The Case for Buying Small Caps Now

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1:51Merryn Somerset Webb: so small cap value is the anti-ai trade you think jet quite possibly i mean the only certainty is

1:58Simon Evan-Cook: we don't know until it happens if you look around the world merin small caps generally particularly small caps are very cheap uk is an outlier within that um if you believe in reversion

2:08Stuart Widdowson: to mean there's still upside on rating if it's purely a rotation rather than an economic event or a war or something worse there's no reason i think that movement of money out of the massive of concentration in AI stocks into all the stuff that's been neglected for three years can't happen as well.

2:35Merryn Somerset Webb: Welcome to Meryn Talks Money, the podcast in which people who know the markets explain the markets. I am Meryn Somerset-Webb and this week I am speaking with Simon Evan-Cook, who's a fund manager at Downing, running a fund of funds. Also, Stuart Whitteson, who's the co-founder and managing partner of Odyssean Capital, who are the managers of the Odyssean Investment Trust. Simon, Stuart, welcome to Merrin Talks Money. Lovely to be here. Nice to be here. Simon, you have a history of investing in and talking about investing in not just small companies, but small investment funds. And there's a particular reason why it is interesting you to look at not just small funds, but new funds.

3:16Merryn Somerset Webb: And there's a history, isn't there, of new funds outperforming in the first couple of years of their existence. Can we tell us a little bit about that before we move on to small caps?

3:27Stuart Widdowson: Yeah, for sure. I mean, there's all sorts of belief out there amongst investors. And I sense it as well, that if you're going to buy a fund, you should buy a nice, big, safe fund, because it's got an amazing track record, and loads of other people are in it and therefore that is the thing you want to buy and occasionally this is true but really those big funds only really got big because in their early years they smashed it out of the park and there are all sorts of reasons why holding and managing a smaller fund is considerably easier than managing a large fund so we're about to talk about small caps later on that's one of the reasons for one that if you're running a smaller fund you can invest in smaller companies over the last few years that wouldn't have helped you a great deal because of the market dynamics but generally speaking we all know that that kind of fact that smaller companies will rise more than larger companies over time and the best managers are able to winkle them out that part of the market is also less efficient so you can make more alpha because you're more likely to find a company that everybody else has ignored has only got one analyst covering it rather than the 100 that are covering nvidia and so you're able to find a company that is materially undervalued and that can potentially even if it's not undervalued still grow by 10 20 even 50 times whereas obviously a company like nvidia amazing as it is shouldn't be able to grow by 50 times from here i mean the maths of that must be yeah i can't even imagine but it must be impossible

5:00Merryn Somerset Webb: okay so that's part of it being able to buy smaller companies a giant a giant uh fund can't buy into a smaller company, obvious reasons. But that's not all, right? There's got to be more to it than that.

5:11Stuart Widdowson: No, there's more to it than that. I mean, for starters, you've got to, if it's an emerging fund, so let's call it a new fund that's just been launched, there are different reasons why it may be that. Put them into two camps. One might be that it's a new manager. So that's someone who is younger, maybe getting their first chance at running their own fund, having been an analyst somewhere. And the second one might be that it's a more experienced older fund manager who is leaving a bigger company somewhere because they've got annoyed with the red tape or the amount of extra work they've got to do and is establishing their own boutique and is starting their own fund so if we take those one by one starting with the experienced older fund manager the reason why you'd want to back that particular fund is because now they're finally being let off the lead you know whatever was kind of annoying them holding them back before it might be that the funder got too big.

6:00Stuart Widdowson: Might be that they had an overbearing risk department or a CEO who wanted them to hug the benchmark. Now they don't have to do that anymore. And if they are a good fund manager, that should mean that they can create better returns for you for doing that. And at the point when their fund is still small enough for them to be able to maneuver it and buy smaller companies, all of that good stuff, they can still do that. So that's one reason why a smaller fund might be your friend. The other one is that it might be a younger fund manager who's getting their first outing. Now, no one ever gives a fund manager an outing when they're 22, 23, literally out of university.

