Our Portfolio Returned 26%. Here’s What We Did - An Honest Review

0:06Hey, everybody. Welcome to the art of investing, your favourite podcast brought to you by IG, the global investment platform. Introducing my experts riding the equity wave for 40 years in the city. It's Mark Spiceholden. Thanks, Rich. I'll keep on riding. And of course, my Bond Supremo, the king of the guilt markets. It's Chris C.J. Fellingham. Hi, Rich. let me tell you today, I'm going to be taking on a slightly different role. That's right, everybody. I'm going to be one of you today or an investor. In fact, I'm going to imagine that I've had my own money invested with these guys in their portfolio for the past year, because that's right.

0:47It is week 52 of the portfolio that you're about to see on screen. So it is the end of year exam. I am going to grill these two. And then by the end of today, I'm going to decide whether I'm going to keep my money with them for the next 12 months, or I'm going to go and give it to Leopold Aschenbrenner, the safe hands that are. So let's have a look at this week's portfolio. Yes, it is up yet again for the final week of the year. That is up 0.5 % to 26%. Year to date, since January, then it's looking at 13.5%. But without further ado, let's go into the Spice Market update. Well, thanks very much, Rich.

1:32A very busy week and a good week for the portfolio, as you heard. Nice way to finish the 12 months since we've been running the portfolio. Let's start with the all-time highs. And just to make CJ happy, the FTSE 250 hiked out another all-time high today. Happy days. Finally. It's taken years, years. Two weeks in a row. Blumenheck, take that. And the S &P equal weight also hit high as the S &P, the Russell, the DAX. The big laggard was the FTSE 100, which maybe we'll talk about later if we've got time. But in the background, you've had an 11 % increase in the oil price this week. And that's despite people like the Saudis actually saying that they've increased their oil production by 1 million barrels a day over the past month.

2:16And OPEC saying that they've now seen about 5 million barrels a day of oil going through the Straits of Homoz. Now, to give you some perspective, there was about 21 million barrels a day before the war started passing through the Straits of Humboldt. So although there's no official ceasefire, the bombs seem to have slowed up and there is some flow from the braver tanker owners going through there. Interesting though, talking about Saudi oil, for the first time in 41 years, the US did not import a single barrel of oil from Saudi Arabia this month, which is really, really interesting. They've been importing oil from Saudi for years and years and years.

2:54But because they've been up in their own production, they no longer need to import anything from Saudi. Very interesting move. I would say, Spice, they haven't increased it enough by the sounds of it because their strategic reserve hit an all-time low this week. 300 million barrels. Now, that has come down significantly. Why were they still taking barrels out of the strategic reserve of in the last few weeks when oil was down below$75 a barrel? I just don't understand. Of course, if they get down too much further, then that oil price will start to nudge up towards $100. So far, the equity markets have been prepared to just look through it and say, you know, these things will be only temporary.

3:35And we saw when there was an official ceasefire, we saw the speed at which the oil price came down. It felt 15, 20 % in a straight line. So So although there's no ceasefire at the moment, when there is an official one, maybe that will happen again. I suspect that there's a bit of an uneasy calm. I mean, it is August, let's be honest. There's not a lot going on in most things. It's still in the US interest to keep the oil price down as low as possible with the elections coming up. So it's not a surprise in my book that they might be letting a few barrels go here and there to keep that price down.

4:13It's going to be very interesting to see, though, whether we get follow through on these negotiations, because as Rich says, if we don't, then at some stage, that shortage or that lower level of reserves is going to have some influence. So let's have our fingers crossed that they're actually talking and they're not sort of making up as they go along. Now, there were some very good results from AI dedicated data center providers. There's a company called CoreWeave, which is now a very big company. And it was one of the first companies to build data centers only and specifically for AI, rather than for the cloud that people like Apple and Microsoft and Meta use.

4:53And their shares were up 20 % yesterday. They're saying their CapEx has been going up, but so too have their margins. And they produced 2.6 billion of revenues in the second quarter. Now hold your breath a bit here. They've got a backlog now of about$130 billion worth of orders. So that's almost 10 times the amount they would do on an annualized basis from where we are now. And that's one of the reasons the shares moved up so quickly. They're seeing good pricing power. And basically they're saying that near-term AI computing capacity is effectively sold out. Right. Hang on, hang on, hang on. CJ, just for your information here, CoreWeave that is talking about waxing lyrical, has a$14 billion negative free cash flow and is not expected to hit profit until 2031.

5:45So it's not earnings from this company. The revenues might be good, the future promises might be good, but there's certainly a lot of questions around the deck of this company. There's nothing new though, Rich, with any of that. As I said before, being an observer of the equity market rather than a keen participant like Mark, why let facts get in the way of a good story? You know, at the end of the day, if you can make the story up, make it sound great, then equity people like buying it. For example, you will all have seen the headlines in the last day about NVIDIA. But for those who don't know it, they are essentially, you know, introducing a financing platform of$500 billion, which they're going to underwrite.

