Hoxton Life

Inflation Protection Investing: How Canaccord and Hoxton Wealth Tackle the Turbulent 20s

• Hoxton Wealth

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In this episode, Chris Ball from Hoxton Wealth sits down with Thomas Becket, Chief Investment Officer at ⁠Canaccord, for an honest conversation about what it takes to invest confidently when markets are messy.

Tom has over two decades of experience managing money through good times and bad. He shares how Canaccord builds portfolios that stay balanced, protect against inflation, and don’t get caught up in short-term hype.

Chris and Tom cover:

  • How Canaccord’s approach focuses on consistency and real-world outcomes
  • Why fixed income is finally interesting again
  • What inflation-plus returns really mean for long-term investors
  • How diversification should actually work
  • And how the partnership between Hoxton Wealth and Canaccord helps clients stay calm and on course

If you're wondering how to stay invested without second-guessing every headline, this is the episode for you.

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Want a copy of Tom’s “Turbulent 20s” white paper? Message us and we’ll send it your way.

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Speaker 1:

A lot of people in financial markets forget that this is real people's money. What we're here to try and do is turn long-term aims and aspirations into financial reality, alongside people like you.

Speaker 2:

Vanguard did a study where they said that as an advisor, you can add 3% per annum. Your advisor will add 3% per annum extra. 0% of it came from the asset allocation from our side, where we add value as behavioural coaching and drawdown.

Speaker 1:

from our side, where we add value is behavioural coaching and drawdown. Clients might pick up the newspaper, turn on the news two pursuits that I'd urge against and think the world is ending, but ultimately, for financial investors, it's starting to get interesting once again.

Speaker 2:

You've got to expect and accept, so you've got to expect this volatility going forward. It's not going to go away.

Speaker 1:

I would point out that anyone who sort of comes here and says they know exactly what's going to happen next is either lying, slightly mad or just trying to convince you to part ways with your money, because I think it's very difficult for us to sit here with any certainty and say what's going to happen next. Ultimately, what we're trying to do is achieve your clients the best rate of return to match their long-term financial planning aspirations, with as little risk as possible, as cheaply as possible and there's an efficiency across all three of those different inputs now.

Speaker 2:

If you could leave our clients with one piece of advice about investing during these uncertain times, what would it be so great to have you with us today. Tom um, thanks very much for joining us down here on our Hoxton Life podcast. So first off, can you introduce yourself to our viewers on? You know a little bit about Canaccord and a little bit about your good self, yeah definitely, and thanks for having me, and I'm particularly looking forward to the longer run format.

Speaker 1:

So much of what we do these days is sort of made into very short sessions and very quick commentary that you never really get to get to grips of what's going on around the world, so very much looking forward to doing that. So I've been working in financial markets now for 21 long years. I say long years because, as you know, chris, yourself, financial markets have been bumpy for all of that time but broadly done the same job throughout those 21 years trying to achieve the best possible returns to clients at a sensible cost whilst taking as little risk as possible. That sounds very simple, as we'll get into it. It's a lot more complicated than that, but, in very simple terms, done the same thing for the last 21 years and absolutely love it.

Speaker 1:

And Canaccord gives us the opportunity to do that. We have a multi-asset, multi-manager investment proposition which I believe is one of the best in the industry. I'm not going to say that because I'm in charge of it, but ultimately it gives us the opportunity to try and achieve clients' aims and aspirations, which is a vital component of people's lives. A lot of people in financial markets forget that this is real people's money. What we're here to try and do is turn long-term aims and aspirations into financial reality, alongside people like you.

Speaker 2:

Yeah, indeed, and can you tell us a little bit more about the investment philosophy that you? You know super high level to start with and we can dig down on it as we go through it. But you know your investment philosophy leading the business and leading the portfolios that we have.

Speaker 1:

Yeah, absolutely. I don't want people to turn off from your podcast, but I can promise you you're going to find people out there who probably do more exciting things than what we do. And that's on purpose, because what we tend to do is at the core of people's financial portfolios. We tend to be the sort of, you know, the real center point, the sort of the ballast that holds people's financial aspirations together, and people tend to do more exciting things around that, not all simple, boring things, just holding lots of cash or whatever might be on the sidelines. So so we are very much at the center of people's portfolios, um and I don't play golf because I don't have much time got three small children and a myriad other things that we have to focus on, um, but we have a sort of fairways and greens approach to it.

Speaker 1:

What we're trying to do is not do anything which is too extreme one way or the other, and, if you think it, there's lots of people who've probably had very exciting investment portfolios over the last couple of years and they've been really bad at the start of this year.

Speaker 1:

There'll be some people recently who've done really, really well, because they've been quite defensive but they didn't participate in the last couple of years. What we're trying to do is to do something that's balanced and sensible and take a common sense approach to investment, which really, through the last 21 years, has meant that we've avoided a lot of the pitfalls that there are out there in financial markets. And what we're trying to do basically, in very simple terms, is achieve attractive risk adjusted returns. What does that mean? Trying to achieve your aims and aspirations whilst taking as little risk as possible to do that. And again, that sounds quite easy. We'll get into it, but it is more complicated than that, but it is perfectly doable, but we like to have that sort of straightforward approach and I know a lot of the clients will be asking how we kind of came into contact or you know why do we use canaccord?

Speaker 2:

um, and you know, obviously I have a relationship and the business has a relationship with canaccord internationally. You guys obviously have a massive international presence as well as a UK presence, yeah, which makes us quite unique, actually, yeah, and but maybe you can talk to you know, obviously you've got long-standing international partnership and now we're looking at you know doing a lot more together in the UK.