6:36Stuart Widdowson: This guy seems bright. Let's give them a brand new fund and 10 million quid to go in it. That doesn't happen. They're normally someone who's proved themselves as part of a bigger team, as an analyst, and they're being given their first chance with a new fund. And you might think, well, I don't want to invest with a 28, 29-year-old, 30-year-old. That's too young. I want some gray here but you would be surprised at the statistics around that i mean if you take possibly the most famous fund manager there's ever been peter lynch um i'm not including warren buffett in that because it's not technically a fund but peter lynch i mean peter lynch is considered to be one of the goats of fund management incredible fund manager stunning track record and when we see pictures of him today we see pictures of this gray-haired gent and you think that's what a fund manager should look like But he retired at 48.

7:27Stuart Widdowson: So he did all of his fund managering. All of that track record happened between about the ages of 30 and 48. So that's a younger fund manager running what was initially a smaller fund. And I think that comes down to lots of factors, including the hunger of the fund manager. I think the point in life where you're at, where your brain is still at its physical peak, but also you've got enough life experience to be able to use that. So picking that sweet spot ties in quite nicely with picking smaller funds. and then to tie a ribbon on the top of all that for me as a professional fund buyer because nobody else is doing what i'm doing currently and nobody else has learned the art of picking younger funds we get a nice tasty discount generally for being what's called a founder yeah in that discount on

8:18Merryn Somerset Webb: the fees i mean it always seems to me that there's something in the fact that when you you know say you're reasonably young and you start a new fund or even if you're older and you're starting a new fund that's when you're going to be incredibly high conviction really going with the style that you believe in, et cetera. So if you're going to outperform, those first three, four years are absolutely going to be it. And you've chosen a style that's going to work in that period anyway. But then, you know, let's say you do that. Let's say you outperform in your 10, 20, 30 % a year, whatever it is. And you hit year four, people have started to put money into your fund.

8:50Merryn Somerset Webb: And that's when the nerves kick in, right? That's when it's like, what I got to do now is I've got to maintain this. So I've got to hang on to the money. so what I want to do now is not quite not take quite so much risk maybe not be quite so high conviction pull back from the brink a little and that's why those first three years can be so profitable and after that things will kind of slide off it's just it's just emotion it's human

9:16Stuart Widdowson: nature it is human nature and it's it's definitely that's one side of it that the fund managers themselves might think okay I can throttle back a little bit here but if you've met some of the individuals I've met I mean that is not in their vocabulary to do that just as often if you think about the dynamics within a larger fund company when that younger fund manager starts their fund and it's 10 million in size and they're working as part of 100 billion fund manager the CEO of that company does not give a damn about that fund but when that fund becomes a kind of category killing franchise running 5 billion pounds then they start to care and then they start to worry about what happens if this fund manager underperforms because there's a style change wouldn't it be more sensible if we pulled it back in a little bit so it looks a bit more like the benchmark so quite often it's corporate tampering as much as a fund manager losing their their kind of their willingness to take risk okay so when you talk about an emerging fund what are you talking about up to what sort of size uh it's a that's a bit of a how long is a piece of string type of question but i would say an emerging fund nowadays is probably anything south of 250 million um and that in itself is a bit of a sad thing because 250 million used to be enough to just just to run a fund for it to be a going concern and a way you go and that's what you've got but nowadays if you're running a fund that's 10 20 even 50 million sometimes even up to 100 million particularly a bigger company that's seemed to be not enough and not viable and you can't attract the bigger fund buyers so it's not there yet so you'd put that in the emerging camp and that's a shame and the reason it's become that is because a lot of fixed costs involved in running funds have become more onerous and it means you just need more money and it's more of a risk to launch a fund now which in itself is a shame i have a big gripe about that because like any market, you want lots of things being tried and the fittest things to emerge from that Darwinian soup.

11:24Stuart Widdowson: Whereas currently what we're doing is limiting the number of people who can start funds, who can run them down to really the people who've got the money or the backing to do that. And that is not many in the current environment.

11:34Merryn Somerset Webb: And the other problem, of course, is that there aren't as many active fund buyers around as there used to be because of the rise of passive. Okay, Stuart. So with that in mind, let's move on to the Odyssean Investment Trust. And that, by Simon's definition, is only just, only just hits the 250 million below mark, doesn't it?

11:54Simon Evan-Cook: Well, yeah, I think we're about 330 million today. So hopefully on Simon's analysis, we're about to break out and attract some more people to look at it.

12:05Merryn Somerset Webb: Okay. And everything that he said about why it is that smaller funds can outperform, does that all make sense to you?