6:34And the funding is going to be provided by all the rich private debt and private equity firms. And where are they going to get it from? All the pension funds and other people's cash. It's not their cash. It's clients' cash at the end of the day. Now, we've heard this sort of thing before, And, you know, this could be the most intelligent thing to happen, or it could be a great big Ponzi scheme. The fact is, you know, NVIDIA is saying, hey, why don't you come and borrow all this money from these people who are silly enough to lend it to you? And we'll put some guarantee on it. So it's this roundabout circular argument again.

7:14It's the summer. People are going to believe anything they want and send the prizes up. Let's wait for some reality. The good reality is when you hear a Spice set on CoreWeave, they've got those orders there. The problem for NVIDIA is NVIDIA now financing almost everything and arranging deals with everybody. So now, in the old days of the financial crisis, they used to say about banks, if you're a small bank, you've got a problem. If you're a big bank, you've not got a problem. The economy's got a problem. The central banks have got a problem because it's going to affect the whole industry. The same is true of NVIDIA.

7:49If anything goes wrong with NVIDIA, they are so behind and so much in everything else that's going on, it's going to get messy. Surprise, surprise, CJ. NVIDIA on a stake in CoreWeave. And there we go. Funny old game. You scratch my back, I'll scratch your back, you scratch his back, and then you can all scratch my back. Wonderful. That's very nice. You slag it off the most intelligent and sort of most the richest companies and biggest companies in the world. I would rather put my money behind them, to be fair, because you've got the likes of Goldman Sachs, BlackRock, your old employer CJ is one of the big names in that£500 billion financing there.

8:29But also this week, we've seen a huge wave of further sort of capital expenditure announcements that are going to be either helping or taking part. So Alphabet, they've issued$25 billion of new investment grade bonds. Those are the highest quality bonds they can do, apart from government, and they're corporate bonds. They've done that over 10, 20, 30 years, and it was four times oversubscribed. So they had orders for over 100 billion of those bonds. Intel have issued equity this week. They were going to issue$15 billion worth of equity. They raised it to 20 billion because they had about four times the amount of demand for that as well.

9:11And they did it at just a 2.5 % discount to the price at the time. That was$95. And the shares are now higher than that, about 5 % higher than that. They're basically, again, raising money to put into this AI boom. Elsewhere, in the major banks, Bank of America, yesterday announced that they were going to spend$250 billion in the next 12 months on critical infrastructure and AI data centers. So that's providing the power for these things. You know, that's over the next 12 months,$250 billion from a bank. Morgan Stanley announced in the last week or so that they're going to spend$1.5 trillion over the next decade, as did JP Morgan, another$1.5 trillion over the next decade as bankers to this area.

9:57So, and we can sit there and we can set a slag at off. Hold on a minute, hold on. You and I have been around long enough, right? We all say that when everybody's on one side of the Titanic, it's probably right to go to the other side. You are telling me that everybody has bought into the Kool-Aid. Everybody is on the same side. Everybody is doing the same trade. But now that's a good idea, when in the past, that wasn't a good idea. So let's just see. And it doesn't impress me, all these people saying I've got to get part of it. There's an excellent article in Lex today. So Lex is the thoughtful comment in the FT.

10:34In my day, back in the 80s, and that's the 1980s, Rich. and the 1990s, everyone read Lex the whole time. You didn't have the internet. You didn't have any of these things. That was the best logic around when you read what they wrote. And they wrote on, I don't know, results would come out or central bank policy or whatever. And they would write something. Everybody would read it. And so I'm old-fashioned. I still read Lex. And Lex is, I think, excellent. Last part of the paragraph today, the question of who will use all these data centers and for what price remains unanswerable. Those with a moderately long memory remember Citigroup chief Chuck Prince's pre-financial crisis remark that as long as the music is playing, you've got to get up and dance.

11:21For now, the giants of the financial world have every reason to jig to Nvidia's tune and tip the band while they're at it. So we're right in that spot. It could be a problem. None of us know, but everybody's the same way. There's not anybody who doesn't believe this is what's going to happen, it's going to work, it's going to be brilliant and fantastic. But of course, what everybody forgets, Spice, is that Elon's going to put all these data centers on the moon. So all the ones on Earth, they're going to be a complete waste of space. You know, they're going to be up there with SpaceX. That's not, they had such a bad week.

11:56Yeah, SpaceX, yeah, 30 % air squeeze. Remember, as Rich pointed out last week or the week before that 25 % of the equity of SpaceX had been shorted. And there was a whole load of new equity coming into the market last week, last Friday. And it didn't impact the share price going down. The share price went up 30 % from this time last week. So, you know, well done Elon on that one. It's back above the IPO price, the price at which it floated on the market, which was$135. This morning, it's about$146. So yes, anyway, apart from the skeptics like CJ, there are many, many of the biggest names in the world and the wealthiest people in the world putting money into the data center.