Speaker 1:

Maybe you can just tell us a bit more about your UK business yeah, absolutely, and just remember the investment proposition is is pretty consistent across both the UK and the international business, but we do service different sorts of clients. I mean international clients will probably have less than exposure to the UK as a guide, so just keep that in mind when thinking about the jurisdiction that you are investing from. But in terms of the UK business, I used to work for a company called Pundit Self or Wealth. We set up the business 20 odd years ago. I was the CIO from 2008,. Quite possibly because no one else wanted the job back in 2008 while the business was trying to cut costs.

Speaker 1:

But again we get into that in the interview today to really try and fill a part within the business of that multi-asset, multi-manager investment approach for the top end of the retail market and the bottom end of the professional market. That's been our sweet spot over the last 20 odd years or so. When I first started working at Pundit South for Wealth in 2004, seems like a very long time ago we didn't have many assets under management. We grew to a business of just over 5 billion. Canaccord bought those assets to bring it into the sort of centerpiece of Canaccord's model business which covers a vast majority of the potential client base that we can work with.

Speaker 2:

And what makes you unique compared to others? There's obviously lots of asset managers out there. What kind of sets Canaccord and what you guys do apart from the others?

Speaker 1:

Yeah, I mean, I think there's a few things. First of all, the way that we think about investments. We like to be as predictable as possible, and I'm sure your clients will look at the unpredictable world that we're currently operating in and themselves want an element of predictability. I think that sort of focus on that fairways and greens approach I mentioned already just trying to keep a complicated world as simple as possible I think is still relatively unique. There's still lots of people out there who try and do very exciting things and ultimately there's a time to do that, I'm sure, but most of the time we just like to try and play it straight down the middle.

Speaker 1:

The other two things, I think, which really set us apart and they're very relevant at the moment is since we started managing clients assets in 2004 at my old business, we've had a an inflation plus mentality. Now you know yourself and the job you have, and I have the job. We have to go and see clients and we present performance against. You know various different benchmarks. The benchmarks change over the years, but really you're comparing yourself against what a client could have got elsewhere. I I think such measures are nonsense. Now I'll caveat that by saying that I have to use these in my job the whole time. But ultimately what we're trying to do, chris, is achieve a rate of return from a portfolio over and above the rate of inflation, plus a little bit more, so clients can carry on spending in the future the way they are today hopefully a little bit more but protect their assets against the ravages of inflation. That inflation bias within our portfolios has been central to the success we've had in the last 20 odd years.

Speaker 1:

The other point I would also note is that and you'll know this, working across the world but the term balanced is very often used in a wealth management portfolio and it means absolutely nothing.

Speaker 1:

It's one of those nonsensical terms that no one really understands what it means, and I've looked at balanced portfolios across the world that had anywhere between 40% and sort of 85% in equities. I'm not sure how the latter of those is balanced, but leave that to one side. We have typically always had lower weightings towards equities, which has meant that we've had to work harder in other areas of asset markets to achieve the similar returns to our peers who might have higher levels in equities, which has led us to think very differently about fixed interest. And that's completely relevant now because for most of the last decade if you'd have gone out and spoken to your clients about fixed interest, you'd either got laughed out the room or they'd have gone to a different advisor because there were just no returns in fixed interest market. The world has now changed and that's really good for all of our clients. So inflation protection, fixed interest very relevant now but also that sort of element of predictability. That's something that you guys are super strong in obviously.

Speaker 1:

Well, we try our best. Sometimes things are easier than others, but the very simple fact the matter is that, you know, go back to the sort of three or four years ago. Achieving returns and fixed interest was really hard. It's now much easier.

Speaker 2:

Yeah, yeah, when interest rates are extremely low, there's not much, there's not much in return that you can get from them. And you know, obviously, in 2022 we saw that, when interest rates went up, it, you know it flipped the other way, alongside the EPSY market as well, which we, you know, which was tough times, but I think it's, you know, I'm with you. I was laughing. I saw a post the other day on LinkedIn of someone saying 2024 fixed income, kind of you know, 2025 fixed income. You know it's the way to go, um I think, quite possibly.

Speaker 1:

I mean, I think it's an important point to focus on and that tells people how much things have changed. So, if you go back to the end of 2021 and this is one of the reasons why, despite all the uncertainty we're going to talk about today, chris I think we can invest with some confidence for clients, because I think there are times when there are big problems out there but no one one is focusing on them, and there are times when there are big problems out there, like now, and everyone's obsessed with them. So, at the end of 2021, if you're investing in fixed interest markets, you had a range of investment opportunities where the returns were just pathetic and not going to compensate you for the risk you're taking, particularly as interest rates went up to meet the inflationary pressures we saw. So, at the end of 2021, there were $18 trillion of bonds around the world that had a negative yield. Now, to the uninitiated, or perhaps those who don't know arcane financial terminology, that means that you were investing your money with a company or a government and paying them for the privilege of lending your money to them. I mean, how ridiculous does that seem in hindsight? I mean just madness. If you want to invest in a government bond, let's be parochial and focus on the UK government bond now, at the end of 2021, you could probably get a rate of return of roughly 50 basis points per annum. Take off your fees, our fees and the inflation rate. That's a very negative number in real terms. Again, it makes it uninvestable.