12:11Simon Evan-Cook: No, absolutely. We IPO'd with about 85 million.

12:14Merryn Somerset Webb: When was that, by the way? When was your IPO? How long have you been on the go?

12:17Simon Evan-Cook: That was in May 2018. So, and I'd been someone who I think was in the first category that Simon suggested, who'd been somewhere else before and wanted to go and have a go independently.

12:31Merryn Somerset Webb: Okay, so you're self-identifying as the older guy, not the younger guy.

12:36Simon Evan-Cook: yeah sadly yes i'm and sadly i'm i'm a bit depressed because i'm a little bit older than peter lynch need already retired but um hey i love what i do so that's all right and i've got younger people in the team and that's all all good um but no i think the three things for me is you can be really agile you know you start day one with a clean piece of paper no legacy how do we do what we did last time but better right and that doesn't just mean actually your fund selection it means how you how you build the people around in your team um number two i think completely agree with what you said and it is darwinian you know you there is pressure you know very few people launch a fund and a viable day one and we were very lucky with investment trust it was it was a binary outcome either it launches or it doesn't and if we launch it we sort of you know we we wash our face day one but but there is a lot of pressure on you not just to raise the first capital but really make it work for the first three years um i think we've got a good team so we we haven't sat back on our laurels and we've you know we've we've kept pushing because it's in our nature but um i agree with a lot of what simon said um i think that the interesting thing for me was was when i talked to the clients about it because we're quite a long-term investor our average hold is three to five years and when you ipo when you when you launch a fund everyone's expecting you to be fully invested as soon as possible and if you do the maths on that you're doing three to four times the number of investment decisions in a year than you would normally do and as we're all human you always make mistakes i think the key thing for us actually in the portfolio is getting getting the first investments right and if you get the first investments right actually you'll be viable and you'll grow and and you'll create a you know a more sizable vehicle over time so you are a small cap investor that's what goes into the

14:21Merryn Somerset Webb: investment trust um your record since your ipo was pretty good but your record for the last year is is excellent the last six months and the last year very good um is something changing in

14:31Simon Evan-Cook: this market i i don't think something's changing i mean we we've had a particularly good period but it's come off two years that were quite soft after a fantastic 22 and i think from our perspective a lot of the decisions that we made two to three years ago which didn't seem right in the short term have actually really come home to roots positively over the last 12 months or so we've been very bearish about the prospects for domestic uk companies for some time you know we're not great fans of what we see around ourselves not just in you know the corporate environment but in our home lives um and you know we were very focused on finding international companies that happen to have their um uh their headquarters here so so we we weren't really betting on the UK economy which has proven to be a good thing we really have valuation discipline as well Merrin so a key part of what we do as well as for decent companies is to not overpay and then finally I think the one thing that we have started to benefit on benefit on more recently is a lot of our companies go through self-help transformations much easier the small company than if you're trying to turn around Vodafone maybe the one thing that has changed in the broader market is when a sector goes out of favor for many years a lot of there's a lot of liquidity problems in funds and you you people that have open-ended funds become forced sellers to meet redemptions and when those redemptions are quite high and there's no buyback so there's no m &a there's selling pressure on a lot of these companies so illiquidity and small caps works against you what we're starting to find actually is buybacks and m &a is more than compensating for small outflows and actually good news is is is actually creating positive momentum in share prices and therefore illiquidity has started to move in your favor so we've had a couple of stocks you know this year up 100 % really because the market started to see actually this is a really interesting story i want to go and buy some shares and there's no sellers so i think that it appears like to us small cap is is towards the end of the clearing phase

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20:53Merryn Somerset Webb: so it's an incredibly simple story really we've been through a period where everyone loves mega caps where u.s tech has been very exciting a is ai has been very exciting at the large cap level people have poured into those now they're looking at that going a bit pricey i'd quite like did i just if i look at all that cheap stuff over there and shifting into small cap yeah i definitely

21:14Simon Evan-Cook: think that's that's that's an aspect of it divert market small caps uh are some of the cheapest assets around uh quite the small caps of cheapest assets around in the world today uh simon produced some analysis we talked about a few months ago showing the forward returns from these points post-inflation that potentially very attractive for the next 10 years and yet the forward returns from the mega caps in the u.s appear to only potentially just be beating inflation for the next 10 years so so there's going to be some style change what we see going and talking to our clients, a lot of our clients are wealth managers.