12:37And you fight it at your peril, in my view. I'm happy to go with the flow on this one. Good. Very pleased to hear it. Once again, in the crowd is always the right place to be. Oh, this is warming up nicely for the questions that I'm about to hit you both with. Carry on, Spice. Right. Before we do that, let's just finish with a little bit of economic data because it's been an important week. Last Friday, we had the US payrolls, which would remember sort of gauges how many jobs are being created in the US economy month on month. And last week, we saw a drop of 23 ,000 jobs. And that was against an estimate of 80 ,000.

13:14So that was basically pretty tough. But there's growth going on in the US economy. This is what you might describe as jobless growth. And that could be quite good news for Kevin Walsh, the chairman of the Federal Reserve in America, because if you get jobless growth, you don't get wage pressure going up. And therefore, that's one of the feeders to inflation. And if that is subdued, then overall inflation could be a bit lower than expected. And yesterday, we had the US CPI, the Consumer Price Index, that came in in line with expectations. Yes, it rose 0.2 % in July and is up 3.4 % for the last 12 months.

13:51And that's pretty in line with expectations, I say. But look, they've got a 2 % target in the Fed. And Chris and his fellow bond investors are sort of pulling their hair out that they're nowhere near 2%. And we're up at 3.4%. But this has been above that 2 % target now, the CPI, for five years. Every month for the last five years, they have failed to meet that target. Oh, dear. It seems like it's going to be one of those podcasts today where Spice and I had struggled to find common ground. And one of those is on the bond market reaction. All the bulls on Friday were saying, oh, look, you know, there's no jobs in this.

14:37Interest rates are going to be cut. Or interest rates are going to stay the same. They're not going to have to go up very much. And that's really good news. Let's push the market up again and push it higher. And yesterday, we had inflation numbers in the States, which came in in line with expectations. So another reason to be positive. But actually, the bond markets haven't actually moved at all for three weeks. US 10-year yields still are at 4.7. What that's telling you is that interest rates are going up, guys. They're not going down, and you need to be ready for it. and all this optimism about the macro environment is going to be tested quite a lot.

15:14So the jury's out on that reaction at the moment. We just need to keep an eye on things. The final thing for me is the Japanese bond market as well sold off again. That's up to 2.9 % in 10-year yields. So the bond market pressures are here still. Quite August, nobody cares. Your capital is at risk. The value of your shares, ETFs and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. Great. So let's get back to that portfolio then.

15:50Spice, run us through the top performers of this, the last week of the first year of the portfolio. Well, it was another good week for commodities led by gold and silver, which helped our BlackRock world mining position, up 3.3 % this week. A position we've got even a bigger holding in is Japan, the Nikkei 225 index there, which is their main index. That was up another 2.7 % this week. We've seen some stability in the Japanese yen. That's been brought about by the fact that the US government are helping stabilize the Japanese currency. And that's important because, as Chris said, the Japanese bond yields are going up, which is a competition for capital, might be attracting people to sell basically US government bonds to buy Japanese government bonds.

16:36And that's one of the reasons I think the US have got involved there to try and support that. And either way, a good week for Japanese equities up 2.7%. Then our old favourite, CJ, not just an all-time high, but the FTSE 250 makes it to the top three. I'm still dancing, Spice. I'm still dancing. One of the things actually that has been interesting, in the last couple of weeks since Andy Burnham got in. We've seen nearly one whole interest rate rise, which is expected to be 0.25%, come out of the market between now and December. And if you remember, we were looking for two interest rate rises in the UK between now and then.

17:13That's been reduced to just one now. And that maybe is giving Andy Burnham some credit, not doing anything radical and scaring the horses. And then the underperformers of the week, We've got MSCI India down 1.4 % on the week. We got copper giving up some of the strong gains from the previous week down 1%. And then good old XLI, our industrials ETF in the US down just 0.4%. So a good week to finish off the year. However, that is the end of year, which means it's time for the end of year exam. guys great performance up 26 but chairman how much of that was just asset prices rising and how much was actually good portfolio management uh rich a good question been a good year for assets generally um we got it right to suggest the monetary policy was going to stay supportive i.e the interest rate moves were not going to unsettle the market first of all everybody thought They might be cut a little and now pretty much unchanged.

18:19That's good. But that's a decision we made. So we shouldn't be stepping back from that. That's a decision that we took ourselves. And then I think that we made the right decision with the war in Iran, where we stayed invested in the market. And then we actually added to the US market when it came back. so i think we should be happy there those are the positives clearly it was a good period for risk so you could have thrown a darts in a dartboard and done okay but i think it is worth pointing out that the all world index so if you'd invested in all the equities in the world according to their market capitalization you would have got a return last year of of this 12 months of about 21 percent and we have done significantly better than that with much lower volatility.

19:16It has not moved about so much. So I think if we were to look at ourselves on a grading scale of A is excellent and E is crap, I'm giving us a B. Well done, guys. Could do better, but a pretty good performance. Spice, what would you say you're rating for the overall year is? Oh, you know, because CJ used to pay my bonuses, so I'd have gone for A +, obviously. I think one of the things that I think is important to point out is a differentiator between us and other people. So if you'd invested in a typical wealth management portfolio, which is 60 % equities and 40 % in bonds, you'd have probably only made about 13%, 14 % this year.