Speaker 1:

High quality corporate bonds maybe 1.5%. Again apply the same methodology a negative real return. Even the highest risk areas of corporate bonds, you might have only got a return of three, five percent. Think about emerging markets or some of the riskier corporate bonds out there. As we sit here today, as we'll get into the market section, you know that whole fixed interest curve has gone out. You now get four and a half percent for a government bond, maybe five percent, six percent from high quality corporates, seven, eight to ten percent from riskier bonds. That's why, despite all of the uncertainty out there, I think clients should be quietly confident about achieving their aims.

Speaker 2:

That's very interesting and I think it's interesting times for us at the moment, which kind of brings us into our next point, which is can you walk us through a bit more on the portfolios that we've built together for our clients? And you know high level what what they mean yeah, absolutely.

Speaker 1:

Um, you know you've taken from what I've said already that we're very balanced. But, that being said, we've created a structure that allows clients of different risk categories to be able to accommodate within the joint investment proposition that we put together. But in very simple terms, at the moment we're not taking very significant contra benchmark risk. So a client comes to you and that you come to us and we set up a strategic asset allocation so you might have, for example, 40% in equities and 60% in others At the moment, if that is the case, you would have roughly 40% in equities and 60% in others. Now lots of people would say, well, hang on a sec, there's a lot of risk out there. Why are we not very low, lowly risk in portfolios? Why are we not a lot perhaps 30% in equities as opposed to 40? And I would point out that anyone who sort of comes here and says they know exactly what's going to happen next is either lying slightly mad or just trying to convince you to part ways of your money, because I I think it's very difficult for us to sit here with any certainty and say what's going to happen next. So we tend to think about things on a sort of more objective sort of three to five year view looking forwards. And I sit here today and think about the equity valuations around the world. They're not ridiculously expensive. They've come down a bit, particularly in the us so far this year. I think that reflects a more difficult future environment, which which I would agree with. But ultimately I think taking massive skews with clients' money on a sort of guesswork basis here at the moment would be the wrong thing to do. And fixed interest markets I've already said you know things look really quite attractive at the moment. So we are neutral in equities, neutral in fixed interest. But what we will find with portfolios managed through Hoxton, through Canaccord, you know we are definitely more multi-asset than some of our peers might be.

Speaker 1:

At the same time you think about the portfolios. It would be really easy at the end of last year to follow what everyone else was doing and say actually it's all about the US. Us exceptionalism is here to stay. Donald Trump is going to be brilliant for the US economy. He's going to be brilliant for companies. He's going to reduce taxes. The US is going to continue to be a sort of bastion of growth in a sort of stagnant economic situation around the rest of the world.

Speaker 1:

It was a very, very enticing story. Now, of course, so far this year, it's been proven to be somewhat different to that. So what you'd also find from our portfolios, chris, is that we're more globally diversified than others, and so far this year that's been useful, because it's been the areas of the world that everyone hated last year sort of large-cap uk equities imagine those we could really go back in time to when they were last popular european equities sectors like healthcare, infrastructure, those the things which are kicking, and that's why we insist upon a diversified approach. Also, by taking that position early, it's allowed us to look at portfolios more recently and start to lean into some of those things which have done badly. So the last 15 years, the last 10 years, the last five years, the last three years, has been all about the technology sector, those big tech companies, and I can understand the story because, ultimately, these have been some of the most successful corporate success stories in history, and history is, as we know, a very, very long time.

Speaker 1:

But at some point you've got to look at these things and say actually, everyone knows this, everyone's in there, money's been flooding in. I think there was some 650 billion dollars that flooded into the mega cap magnificent seven companies in the 12 months rolling to the end of february. We like to lean out of investments like that when things get very expensive, so so far this year we've been able to avoid quite a lot of that damage, and now we're starting to lean back into some of those opportunities which actually have proven to be um, uh, you know poor performance so far this year. So there is an element of contrarianism as well in the portfolios that we've mutually constructed and where do you see some opportunity?

Speaker 2:

where, like, where do you see opportunity within the portfolios that you're making or you're trying to exploit at the moment?

Speaker 1:

yeah, well, I think I think that's. You know a lot of people in the industry working and you know I've got used to this because, let's be honest about it, the working careers we've had have been very volatile. I really wish that I'd started working 20 years ago, when my former colleagues would have got rich, fat and happy off of a very, very calm world where stuff only went up, apart from interest rates that only went down, which made everyone a lot of money. We haven't had quite the same blessing in our careers respectively, have we? But there we go, never mind. We're here to make money on behalf of clients and I think the opportunity to do that is actually still right, because people believe that volatility is the enemy of an investor, and I think that's completely wrong. Volatility is our friend. It allows us to lean out of those assets so far this year which have done well, lean into those which have done badly. You know, those sorts of opportunities get presented and we have to take advantage of them. I'm going to use a sort of slight sort of technical term here and I'm going to take us to the world of fixed interest markets, which might be an opportunity for everyone to switch off. But anyway, just bear with me a second.

Speaker 1:

So in February of this year everyone was very positive on the outlook for financial markets. It was before Trump's Liberation Day and the tariffs and the growing concerns between the US and China really started to accelerate. But at that point there was an element of complacency in financial markets, both in equities and also in fixed interest markets. And a good guide to complacency in fixed interest markets is something called the spread. Now the spread is applied to a corporate bond over what you might get for investing in a government, because, unless they'll get too complicated here, apparently investing with governments is quite safe. Now we might look at Labour government in the UK and think something otherwise, but just bear with me, okay.