21:46Simon Evan-Cook: You know, small cap is moving from, I know it's cheap, I don't care, to, I know it's cheap, I think it's starting to move, which it has. I think I better own some. What am I going to buy? And that's a significant mindset change that we've seen in the last six months.

22:01Merryn Somerset Webb: Yeah. Okay. That's interesting. Simon, tell us about that valuation research that you did.

22:06Stuart Widdowson: Well, I can't claim to have done the research itself. I just put the lipstick on it and

22:10Merryn Somerset Webb: sent it out into the world we'll still call that you doing it we're very giving here i should just

22:15Stuart Widdowson: claim it yeah it was but so it's by research affiliates and they do a lot of work on looking at um the same way weather forecasting works you look at conditions today and you say right historically speaking what could you expect going forward from similar conditions in the past and a lot of that work is based on the valuations you're paying for different geographical markets different segments of those markets. And unsurprisingly, the areas that have done the best over the last 10 to 15 years, most obviously US mega cap growth, have exhausted their potential returns, because you're now paying so much for those assets that if they just mean revert to anything like a normal valuation, then that's not much in the way of return.

23:01Stuart Widdowson: But then when you look at the other side of it, so if you look at European small caps, UK small caps, even within the US, a lot of the small cap markets as well they really haven't had an incredible 10 years it's not been a disaster they've still made you money but they haven't over delivered so it's been sustainable returns they've been delivering and there's no reason to think that over the next 10 years that they can't keep delivering you inflation plus five six seven percent so let's call that nominal maybe nine ten eleven and if you put a great fund manager on top of that then maybe you can add another one or two and you start to get up to something that's very respectable looking at a time when asset allocators on my side of the fence the multi-asset fund managers are scratching their head and thinking what do we do everything that equity markets look expensive bond markets look compromised there's other stuff out there but it's unproven well if you can just pick good stocks out of the market then actually there's not too much of a problem in my view i

24:03Merryn Somerset Webb: I had Jeremy Grantham on the podcast and we were talking about value and the small cap effect, etc. He said he didn't believe in the small cap effect, didn't believe that there were sort of mysterious reasons why small caps outperform long term. It was just another part of the value effect that small caps are automatically cheaper than larger companies. And so we talk about small caps as over something special, but they just outperform over the longer term because they're generally cheaper.

24:29Stuart Widdowson: I would never argue with Jeremy Grantham. I was hoping you would.

24:33Merryn Somerset Webb: I thought that would be really interesting to have someone who would say, well, that Grantham, he's always wrong.

24:37Stuart Widdowson: Yeah. Have you ever met anyone who said that? I'm sure there are people who do.

24:40Merryn Somerset Webb: There are loads of people who say that Grantham is always wrong because he goes bubbly too early.

24:45Stuart Widdowson: Well, that's the rub, isn't it? If you think a train is going to crash, you just get off of it. You don't wait five stops and then get off of it. And I suppose that's the trouble with that. but i i would take the argument that it's a value effect uh quite happily and when you look at some of the dimson and marsh data looking back over the uk back to 1955 the very best asset class you can be in is small cap value and i've certainly seen that in my time small cap value over long periods smokes everything else if you find a talented manager there you just want to hang on to them alex right one of the best known managers in the uk today cut his teeth on the fidelity uk smaller Companies Fund.

25:23Stuart Widdowson: After 10 years of him running that, that was the best fund, full stop, in the UK. It was the best performer because of the inefficiencies of that part of the market and his talent, combined with a great style. Just stunning returns.

25:38Merryn Somerset Webb: Stuart, you're a small-cap value guy, right? Yeah.