20:00And that's because one of the key decisions we've made and got right is we've stayed well away from government bonds and the bond markets. And they have been one of the few asset classes that hasn't gone up very much this year. Yes, you might have eked out a small gain if you'd taken the income into consideration. But I think we should slap ourselves on the back and say, well done by staying out of those bond markets. And the other differentiator is we've been at a decent position pretty much the whole way through in commodities. Again, that differentiates us from many of the wealth managers and even institutional fund managers that are out there.

20:35So things like our Blackrock world mining, we've had copper, we had gold for a period, made very good return in gold, sold it, maybe a bit too early, but we made some very good returns on those. So I think, again, those are things that are big positives, rather than just getting the equity market broadly right, which obviously we have done. And Cito, what about the story of the year? What do you think was the defining event that affected the portfolio, but affected the market overall as well? I'm sure we'd all have different views as to what that event might be. But to me, if I look at the year as a whole, I think of it as, who was the football manager who said it's a game of two halves?

21:15Alex Ferguson. And it was a game of two halves. We had the first half of the year up until the war, where it was the end of US exceptionism. European markets, emerging markets, and all these other markets did pretty well. And the US was struggling a bit. Done very well for the previous two years, it was struggling for a bit. Then we suddenly had the war. Trump attacks Iran. And what I think I missed, certainly, and I would argue we all missed to a degree, was that he would derail so clearly the engine for world economic growth with that move in the oil price. And so from that moment onwards, clearly all markets came back.

21:58You then saw the American market do fantastically well. The AI trade take over again because it's an independent story of the rest of the world economic growth. And the rest of the world struggled a bit. So if I'm being harsh on myself, the most important impact to me was then. And although we got the first period bang to rights, I wasn't quick enough. in my adjustment to the second period and what that meant. Because since then, America's been great. I've got just a couple of numbers, if that's okay. FTSE for the whole period, up about 20%. S &P for the whole period, up about 20%. But if you look at it up to pre-Iran war, FTSE was up 20 % and hasn't moved since the war.

22:46America was up 8 % and has now gone up another 13%. That shows you how that works. but I'm sure Spice would put some more flavor on that. Well, Spice, on that, you remained the consistent, naive bull that we termed you at one point. On the US, you know, US markets now at their all-time highs, you have been the clear US bull throughout. How did you find the conviction to stay so bullish even when maybe markets were turning against you and other people were more cautious? and would be more tempted to sell. In the back of my mind, the whole way through is, I was looking at underlying economic growth acceleration around, looking for it around the world.

23:33Unfortunately, in the UK and Europe, we're basically old world, not been investing heavily in AI. And therefore, our economies are struggling to grow at all, if at all. We might be lucky to get 0.5 % or 1 % out of the UK. And the same goes for Europe as well this year. However, we know that the Americans have been going hell for leather for capital expenditure and AI. And about half the economic growth that has been delivered in the last 12 months comes from this AI capital expenditure boom. And I think that's one of the things I was focused, laser focused on. I think, and that worked very, very well for a period.

24:13And I'll put my hands up because then there became a huge number of CJs coming over the Hill, being enormously skeptical about the potential return on that investment. And for a period, CJ and his mates were right in being skeptical because those companies and that sort of sector of the market, technology and exposures like NASDAQ that has 60 % in technology, suffered and they underperformed quite markedly for a couple of months. We then saw this massive sell-off, which we were then lucky enough, led by our chairman, so he wasn't just completely skeptical, We went around and we actually bought back into this US position, which has the most exposure to CapEx.

24:55So I've been laser focused on AI. And I suppose the other thing that, you know, other area of the world that's been spending heavily on AI is in Asia, Japan and the emerging markets led by Korea and Taiwan. And we've talked about them numerous times about how well those indices have done and how they've helped our emerging markets position to go well. What followed, though, which is really healthy, I think, is there's been a rotation out of those biggest and best stocks into the broader market. So we talked last couple of weeks, the S &P 500 equal weighted index basically hit all-time highs. The Russell 2000, the small and mid-sized companies in the S hit, hit new all-time highs.

25:37even as we said this morning, the FTSE 250, again, UK's minus world cap also hitting new highs. And these are areas of the markets. Basically, the markets are saying those companies in those areas are going to start to get the benefits of AI through efficiency gains, better cash flow, and that should make their businesses stronger and grow their profitability and less dependent on putting prices up to get those gains. Was there not a temptation at some point to move into the equal weight then rather than stay invested in the the s &p 500 well we we did discuss it very briefly i think in one of our podcasts i think we concluded that actually a better way to do it was to have make sure we had a decent position in the russell 2000 so the russell is split up into 3 000 companies the russell 1000 of the 1000 biggest companies the russell 2000 are the next 2000 down and they that's been a terrible index for years and years but because they were starting to see some benefits and there was early signs of them benefiting from this AI spend, it seemed like a good place to be.