Speaker 1:

So in corporate bond world you get a gap over the treasury yield or the government bond yield for what you get from investing in a corporate bond, the interest you might get from a corporate bond. That gap is called the spread. In February this year those spreads were incredibly narrow, as we saw. But actually what we saw through the volatility of March and April was those spreads ballooned and gave the opportunity for nimble investors to take advantage of those opportunities. So again we are finding opportunities. Clients might pick up the newspaper, turn on the news two pursuits that I'd urge against and think the world is ending, but ultimately, for financial investors, it's starting to get interesting once again.

Speaker 2:

It's. It is very interesting times out there, so that's definitely one way to start. Yeah, I think that's probably a bit more politically correct than uh, than you know, than a lot of, uh, a lot of people's opinions be. But okay. So we talked about the opportunities. But where do you see, where do you see the risk? Where you kind of you know moving back from? Where do you see the challenges?

Speaker 1:

yeah, and I just want to pick up on those points actually there, because you said to be politically correct and I their political correctness is obviously something that we have to employ in our jobs and our roles and, you know, as 21st century citizens. But actually, what's interesting and I've seen this really recently with lots of the research that's being written, lots of the financial commentary I had a couple of investors come over from the us to present this recently and, whilst I wouldn't go quite as far as saying they're suffering from trump derangement syndrome, there is an element of politicism which is creeping into their investment views and actually, I think our job is to be completely apolitical and in the uk, as you know, it's not hard to become apolitical because we look at the options ahead of us in terms of voting for political parties and none of them are particularly smart at this particular point in time. So becoming apolitical is quite easy, but I think, when it comes to trump and the concerns out there in financial markets, we actually genuinely need to take a step back and say, okay, this is the noise, this is probably what they're trying to do and this is the likely end result, and forget any biases you might have politically, even if they are dominating in your own minds at this point in time, and I think that will serve investors really well for the next few years. In terms of risks, I mean there are obvious risks out there. I mean, let's just re-ase the views that we might have had from the start of the year to where we are now, towards the end of April, and a lot has changed. At the end of the year, we said that we didn't expect to see a global recession this year and whilst that's still the view we'd have, obviously the risks of a global recession have risen. In a global recession, you will likely see corporate earnings fall. Now markets are priced in on a little bit of this already, but if earnings fall, equities are likely to have a tougher time. At the start of the year, the expectations were that we'd see sort of 12% to 15% earnings growth from the large cap US companies. My suspicion is a recession. We actually see all that potential growth wiped away and we actually see a little bit of a decline. That's obviously a risk.

Speaker 1:

The second risk is just around tariffs themselves. Now I think that there is obviously an element, as we go forward, of what the worst case scenario is what the best case scenario is and, obviously, scenarios in the middle. Now I'm leaning towards a scenario where we end up with 10 tariffs on everyone from the us, and we can get into this a bit more detail in a minute. But I think some of this is fair. Actually, you know, a lot of Trump's success has been around the fact that we might not like the way he says it, but a lot of the things he says actually do have some truth to them.

Speaker 1:

He's trying to create a more level playing field for the US, so I think they will end up with tariffs across the board in terms US, and they really need them as well, because they need money to come in from the tariffs to fund some of their grandiose schemes around corporate tax cuts and personal tax cuts later on this year and some of the fiscal spending that they want to do.

Speaker 1:

But that's obviously a risk because if it's not 10% on everyone, perhaps 15% on Europe, 20% on China and it's something considerably higher than that that is a big risk. I yeah, I mean ultimately, by putting in place 145 tariffs on the chinese, he's effectively committed economic murder, because you're not going to ship anything from china on 145 tariffs, and we're seeing that and things like the freight rates, so that's clearly, alongside economic growth and activity, a concern. I think the third point that we just need to recognize and all of us need to recognize this as global citizens and global consumers and global investors is that what we're seeing at the moment is quite obviously a major deterioration between the two world's leading superpowers, the US and China, who are increasingly competing for hegemony of the world on a financial, an economic, a political, geopolitical, military perspective.

Speaker 1:

This is a real shifting situation that we need to focus on now there could be some form of detente, there could be some sort of treaty sign, there could be some sort of you know, tariff, peace, um sign, but ultimately, this is going to make the world a more turbulent and complicated place as we go forwards yeah, it's not going to make life simpler no, I mean, you could argue, chris, we've seen this throughout history.

Speaker 1:

This always happens. You have a superpower in place, and once upon a time that was the uk. Um, and you know, you get superseded by an emerging economic superpower. Now, typically, this ends in military conflict. Now, that wouldn't be. I don't expect any form of sort of hot war hopefully to take place, although obviously, with events in places like the south china sea, risks of that have risen and a lot of wars have started because mistakes were made, you know, missteps took place. But are the US and China on course for an economic, geopolitical, political, trade war? Absolutely, I mean, I think we're in one already.

Speaker 1:

Yeah.

Speaker 2:

Well, I think you could argue definitely that you are. I mean, if you have a look at the three types war military, cyber and economic yeah, you would definitely say that his actions have been a, you know, an act of economic war by, uh, you know, by imposing the tariffs globally, as he did as well, you know, yeah, it wasn't just china at the start, obviously it's. We're leaning more into that now yeah, but you know it was very broad, uh, how it initially started it was.