25:43Simon Evan-Cook: We also like quality as well. I think our key differentiator is we particularly like companies that have the potential to improve themselves through some sort of management action irrespective of what's going on the market so we're very greedy we have a very concentrated portfolio as you might remember it's i think we've got 18 stocks at the moment we quite like a bit of everything you know ideally i don't know the value of aberforth with the growth of something that would attract line trust um but with the self-help that i don't know um uh the melrose management team would love to get their teeth stuck into you know you when you have a concentrated portfolio you can afford to be really greedy right you want a bit of everything yeah and simon you said just

26:24Merryn Somerset Webb: now that uh talking about great managers on top of all these things what makes a great manager

26:29Stuart Widdowson: uh you've got to have a particular character trait and that character trait is the willingness to be extremely different as the circumstances require it that is ever so slightly different from being different all the time which you might call disagreeability or just being a grumpy bugger it's not that exactly it's believing that in what you're doing and if what you're doing happens to look like the market fine but if what you're doing happens to look 100 different to the market also fine and the strength of character and ability to ride that out because when it's going against you and the world thinks you're the biggest idiot going because you didn't buy Nvidia you were buying some sort of mid-cap turnaround stories that's incredible pressure and to take that on the chin is is extremely difficult and not everyone can do that so there's definitely a character trait and then there's all the basics of to my mind you've got to be a bottom up stock picker I'm not a big fan of people who are macro investors who are trying to guess what Putin will do next or what Trump's next move will be I want people who are trying to find 20, 30, 40 individual stock situations where the quality of the company is good, the valuation of the company is low, and it's diversified enough that if you've got 20 of them, then they're not all pointing the same way.

27:51Merryn Somerset Webb: So tell us about some of the stocks you do hold in the trust, as you say, super concentrated, 18. What's the most interesting one you've added recently?

28:01Simon Evan-Cook: Well, we don't add very many new ones a year. I think the one that stood out for us this year was a company called Zote Foams, which has been around for a very long time. It has a unique process of creating foam using nitrogen being forced into it, which means it's inert. This was our halo asset investment, so heavy asset, low obsolescence. We really like this company. There's a management improvement story going on. It has a very high market share in the UK for what it does, about 85%, which is great. but the key thing is is very well invested and the as the useful life the assets is we think until 2016 and they're virtually fully depreciated and in our view this is a great place to be in a company that's growing that can pass on inflation and doesn't need to reinvest very much in the future right so so it was very much an asset play there's also an interesting growth play they are putting some more capacity in at the moment and you know they want one of the customers they have is Nike for example where they do a lot of the mid specialist mid-layers for Nike shoes and they're actually putting some capacity in close to the Nike shoe factories in Vietnam which will allow them to free up some capacity in the UK so it's a very we think it's a very rare super super asset-backed business we think we've probably got in at around 60 percent of the the real asset value it's a growth story we bought in very cheap.

29:29Merryn Somerset Webb: And valuations how do you look at

29:30Simon Evan-Cook: valuations on a stock like that well the current p ratio is about 11 times it's got a tiny bit of debt uh so i think the the evu bit's about somewhere between eight and nine which is not really expensive on on an asset basis uh the net asset values i mentioned i think we paid slightly above uh book value as stated but the book value is materially understated in our view i think from to give you an idea, Merrin. I think the site in Croydon, the insured value and replacement value in the site is a multiple of what it is in the books. So it's quite a nice mix of like an old style deep value investment asset backed with a growth story, but also a management change story as well.

30:14Simon Evan-Cook: Relatively new chief exec, relatively new finance director who are also very incentivized to perform. Okay.

30:19Merryn Somerset Webb: You said earlier that you tend to hold things for a couple of years. What would make you sell this?

30:24Simon Evan-Cook: three reasons something would leave the portfolio one it's taken over and we've had a lot of our because the way we select stocks a lot of our companies have been taken over over time typically overseas trade buyers the second thing is before we invest we we write a very detailed investment thesis we all discuss as a team and that provides the you know the guidebook for what we think is going to happen and every periodically we review this typically no more than every 12 months and if a stock isn't doing what we thought it was going to or the management team aren't doing what we thought it would do it's a trigger to say actually if we just got this one wrong and the important thing for the team is it depersonalizes the decision that we've got this one wrong so you know thesis second thing is thesis thesis goes wrong the third thing absolutely right is around returns so we set a target price for all our stocks three to four years in advance you compare that to day share price that gives you a potentially forecast annualized return now if that annualized return goes below 15 or isn't as good as other things in the portfolio or other things we want to buy we reduce or move it on so we have a quite a disciplined disciplined way of thinking about returns in the portfolio and i think that's a big differentiator compared with some that has 100 stocks if you have 100 stocks you know it's a bit like the magpie you know you collect interesting things and leave them in the nest for us every single stock has to work.