26:38And I have to say, that's one of the things I think we've read well, is this broadening out of the recovery, and particularly in that small size area, which is great. CJ, I think Spice might be in danger of hurting his shoulder there from patting himself on the back too much. So let's turn to you. What was the biggest mistake? Because I certainly remember during the start of the Iran war, there was quite a few weeks of negative performance and we didn't cut any. So is there a danger that we could be described as the rabbits that Lee Freeman Shore defined? And maybe just remind everybody what a rabbit is before you acknowledge whether we were or not.

27:22Yeah, I mean, a rapist, as Lee has described to us in his book, is essentially somebody who buys a position, sees it come off, frets about it, sees it come off more, frets about it, doesn't do anything. sees it come off more frets about it doesn't do anything and then it goes back up but it goes back up and it goes back up and in the end it goes back to let's say where it was bought there's been a lot of emotional pain but you haven't actually made any more money from the start point to the end point and his what he was essentially saying was guys when you've got that sort of thing going on you've got to make a positive decision as to what you're going to do are you going to buy more if it goes down?

28:06Are you going to sell it because you're wrong and you chop it out? And that's really essentially where he was coming from. So first question is the practicalities of our portfolio. We do our podcast on a Thursday and we deal on a Thursday at the prices of Friday close. So we're not actively sitting there every minute able to deal when we want to. we have to make a judgment on where it's going to be once a week essentially and why is it the friday night close as opposed to when you record the podcast on a thursday morning we do on the friday night close so everybody can if they want to follow us can deal at the same prices as we're going to do we're trying to be as open and fair as possible in that sense now because of that we need to be very clear when we feel very strongly about a position.

29:01And I would argue when the market came off after the Iran war, it moved very quickly, very fast. So we need to make a decision. Was this a situation where the fundamentals are changing of the world we needed to radically rethink our portfolio? Or did we think it would be one of those situations where the central banks would come together and act as a sort of underwriter of where the portfolio was. Now, in this situation also, we had to think about Donald Trump and the fact that there were November elections coming up and what would hurt him badly was the rising oil price. So Mark and I, I think, were more of the view that Trump, it seems a silly thing to say now, knew what he was doing and therefore would be able to keep the oil price reasonably low and therefore will stay with it.

29:57And, you know, that wasn't an easy position to have. Markets came back. But I remember distinctly the conversation then, because we were still confident it would happen, and it came from you, Rich, which was, look at the valuations on these US equities now. Look how much they've come back. And Spice was talking about the earnings all the time. And so net nets, they were becoming so cheap. You think we've got to do something here. So although I might be a little bit of a dinosaur, as Mark has been trying to imply so far in today's call, I'm happy to take the brickbats. I've got many knives in my back for many years working with these individuals.

30:38There are holes everywhere. At the end of the day, even I recognized that we needed to add to that position. So what we did was actually exactly the right thing. What Lee said we should do, which is when you review it, you think it's a buying opportunity, go and buy some more. And that is what we did. Right then, looking forward, and of course, what I really want to get here is to help everybody home, understand how they run their own portfolio and what they should be doing in their own SIPs and ISAs. Spice, what would genuinely make you change your mind on the US, maybe downgrade your optimism, not just a market crash, but what would have to change structurally for you to change your opinion on US exceptionalism or the economy?

31:30Yeah, that's a great question, obviously rich one of the things that has mattered most to me about the u.s particularly this year has been that we've seen the biggest non-recessionary recovery in earnings growth or acceleration in earnings growth that i think i can never recall so yes earnings jump very you know when you come out of recession earnings go up a lot when you sort of you know you have covid and that sort of turns around and people go back to work earnings go back up again but what we've seen this time is there's not been a special event like that that has led to 25 % plus earnings growth in the first quarter of this year in America.

32:06And this quarter, we're running at about 28 % earnings growth. But I say, that's about as high as I can ever recall in my lifetime, looking at earnings growth outside of those big events. So what would make me sort of change my view on the US is if that growth that we're seeing in the US moderates, and I fully expect it to because you cannot keep running at 25, 28 % a quarter. You can't do that. So it will moderate, but if it still stays up in the high teens or nearer 20%, that would be fantastic. But I think the thing I'm watching for is if the rest of the world, like the UK and Europe, manage to generate some proper earnings growth as well.

32:46At the moment, the earnings growth from those regions are anywhere between 5 % and 10%. So less than half of what we're getting out of the US. So in answer to the question, if I was to suddenly see US growth sort of plateau, maybe, maybe edge down a bit, and the rest of the world growth pick up, then I'll be wanting to take some money out of the US and put it back into Europe, which we've been reluctant to do. And places like, you know, the FTSE should do better than that as well. But I think where it will benefit most is those mid and small size companies, because those are the ones that are most domestically exposed to the economic growth in each economy.