Speaker 1:

But I mean, I think we need to have a sort of slight history lesson in this because ultimately this was started in the US 10, 15 years ago. I mean, the Obama administration took a hawkish line on China and let's not forget that. This is the one thing Americans agree on that China is the enemy. Well, that, and the fact they want to spend money they haven't got, but let's put that to one side for a second there. Well, that, and the fact they want to spend money they haven't got, but let's put that to one side for a second that's another rabbit hole. But if you think about the situation under Donald Trump I mean actually with the signing of the trade deal in the late part of the last decade, there was a sort of you know, sort of coming together and the Chinese completely reneged on the deal, and I think that's one of the reasons Trump is so angry now, because that deal they kind of walked away from it and didn't fulfill. You could argue the americans didn't as well. But that trade deal was quite a sensible thing. But the trump administration obviously became more hawkish on china. The biden administration picked up the baton on that and took it even more aggressive. If you look at a lot of the last decisions of the biden administration, it was trying to throw sand into the gears of the chinese economic engine. That trump has obviously taken now to a new level and quite obviously within the Trump administration depends on who you think's in charge of the Trump administration. Is it all Donald Trump or are people like you know? People like Rubio and Vance are significant China hawks and recent events would suggest that they are holding the power cards within the Trump administration and they're saying but let's not forget that this is something that the Americans agree with, you know. I think also we would complain about a lot of what the Trump is done and the sort of the odious nature they've gone about it. But let's be honest about it. A lot of the things that he says are things that most Americans would agree with, even if they don't like Donald Trump.

Speaker 1:

Do most Americans want a better immigration system? Yes. Do most Americans want a better trading system? Yes, better immigration system yes. Do most Americans want a better trading system? Yes. Do most Americans want to rely upon China for producing lots of goods, which we find that during COVID is not a good place to be, particularly from national security concerns? Absolutely they do. Do people in America want to have more of a manufacturing base in the US and reverse what happened with China's accession to the World Trade Organization 20 odd years ago? Absolutely they do. Do Americans want to see a cessation of the fentanyl flooding across the borders which is bringing down life expectancy in the US, whereas all around the rest of the world it's going up? Absolutely they do. So. I think that the Trump policies a lot of them, we could argue are pointing in the right direction. But let's be honest about it. The way that they've gone about it and some of the actions have been something which have completely upended decades of globalization.

Speaker 2:

Yeah, and in the portfolio. So all of the pieces you know you've just talked about all very relevant. What changes have you made in the allocations in the portfolios to? You know, to try and take advantage of that? And we're going to come on why active versus passive in a bit, but you know that's in the active style that you manage. Yeah, what changes have been made?

Speaker 1:

so I think there's obviously a point we need to make about being proactive rather than reactive. So, if you think back through the last 20 years that I've been investing and all the time that you've been a financial advisor, if you respond to market events by changing portfolios, you're quite often buying into something that's done well or you're panicking to try and sort of reverse a decision you've got wrong. Being proactive here is is obviously important. Now, sometimes, I'll be honest, you get lucky as opposed to necessarily being good. I've got no problem that whatsoever. I think we I'd like to be lucky all the time, but we know that's not going to be the case. But um, so so far this year it's been really a case of recognizing that if there were risks out there it were was to expensive us valuations at a time of peak complacency, anda, lot of uncertainty around what the trump administration might bring. And let's not forget, back end of last year us markets were flying, absolutely flying. Big us companies were performing incredibly well because it was what everyone wanted to talk about, everyone really liked. We sort of looked at that and said, well, actually there's a lot of positive priced in, and I think investors do need to ask themselves those sort of what if? Type situations. We've seen quite a few of those in the last 20 years, but we were asking ourselves those what if? Situations.

Speaker 1:

So we wanted to be proactive and make sure we didn't have too much exposure to the US. We wanted to be underweight those big, magnificent seven big tech companies which look to us to be extremely overbought and really quite expensive and we wanted to have areas of diversification, defensiveness in some of those things which absolutely everybody hated Healthcare, because obviously RFK was going to destroy the healthcare industry. Well, that's interesting, but it's trading in the lowest fifth percentile of valuations versus the rest of the market it ever has done. There was a lot of bad news priced into healthcare, things like utilities and infrastructure. No one wanted to know because they're boring, it's all about technology and, again, owning some of that. So being proactive in those allowed us then the opportunity to start to reduce and take profits in those sorts of investments and rotate in some of those big US companies which had obviously started to perform quite poorly. Those are the sorts of decision making but we're not really shifting the dial at the moment Because I think one of the other things you can recognize is that things start to move and you assume that we're done.

Speaker 1:

I'm not sure that is the case. It's been very interesting and I'm sure your clients are totally relieved, as are all of we, that we're no longer in that sort of post-Liberation Day market downturn that saw the S&P 500 fall sort of 20% from sort of peak to trough very, very quickly. We're now down roughly 10%. A lot of that negativity has been reversed and actually lots of markets around the world the UK, europe, et cetera are actually in positive territory yesterday. We shouldn't forget that the declines haven't been too large so far this year, but I wouldn't be surprised if we saw more volatility as we go forwards. There's a lot of scenarios out there where I still think the diversified and defensive approach that we've taken alongside yourselves in managing our client portfolios is appropriate. We do not know what's going to happen next and, to be honest, I would probably rather give up a little bit of the upside from being a bit too inverted commas defensive than really push here on a button for more aggressive approaches at a time.

Speaker 2:

I just don't know. Yeah, I think it's interesting, isn't it? Again, you've got to expect and accept. So you've got to expect this volatility going forward. It's not going to go away, we know go away. We know the current administration is quite volatile and there's not a lot of warning when they do things. And you've got to accept that's part of being invested in equities and the returns that you can potentially gain from them over time. It's the cost of admission.