31:57Merryn Somerset Webb: This is the Bloomberg Tech Minute brought to you by Chachi PT. I'm Carol Masser. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk, and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs, and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence.

32:35Merryn Somerset Webb: A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices. But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, must be willing to work extended hours and weekends as needed. One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time.

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36:06Merryn Somerset Webb: You mentioned M &A and private equity, etc. Do you worry that the market is shrinking and there will come a point when the interesting stuff is not available to you? And we always say when we talk about small caps, John and I, when we're doing podcasts and when we're writing, we always say, if you don't buy them, somebody else will, and then it will be too late and there'll be nothing left, nothing left for the domestic retail investor to buy in small caps.

36:27Simon Evan-Cook: Yeah, look, it's a really live debate. I mean, we're very fortunate because we don't have to own many stocks and we can put up to 20 % of the portfolio overseas. So I would be more concerned if I was used to running 100, 150 stock portfolio and my job was to try and beat the index by 1 % a year. Because as your index shrinked, you're going to end up with more volatility against the index, which as Simon knows for big asset management companies risk, right? So I think it's a much bigger concern for the bigger players than us. I mean, I'm more optimistic. I used to work in private tech team many years ago.

37:02Simon Evan-Cook: I looked at taking lots of companies private. it has been a bit like shooting fish in a barrel in the uk for private equity for many years when when the cost of debt was very low i think where the cost of debt is now it's much harder to justify taking companies private so i i don't see so much risk from private equity it's not said there's none but i think that the bigger issue more is the really interesting companies particularly those global niche market leaders um if they're not recognized properly by the uk stock market the obvious trade buyers can come in and if you look at some of the m &a we've had this year that that appears to be what's happening on the other hand i think rationally what should happen is if flows have stabilized what's left should re-rate and actually it will probably re-rate to a point where ipos make sense again and there's so many assets that private equity needs to sell again the quaternary or septunary buyout or whatever it's going to be this time you know it ain't going to work and maybe IPO becomes a good exit again.

38:02Simon Evan-Cook: So I'm short-term concerned, medium to long-term. I think these things do go in cycles.

38:10Merryn Somerset Webb: And rising rates should make sense for growth companies to come to an IPO rather than just keep borrowing money at 6%, 7%, 8%, right? So changing interest rates should really change the dynamic between the choice of private or public.

38:25Simon Evan-Cook: I think that's right. and if you if you know we meet many management teams have done public and private and their pros and cons of both i think the really nice thing is if you treat the public market right and you get the right shoulder base it is semi-permanent capital whereas if you're going through private equity quite often the second the second day the private house buys you there think about how they're going to sell you in two and a half to three years time you know and decisions are maybe made to optimize that point rather than what's right for the next five to ten years. And if you've got a very, very good long-term growth story in a decent company, why wouldn't you want permanent capital?

39:03Simon Evan-Cook: I do think these things go in cycles. We've had a very weird period during zero interest rates. It wouldn't surprise me if we have a boomy IPA market in three or four years' time.

39:12Merryn Somerset Webb: Wouldn't that be great? We've been complaining about the lack of IPOs for so long. Simon, do you think that's possible as well?

39:19Stuart Widdowson: I hope it is um yeah I'm an optimist I'm I'm not as close to the market as as Stuart is but I do speak to a lot of small cap investors they've been a fairly depressed bunch for the last three or four years so it hasn't been a lot of fun talking to them um but yeah I am also a great believer in cycles and it does feel like we've come out of a very long very weird cycle the weird thing this time is that you're starting to see these M &A activity happen and the market is still downtrodden and that's because of the peers on my side of the fence who have been busy selling their UK equity, active UK equity funds that hold the small caps.

39:56Stuart Widdowson: And at some point, the last one of those will have left. And as Tua mentioned earlier, at that point, then suddenly it's not going to take very much to get things moving the other way, I believe anyway.