33:23So that's the thing I'll be looking for, Rich. I think an acceleration in other parts of the world that we would look to take advantage of. And, you know, we won't use leverage on this portfolio. Remember, we talked about leverage a lot last week. We don't want to go to more than 100 % of the portfolio. So we would take some of the money out of the US saying that's done us very well and put it into places like Europe, perhaps. CJ, isn't it almost impossible that that doesn't happen, though? Because if AI works and all the spend on the data centers is worth it and on memory and the investments that these hyperscalers have made, and remember, and they're a huge part of the index weight, the only way we'll be able to tell whether that's worth it and they get a return on that capital is by every other company in the world benefiting from it and spending on AI.

34:11So you would have to see the benefits from everywhere else in the world and the growth coming through for the US to generate any earnings in the future? Look, I think this is a phasing question. And whilst I'm happy to, as I said, receive the brickbacks about being the prehistoric man and person in the room, I've shared the optimism on equities over the whole period. I've not been negative at all. Now, my view has always been that if this is to work, what you're saying is correct. It's got to benefit every equity in the world, whether they be UK, Europe, emerging, Japan, whatever, small cap US, etc., etc.

34:55And therefore, to me, I would rather play the upside there than buy things that were already multiples of expensiveness. because if there is any disappointment at the speed, there'll be a very big rotation from one to the other. And I'm not sure I can move quickly enough to be able to do that. Now, up until February, that was the right view when we could think that the world's growth rate was picking up anyway. So all our bets on growth worldwide were gonna work with the AI kicker as well. I emphasize what I said before. What I didn't work out was that Trump realized that his hatred of everything ex-America extended to the fact that he could cause a conflict in Iran and muck up everybody else's economy, which is essentially what he did at the end of February.

35:54So we've then gone to focus back to that AI story of those earnings and investments. I still like the story that if it's going to work, it's going to work for everybody. And therefore, I would rather hang out in some of those cheaper markets. Although I think we have shown the flexibility to buy into America when the valuation has got attractive. Yeah, because Spice, what concerns me is people listening at home, right, that maybe for the first time, they've all heard that you go into the S &P 500s or you go into the all world index, right? That is the vast majority of what we would call retail investors own.

36:36As you are the champion of that area of, you know, both of those, and maybe you can run us through how the old world investment looks. It just worries me that all those people have a very stubborn view, and it's not even a view, it's an identity. They will only invest in the S &P 500 and in America. So I'm kind of just looking for some reassurance that it's not just your identity, that you will be flexible on that view. Although we have got a position in America, and right now we've got about a quarter of our portfolio in US equities, that's mainly through the S &P, XLI, the US industrials, the Russell 2000, and then a little bit of NASDAQ now, we've still only got 25 % of the portfolio in there.

37:20if someone went out there and their wealth managers said look i just want to buy you an equity position the lazy the lazy work is to just buy a world index equity world index that gives you 70 from the u.s and very little in places like japan and emerging markets that we've had the benefit of having quite big positions compared to our competitors out there if we were competing in in the in the world out there where you're sort of going for multi-asset funds which this is you know we've done well getting a return overall for the portfolio over and above what the S &P 500 has done and over and above what the MSCI World Index has done and that's so yes I've been bullish on US equities but we've not had all our eggs in that basket we've made those returns by some you know some quite well thought out and hopefully you know well received investments in places like emerging markets in japan and if those two have actually performed much much better than the s &p 500 just want to emphasize just one thing that that spice said earlier which i think is really really critical people who are listening to this show um are learning how we look at things but of course their other alternative is to go to wealth manager and if they've gone to wealth manager and mark said this earlier they would have 30 to 40 percent of their portfolio in bonds that's been a complete disaster okay let's be honest and so we have we've scored some own goals as i said we probably i've probably been a bit too negative on some of the ai stuff when we could have slipped it back in in march or april we could have bought more in those areas but the one thing we've been consistently doing is looking at that overall allocation and looking at that bond piece and saying, guys, steer clear of that piece.

39:09Yes, we can talk about all these, you know, if you bought the world index, if you did this, you'd have this much in the US, et cetera, et cetera. But actually, probably the most important call has been to hold no bonds. That must be quite hard for you as a bond expert then. You know, how has this experience been, because it's very much in the public eye, you know, you're speaking to thousands of people per week here. How has this experience differed from that of when you were running money professionally Rich, it's really easy, mate. I started off life as a bond investor, realized that the only time that I'm ever happy is when everyone else is depressed.

39:46You know, lots of people losing their jobs, interest rates having to be cut because house prices are collapsing. I'm going, yes, brilliant, fantastic. Where's my bonus? Of course, there wasn't a bonus because the bonus is generated from the equity part of the shop and they were all doing badly. So I realized that I was not looking at things in the right way so now i understand that although i understand i think about bonds a lot actually the right place to be for most of the time is positioned towards risk assets and i think this is one of the big problems with the wealth management industry the wealth management industry says oh gosh we don't want to take too much risk uh especially compared to other people so we'll have a pretty balanced portfolio between bonds and equities and then if one goes up the other goes down we can't be we we're not risking ourselves.