Speaker 1:

Yeah, absolutely. There's a lot of people who are hopefully listening to today's school and haven't switched off from my rubbish answers. They'll work in real business, not wealth management, and they will know Is that real business? Well, we can debate that afterwards, but in terms of running a business, what you need is confidence. You need confidence to employ, you need confidence to make. You need confidence to make a new order. You need confidence to build a new conveyor belt. Perhaps I'm going back to the 1920s as opposed to the 2020s, but you need confidence to be able to do that.

Speaker 1:

At the moment, there is obviously a confidence shock in the global economy Not quite as great as we saw during COVID or perhaps the financial crisis, but, you know, probably not far off in some cases. I mean, freight transports from China to the US are now down 60% on a year over year basis. So quite obviously, there's been an element of a sort of heart attack in the global economy which is going to affect confidence, and I think we need to recognize that. And you know all the while that confidence is beaten down, and I think a lot of these things are overdone. I think people are talking about the worst case scenarios and they won't be realized, but that will affect the global economy, which will affect corporate profits, which will affect equity prices. It will take a while to come through, though.

Speaker 2:

Another thing that you've said is not just dumping absolutely everything and putting everything into cash. Yeah, you know great investors during this time do lean into the volatility. Bad investors panic and sell everything, which ultimately is where we as advisors that's where we actually have value. The tactical allocation of how everything is getting deployed is done by you, the investment manager. We actually add very little onto that, apart from agreeing risk levels and how that would match at the start. But the underlying asset allocation within a portfolio is very much the investment manager's job, which is you, and I said we'll come on to in a minute active versus passive. But where we add value is that behavioral coaching side, absolutely.

Speaker 2:

Hangar did a study where they said that, as an advisor, you can add 3%. Your advisor will add 3% per annum extra. Zero percent of it came from the asset allocation from our side, where we add value as behavioral coaching and drawdown. So at times like this, making sure that you are not drawing it down from your equities you're looking at more of your cash or cash alternatives and you're looking more of your fixed income, so you're not making bad investment decisions, which is really what he stems from. That was 2.6 of the three percent. Yeah, on average per annum. Now, obviously, years like now is way more years when there's hardly any volatility, like you said at the start that you know of which we've had a lot yeah, no, no, I I would agree and that I would put into recent context.

Speaker 1:

Now I could be being unnecessarily calm at this point in time, but I look through the portfolio and I'm confident in the portfolio from a sort of three to five-year perspective and three to five months, I just don't know, but three to five years I would still suggest that with the balance of valuations and investments we've got, we'll make decent turns. So put it into context. The only real guide that anyone listening to this call today need to recognize is that the only guide to future investment success is buying high-quality investments, sensible valuations and holding them for a long time. There's no other great side. I can try and pretend that I am the greatest investor out there because I market time and I pick specific things to react to specific situations, but you get most of those, or as many of those, wrong as you do get right. But, having said that, there are things that can help you.

Speaker 1:

So you think back through the points of maximum pessimism through the last 20 years or so 2008, back end of 2011. In fact, most years in the first part of the last decade, because of our friends in europe and the politicians trying to destroy the european economy on a regular basis. Back end of 2018 um march 2020, um areas in 2022. There's been plenty of opportunities when things look really, really bad and the right thing to do was to lean into those investment interests done badly. That's absolutely the approach that we take, alongside those strategic asset allocations. Now there's other times, such as back in 2021, as mentioned already. We're not only with a fixed interest, yields very low, equity valuation is very high. That's a time to lean out.

Speaker 2:

Yeah, that's the way that people should manage their portfolios and it's important that people understand as well that you are looking and managing the portfolios and adjusting them, rather than it being left in a subsection of funds. You know we manage this under a model portfolio. Yeah, you make changes to the funds within the model portfolio from time to time. You rebalance. You know things happen. It's not relying on you. Wait for your financial advisor to try and get rounds, calling you and the other hundreds of clients that they potentially manage during that time as well, which is why one of the reasons why we've struck up the partnership- yeah, I'll give two recent examples of that, because that's a very good point, because people might also look at their portfolios.

Speaker 1:

I think not a huge amounts going on, but actually if you break down beneath the sort of the asset class level, um, we had two investments in fixed interest that we've changed so far this year. The first was that we bought some very short-dated inflation insurance in the US at a time that no one was really caring about it because inflation was coming down. But actually now everyone's really concerned about the impact of tariffs, deglobalisation, what Trump might do. Next, inflation insurance has risen markedly in price, whereas longer-dated inflation insurance in financial markets hasn't. So we swapped out some of that shorter inflation insurance and moved it out longer, so you wouldn't necessarily see a big asset allocation shift, but that can add real value to portfolios.

Speaker 1:

Also, again without becoming too parochial, we came to a very extreme point earlier on this year where the difference between what you would get for lending money to the US government versus the UK government had widened to an incredibly wide spread. So in the US the yield was roughly 4.2%. In the UK for the same bond it was more like 4.75%. So what we would do and this is what Puck Clients Bay has to do is rotate some money out of the US into the UK to take advantage of that, and that's worked really well. In the last few weeks People have become more sceptical about US government bonds because mostly of Trump and his administration, and actually the UK has been less in the sort of crosshairs and those yields have come down and prices have risen. So those are the sorts of things we can do to finesse client experience and add value beneath the portfolios great, and I think there's a lot of value in that as well.

Speaker 2:

So let's get on to the active versus passive investing debate. Can you explain in simple terms what active management actually means for clients?