40:08Merryn Somerset Webb: Well, let's go back to the beginning of our conversation to emerging funds and as you said you can't buy investment trusts but in the open-ended area what what's interesting what funds have you been looking at what do you like are you looking at uk specifically or do you well across the board what are you seeing this interesting and newish newish funds that fit the criteria that we discussed at the

40:29Stuart Widdowson: very beginning of this conversation so the easiest place for us to pick a fund currently is in the global value space because uh there's been such a darwinian cull of value managers over the last 10 years that the only ones left do actually very good uh so we've got the likes of a ram more there

40:46Merryn Somerset Webb: that's sean pesci you've met we've had him on the podcast yeah yeah red wheel are very very good

40:51Stuart Widdowson: there we've got a dutch manager called kempen have a locker a very good smaller firm in london uh we've had to leave a few on on the bench as well so there's good funds at jupiter there's good funds at brickwood um and a new manager just having left schroder's a lot of fund managers have left the schroder value team and he's uh gone over to start at brown advisory

41:13Merryn Somerset Webb: so there are a lot of good global value who's gone to brown advisory it is nick kirich who's

41:20Stuart Widdowson: gone across um yeah great track record great heritage um yeah and it's there is disproar that has come out of that Schroeder value team. We've just bought some of their ex-emerging market managers over at Neuberger Berman, Juan Torres and Vera German, who are exceptional emerging market value fund managers. We were lucky enough to get into their fund in July when they were one of a handful of funds that went up when the market was being dragged down by the AI sell-off that happened in that period. And that's been one of the most encouraging things for us is that the funds we have picked by and large have delivered in the moment when we wanted them to deliver which is when you've seen that wobbling ai as you've seen over the last six weeks we've had funds we've had lots of active funds about not just outperformed that falling market but actually risen in that falling market and to the point where our own downing fox funds have actually risen as well because of the underlying stock pickers uh it's interesting

42:25Merryn Somerset Webb: Because you would have thought that the AI fallout would hit everything. Everything. Everything is now connected to AI one way or another. Are you going to be more productive because of AI? Are you in any commodity market is now connected to AI? Are any infrastructure market is connected to AI? Any consumption market is connected to AI, etc. So when it really happens, when the AI bubble really crashes, everything will go with it, surely.

42:50Stuart Widdowson: I'd be brave to argue that it definitely won't be the case. But if you look at the experience in 2000, when we had similar conditions, similar concentration, then it wasn't the case at all. We've mentioned Aberforth, UK smaller companies, that fund went up in that bear market. I had a look at the data the other day because I'm the sort of boring person who does that. there were 50 UK funds, mostly UK equity income funds, who boringly had to stick to their valuation disciplines and buy boring companies, whose price went up as the tech market sold off, as did Warren Buffett, of course, who was doing that same old thing of buying boring companies at a cheap price.

43:31Stuart Widdowson: So if it's purely a rotation rather than an economic event or a war or something worse there's no reason i think that movement of money out of the massive concentration in ai stocks into all the stuff that's been neglected for three years can't happen as well so small cap value is

43:47Simon Evan-Cook: the anti-ai trade you think jet quite possibly i mean the only certainty is we don't know until it happens i mean look it's if you look around the world marion small caps generally particularly value small caps are very cheap uk is an outlier within that um if you believe in reversion to mean there's still upside on rating as simon said every circumstance is different i think you know our viewers you you pick a style and you stick with it and uh you don't get greedy how many funds in a

44:16Stuart Widdowson: funder fund portfolio in ours there's 35 yeah very diversified but then when you think about any given market and we're not we don't pick a particular style we're not one of those fund managers are going to be all in value because we think value does well. You imagine the Japan market, for example, it's not crazy to imagine buying a large cap growth, a mid cap growth, and a small cap growth and doing the same for value as well. And you wouldn't have a single stock crossover. And before you know, that's just six funds in one market. And you can do the same for most markets across the world. And very quickly, you get up to well into double figures and you're not, you know, they're not treading on each other's toes.

44:56Merryn Somerset Webb: Yeah. Thank you both so much for joining us today. We really, really appreciate it. My pleasure.

45:02Stuart Widdowson: Pleasure.

45:06Merryn Somerset Webb: Thanks for listening to this week's Merrin Talks Money. If you like our show, rate, review, and subscribe wherever you listen to your podcasts. And keep sending your questions or comments to merrinmoney at bloomberg.net. You can also follow me and John on Twitter or X. I'm at Merrin is W and John is John underscore Stepak. This episode was hosted by me, Meredith Somerset-Webb. It was produced by Sam Asadi and Moses Andam. Sound design by Blake Maples. And special thanks, of course, to Simon Evan Cook and to Stuart Widderson.

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