40:38The whole point of this podcast, and I hope everybody listens to it, realizes is we are taking positions. We are taking views. They're different views than you get with a wealth manager. And that's where the results have come through. It's been an easy year, right? Anybody can make money in bull markets. What do you guys offer from your experience when it goes wrong? Let's say in the next 12 months, there's something really goes wrong. give us a an example chris when something did go wrong in your professional career and your experience is going to help in the portfolio going forward how long have you got i mean i mean there been many mistakes i've made in the last uh 40 years it's very um normal to make mistakes the job is to learn from them and try not to do them again now anybody who says they never made the same mistake twice is talking rubbish everybody makes the same mistakes but if you can make it less painful the second third or fourth time that's what it's all about and and to me you know perfect example is exactly what we were just just talking about i mean i can remember 2021 um i was working with mark a couple of others we had a big position in equities um we belong of equities um the markets were gently trending upwards but it was not easy we're coming out of covid people were starting to uh to get used to the fact that covid was was ending let's move on to the next theme i remember it well because i went on the golf course and i played a couple rounds of golf and i had a super time spice was away as well we found that while we were gone and we were out um the the the the equity market fell heavily two reasons first reason was that there was speculation as to what the feds were going to do inflation was starting to pick up were they going to tighten?

42:29Was this going to slow the economy down? And at the same time, COVID in Asia was still going pretty strongly. We got rid of most of it this side, you know, in our part of the world and in America, it was we were making good progress, let's put it that way. But there was less progress being made in some of the parts of the emerging markets. And, you know, some headline came out, whatever it was, bond markets rallied on the fact that everybody thought recession was coming everything was going to slow down equities came back and market hit our stops off we go we sold it all and i remember talking to mark saying what golden bed what's happened here and and you know is isn't this terrible now we we we carried on playing golf for a couple of days they went back to the office by the time we got back to the office of course that was the bottom the market was now up five or six percent and what are we going to do because we had the right view we now hadn't got it anymore.

43:25We hadn't got the position, but the market was going up. We had to cover it there and then. We had to buy it back higher. We saw some bad performance numbers because we've been chopped out at the bottom. And that taught us very clearly, one, don't leave stops when you're not in the office. Make sure people ring you, tell you what's going on. But secondly, look at what is going on in the marketplace and understand what that key driver was. It helped us greatly with the war in Iran this year. When it all started turning down, it would have been easy to sell. But we've seen before that central banks and other aspects of the monetary authorities want to keep equities strong, want to drive them forward.

44:09So therefore, you need to be pretty damn bearish to actually get out of your position. So we held our positions then. And of course, then it turned around and came back our way. Yes, it was a bit tough from time to time when some of the markets were falling sharply. There were siren voices telling us that maybe we weren't in the right positions. But as a team, we got through all that beautifully. And that's the sort of thing is you learn when you've been stopped out at the bottom and suddenly you realize that that was a big, painful thing to do. Spice, CJ is talking about when the market turns.

44:43I mean, we're all time highs just now. What if the market turns in the next 12 months? Our target has been 10%. Is it going to stay as 10 % then? Because 26%, would it not be disappointing to only make 10 % next year? Look, I think that 10 % was well thought out when we decided to construct the portfolio the way we have. Remember, it's not a pure equity portfolio. So we're not just trying to beat the MSCI World Index or the S &P 500. We have other assets that we can invest in. And as I say, a big chunk of our return this year has come from commodities, which would stand out different to other people.

45:21And as CJ also pointed out, no bonds, no bonds. So I think that if we were to see or feel that equities were due to consolidate or maybe have a pullback of a decent size and importantly for a prolonged period, just remember small, short, sharp correction is often seen as very healthy in equity markets. it's called a correction in a bull market and that's why people go and buy the dips and then by there those sayings come from that but if you were to expect to see that as a prolonged downturn and that would probably come from economic growth turning negative or going very very flat and remember we're looking nominal in other words the headline number for u.s growth is going to be about six or seven percent this year or after inflation about three percent you know that that's that's pretty attractive if it went to zero then you'd have a problem in equity markets you'd have a a big problem in equity markets.

46:14Now, ironically, some of these big American companies, the high quality companies that can grow, whether there's a recession or not, would continue to do very well relative to other things. But those small cap positions we have in the Russell 2000, the mid 250 and the FTSE 250 would get hit very hard. And so we would have to make some big decisions. And our decisions would be then, do we go and buy bonds? Because if we went into recession, the central banks around the world would go from maybe thinking about putting interest rates up a little bit as they are at the moment to, oh my goodness, we've got to start cutting interest rates.

46:46And when you've got that moment, you'd want to be back into equity. So it's a fine balance and timing is everything at that. But that's the thing that I think we would then have a big decision. Do we want to buy bonds? Do we want to stick in cash? Do we want to take out commodities? Do we want to buy gold? Some of those more defensive things, which we don't have in the portfolio at the moment. And just to be that Jeremiah that I know Spice likes me to be, that is really where I am most concerned if we look forward, Rich. I'm more concerned than ever that the new Fed chairman, Kevin Walsh, is operating a different playbook.

