it is.
And again, looking at hedge funds, recently a number of wealth managers upgraded their outlook, they believe they remain bullish about the ability to aid risk management, but I believe you've almost exited your position on hedge funds, is that correct?
I think that's absolute rubbish. I mean hedge funds are you know, hedge funds, it's a reward strategy for the managers, it's not an investment strategy. We own no hedge funds in our portfolios at the moment. There are some great managers out there, and yes if they can manage to get themselves paid for managing money that way, then fine and dandy, but not my money. I'm not saying they're bad people, it's just I don't think it makes sense for the manager. For me, to put money there, to be able to put my clients money.
What doesn't make sense, is it the cost, is it the liquidity?
What makes the problem, it goes back to what we talking about earlier. You don't know, and don't know what they're doing. Essentially you're thinking, wow that guy's a really smart guy and he made several billion last year if I give my money, I'll make several billion. It doesn't work like that. If you don't know what they're doing, and if they made an awful lot of money last year, then one year they won't and you won't know when it's going to come and why it happens. But you can almost certainly bet it'll be the year you put your money in.
So you've reduced your exposure to indexes, you've looked at removing yourself from hedge funds. Where are you placing your money?
Where we've got money right now, is we've got a significant amount of corporate debt this is large companies issuing money both in the investment grade and in the high yield space. We've also been increasing our exposure as I say to what you can think of as global branded companies, now a lot people think about this as being the Louis Vuitton trade, the sort of high end. No, it's much more the Reckitt Benckiser, we're talking about people buying Cillit Bang, people buying Persil, people buying Colgate, people buying shoe cleaning. You know, boring stuff. But a lot of people want to buy boring stuff. If you look at China, you've got 200 million people a year joining the middle classes, now when they do that, what do they start doing? They start buying Kleenex as opposed to own brand tissue. Now that's a lot of Kleenex that you sell. They start buying Persil or Tide or whatever rather than some really poor grade, they start trading up just that little bit. Those things are very very profitable, and global.
And turning to Europe how do the events in Europe actually affect your strategy on a practical level do they affect it at all, and what's your strategy to take advantage of any future opportunities?
Now Europe's a really important part of what's happening because it's what we call the canary in the coal mine. Of itself, Greece is an irrelevance to us, we have no investments in Greece, we have nothing there. However it shows the way that debt has built up in the system in the same way as sub-prime, you know if you remember back to 07 sub-prime started going wrong in America and we thought, well I don't care about sub-prime, we don't own any trailer parks in Florida, but the point was, it was an indicator of what was going to happen. Now the same way for Europe you've got there the very real, Greece. If Greece blows up it takes down German banks, it takes down French banks. The banking system collapses, then essentially, well it's like the London Underground right now - seizure. And at the point you've then got to start remaking things. But that is ultimately a good thing. No we are actively considering investing in medium caps, low cap European equities now. These are down 80 or 90% and these are good companies, people will still buy ice cream in France.
So things have changed quite significantly of course in the last decade out of all recognition, how do you then shape your investment outlook? Is this a clean sheet now?
I don't know that things have changed over the last decade. Things don't really change. I mean a hundred years ago, people were worrying about Argentina, people worrying about France. Things aren't that different really. No what we're trying to do is to have secure places where you understand what's going to happen. Now we talked earlier about fear and what of client needs. If you, as a manger, have been able to explain what you're doing and you can understand that, and if you don't understand it's our fault not yours. Then outcomes are much more manageable, because they understand, well this is okay. I mean we are really just trying to have very simple portfolios, why? Because then we will understand what's working and what's not.