Speaker 1:

Yeah, there's two elements of active versus passive. I mean active versus passive on an asset allocation basis could just be that you hold, you just stick to the same asset allocation and do nothing else, as opposed to actively moving up and down different asset classes else, as opposed to actively moving up and down in different asset classes. And I would argue that there are times when you need to be quite heavily active in asset allocation and there's times when you need to be quite passive. At the moment, actually, we are relatively passive because we think that the relationship between bonds and equities is appropriate. We're neutral in both. But I've been other times in the past when we've been very underweight equities or very underweight fixed interest. So that's an allocation basis. That's that from an individual investment basis, which is where most of your clients would have heard about the active versus passive debate. Is that active is you're paying someone normally more money to do for passive, to go out and buy individual investments to try and outperform a specific index. Now, spoiler alert, this has been a very bad thing to do for much of the last 15 years. Active managers have just not outperformed the benchmark because the benchmark has performed really well. So passive investment which has captured all of that upside, just simply tracks the index, and that typically costs a lot less.

Speaker 1:

Now, the way that I like to think about things is I am apolitical, as I mentioned earlier, and agnostic when it comes to investments. Ultimately, what we're trying to do is achieve your clients the best rate of return to match their long-term financial planning aspirations, with as little risk as possible, as cheaply as possible, and there's an efficiency across all three of those different impulse. And I think this is one of the things that people people either sort of really believe very strongly in a totally a passive approach fair enough or really strongly an active approach, actually with somewhere in the middle of them, we take a much more sort of common sense, um, approach to it. So my starting point has always got to be why would I not just buy the passive index? Okay, because, why not? It's the cheapest way of implementing and getting a predictable return. And now, interestingly, we are able, very different to 20 years ago, to put together a mostly passive approach to equities with a sort of benchmark index-aware core, but actually overlay that with more innovative passive strategies that allow you to have a sectoral bias, a thematic bias, a stylistic bias Do you want to have cyclical value companies or high quality sort of dependable growth companies? You can do all these things now and radically reduce costs. This is a much better way of implementing efficiently at a much reduced cost for clients than we ever saw beforehand. Now, but you could argue with me. Well, okay, tom, but your passive investment is in the healthcare sector. Is that not an active decision? And again, this is where it starts to get into the weeds. But ultimately it's a much cheaper and more predictable way of investing in healthcare.

Speaker 1:

This is a good thing for clients, but at the moment, I think that what we're also going to see in equities, and definitely in fixed interest, is a greater idiosyncrasy between the winners and the losers. And we didn't see this in the last decade because there was a rising tide floating, all boats rally in everything, because interest rates were at zero and money flooded into financial assets where everything just went up together, everything from government bonds through to expensive footballers, you know, with everything in between, everything just went up massively in value. Now we're seeing a great deal more idiosyncrasy. We're going to see a great deal more bifurcation between the winners and the losers. So what we're trying to do, chris is have a passive call with some sectoral and thematic overlays and where it's worth paying the money to back some high conviction, active investments to try and achieve and optimize the best return for your clients.

Speaker 1:

Now, at times that will skew At some point, like the 2010s, have much more passive approach. Maybe a few more years into this decade have much more active approach. At the moment, we're kind of in the middle and I think anyone who really weds themselves to one implementation philosophy versus the other active versus passive ends up missing out. On behalf of clients, be pragmatic about this Absolutely.

Speaker 2:

Yeah, it should be the best that's right for you. Wins, yeah, different times, different, different strategies. Yeah, and people have preferences as well, and I think a lot of people get really caught up in some of the cult narratives that exist and I think, ultimately, you need to make sure that you people's right for you and what you believe in, and that's no, that might not be the same.

Speaker 1:

um, that might not be the same for everyone no, no, but they've been to context, though, and it'll be the same in dubai as is is, is in, is in london. It's the same all around the world. You know, we used to be screened first on performance and then they'd think about cost. These days, you don't get invited to a big pitch unless you screen first of all for cost. Yeah, performance comes second. Now I think there's a relationship between the two of those where they can actually be married in unison and be very happy together. Uh, but you know people are obsessive about cost. I think you just need to think about what your financial aims are as well.

Speaker 2:

At the same time, agreed, and I also believe that it's it's value, not cost. So what I couldn't agree? Yeah, agreed, which is which is important to differentiate, because the cheapest doesn't necessarily always win, um, and if you want cheap, then you know the cheapest way is to go and try and buy individual equities and figure, figure that out for yourself, which you know would be, which would be very time consuming. So I think people need to be really careful when they're when they're looking at that. Okay, so so come, we've talked a bit about trump and the tariffs. We obviously talked a bit about active versus passive, so let's start to look ahead a little bit now. Obviously, you know there's been a lot of negativity in terms of news. There's been upsets, um, where, where you know, where do you guys? Do you have a view on where things will go over the next 12 months? Would you keep out of it?

Speaker 1:

yeah, I have a view um, I wouldn't necessarily want to be held. Held to them in 12 months time come back in 12 months and review it.

Speaker 1:

So the end at the end of 2019. I wrote a white paper for our clients and uh, introducing financial advisors, um, entitled the turbulent 20s. I think it's read by about three people, so if anyone wants to get a copy of that, I'm very happy to send us them. Uh, it was the first time my career ever got anything right as well, but I'd rather be pathetic than prophetic with this one, though, because what I was saying was that the last decade was fundamentally very easy. Yeah, you know, I entitled it the easy tens. It was impossible not to make money on behalf of clients, um, and that those were positive returns came with low economic variability, low inflation, low interest rates. It was really easy. We all complained about it the whole time, let's not forget that, but it was really quite easy.