47:23We've talked about it several times on this podcast, and I think Mark has explained very well where he thinks Kevin Walsh is. But let me just give it just a minute from me kevin walsh didn't like the way in the uh 2010s 2012 2014s 2016s the central bank's balance sheet got bigger due to the buying of bonds the qe that was going on and the cutting of interest rates down to a very low level because he felt that what was really happening was that Wall Street was being favoured as opposed to Main Street. And then you can see that now in all the reaction around the world with the views about having wealth taxes.

48:10At the time, it was Occupy Wall Street. It was all these things that were going on. If he's serious about those concerns, there must be a thought that he will not act as a backstop to the equity market as keenly as some of the other Fed chairmen have done over the last few years? I'm sure he would act as the backstop at the end. I don't think there's any doubt about that. But would he respond as quickly when we've been used to any problem, you know, basically just by the dip? If there was a problem and he didn't support them, would that make people think differently about what the fed's reaction function was and i think that's going to be critical for us to look at over the next three four five months so that's that's where i'm a slight jeremiah on on spicy shoulder uh at the moment it's not making me want to stop smacking me off your shoulder at the moment it's not making me want to lighted risk at the moment.

49:17But I'm watching very carefully because I think that could be a pretty important theme for the next six months. And along with your thinking for the next six to 12 months, Spice, what do you think will be the asset that really outperforms going forward? And maybe one of the negative underperformers as well? I personally think we're going to see much more of the same. So I think we're going to see, while Kevin Walsh is prepared not to grab the nettle and put interest rates up aggressively, as Chris and the bond vigilantes would want him to do. I think the US economy is what we term running hot, and we talked about that last week.

49:54So I think the US continues to be one of the biggest and best performers, as will Asia, Japan, and Emoji Markets, because in the next six months, and that's my sort of time horizon here, these are the areas that have invested most in AI and capex. And in the next six months, we should start to see improving returns from that investment. Now, other countries that have lagged and not invested as fast, like Europe and the UK, could struggle a bit. So I think, you know, apart from the mid-250, which is obviously hitting the high, Flitzy hit a new high a couple of weeks ago, the areas that I think are going to continue to suffer is, ironically, India.

50:31Unless we get a sustained fall in the oil price, India is going to struggle because they're the big and massive importer of oil, and that's hurting them a lot. And China at the moment, are sort of sending mixed signals. They're basically not, they're saying they want to deliver better economic growth, but they're not really doing anything about it. They're talking the talk, but not walking the walk. And until China really start to get serious about picking up their economic growth, I think their stock markets, and their stock markets have been pretty poor this year, along with India being probably the two worst performers out there.

51:04Until they grass that nettle, I'm going to stay on the sidelines and say, I don't really want to go investing heavily in China and India until I see more evidence that they're going to do something serious about it. And in the meantime, I also remain very bearish on bonds because one of the things I think Kevin Walsh is going to do is going to reduce the size of the US Federal Reserve's balance sheet. Remember, they bought all those bonds to support the bond markets doing quantitative easing during the COVID crisis and before that in the great financial crisis. But if they decide they want to reduce their balance sheet.

51:37And there's about$7 trillion worth of assets, mainly bonds and corporate bonds, mortgage-backed securities. They start reducing that. That means they're going to be selling those bonds back into markets, and there'll be a natural seller, so there'll be more supply than necessarily demand. And that will keep a very tight lid, I think, on bond prices, keep the yields high. And therefore, I think we're right to continue to avoid it for the next three to six months. cj that paints a very worrying picture about the future path of interest rates if you've got huge refinancing from the u.s government you've got potential sellers of japan sellers from china of u.s treasuries and the u.s treasury is going to also be selling bonds as well where does that leave you going into the next 12 months well as i said it comes back to this is my main worry with Kevin Walsh as what he's actually going to do, because I think that scenario that Mark's talking about, which I don't disagree with at all, it means higher 10-year yields.

52:41And at some stage, those higher 10-year yields will force reallocation out of equities into fixed income. And once again, we'll have to see when that's going to be. And if it's not here, maybe it's 100 basis points high in here, 1 % high in here. So 10-year treasury yields are 4.7%. If it's not here, maybe they've got to go to 5.7%. Maybe they've got to go to 6%. But at some stage, that pulls money out of equities and it goes into bonds. Well, at least there isn't a certain industry piling debt upon debt upon debt that reminds us of a problem back in 2007. Yeah, that's not happening. It's really, I'm really pleased that we're not seeing any of that problem.

53:24Oh, we are, sorry. Yeah, sorry. So that's it, everybody. End of exam for this year. A reminder, if you want to drop us an email, ask us a question on anything, then it is theartofinvesting at ig.com. You can also find us on Instagram and TikTok. So thank you very much for joining us. Give us a like, give us a subscribe and join us in the comments. We will be replying all weekend. Great to see you. Enjoy the rest of your summer holidays, chaps. We'll see you next week. you