Speaker 1:

I argued this decade was going to be very different and entitled the turbulent 20s. Now, sadly, this has come true, but I argued that, from a geopolitical and political perspective, things were going to get much more complicated, and, let's be honest about it, we've gone from an era of peace and stability to an era of war and mistrust and a row back from globalization entrenched for 40 years. We're now starting to go back on that. These are big wheels that are turning. I also argued that outcomes become more volatile because of the societal impact. Now, for much of the last 15 years, your clients, people listening to this podcast, our clients, probably all of us have actually had a really good economic experience For the vast majority in society, and this is why Trump is a symptom of this. It's been miserable, yeah, and what we've ended up with is the greatest financial divide between the haves and the have-nots, probably in the UK going back a thousand years the norman times. I wasn't around then so I can't justify this, but if you look at things like the genie coefficient, which measures the gap between the rich and the poor, that's where we are. So I thought things become more volatile and I felt that from an economic perspective, an inflation perspective and an interest rate perspective, things were going to become much more uncertain. And that's what we're saying.

Speaker 1:

Christian, answer your question. I think we're going to see a lot more of that. Your clients might hear that and say, actually, we don't have any part in financial investments and I said, well, that's absolutely fine, but this has been like this for the last five years and portfolios actually done quite well, you think, like the last five years. An average sort of growth portfolio spread about seven percent per annum over the last five years. So I get you know I could have got a rate of return in cash candy, but not, not, not sort of that.

Speaker 1:

That's not about our portfolios, about the industry as a whole. So ultimately, you shouldn't just focus on all the negatives. You should focus on the fact that, as long as you can keep that equation of sensible investments, sensible valuation, sensible holding periods, things will probably be okay. The long run rate of historic history suggests that financial markets go up over time. We don't expect this to be any different, but I expect it to be much more volatile and much more bumpy, and there are going to be times when people obviously wake up in the morning, read the papers and think they don't want to have an investment portfolio now.

Speaker 2:

To me, that would be a mistake yeah, agreed, and I think we've seen three bear markets over the past five years 2020, 22 and now, recently, the drop from, you know, technically a bear market, when it's dropped from its highest point in in february to uh, to what it did, uh, a few weeks ago. You know it's, it's been, um, it's been, it's been pretty turbulent, and that's unexpected given the fact that I think it's something like from 1950 to now. We've seen 12 bear markets in total during that time.

Speaker 1:

Yeah, as I said, you and I have had quite a tough career, but there we go. It's made it more interesting, but I've got a different view on bear markets and economic recession. So, if you think about it, governments and central banks are so scared of recessions these days. But about it, governments and central banks are so scared of recessions these days. But anyone who works through business and people listening to today's podcast will recognize that recessions happen the whole time and you need that sort of period of retrenchment and sort of um, the natural darwinian impulse to take take hold where weak companies that shouldn't survive go bust and the strong get stronger. You need those to get the sort of regeneration of economies and things moving forward. You need winter to have a spring, you know.

Speaker 1:

Likewise, when it comes to financial markets, if you think about, the best years your clients have had from financial markets have been years after you've seen um bear markets in equities and again it gives you the opportunity to do it. So I'm not scared of any of this. In fact, you know, I don't want to say we like to lose money. I kind of welcome this volatility because it just gives you the opportunity to buy things the worst time to be an investor is a back in a 2021, when you can't find anything to buy. I haven't got that problem at this moment yeah, so what?

Speaker 2:

your job is easy. Now is what?

Speaker 1:

well, it wasn't what I'm saying, and the way you were laughing at that they did make me somewhat concerned, but then it makes sense. You know, I can buy bonds at a decent value. I can buy active. I can buy great long-term themes at sensible valuation. Who doesn't think that healthcare is going to have a good next five years in terms of growth? Who doesn't think that infrastructure is going to improve? Who doesn't think that we're going to see elements of technology continue to grow? I can buy all of these things at the moment if I'm picky at sensible valuations, which, which is great, clearly.

Speaker 2:

Okay, so, as we kind of wrap it up now, if you could leave our comments with one piece of advice about investing during these uncertain times. We obviously had a lot of nuggets of, you know, very, very useful information, but one piece of advice, what would it be?

Speaker 1:

um, well, I've mentioned the long-term rule to investment, so I won't go through that for a third time. But I think don't focus in on your portfolio too often. So I met this guy in the industry who wrote a daily attribution report which pulled down all of the performance of portfolios and looks at it on a day by day basis and he broke it down into fixed interest, equities and alternatives to try and work out what the portfolios were doing. I didn't have the heart to point out that actually at the moment, with timing lags and the way things work, this was out of date before we even start writing it down. So I don't do anything like that. And I had a lunch of um with advisors last week and did a presentation. I think there was someone surprised so that I said I only check performance once a month when I get the audited numbers on about the third of the month.

Speaker 1:

And that's in time because ultimately we kind of know what's going on in the world. I know what what's happening in portfolios. I need to look at it on a day-by-day basis. It's just going to confuse me, make a rational decision and be too emotional. So I would try as hard as it is just not to focus in on the short term and focus in on the longer term. The only real reason I would change investment strategy, rather than day-to-day news, is if you sit down with your financial advisor and financial planner and your financial goals have changed, the future or your situation has changed, that's the time to do something about it. Otherwise, trust in your asset allocation, trust in your investments, if you have confidence in your investment manager and the financial advisor does then ultimately I would stick with it. I think that's the best advice I can give you at the moment Forget the noise, be pragmatic and focus on the longer term. Fantastic, that was really really useful.

Speaker 2:

Thank you for.