March 28, 2025 • 31 mins
Alyx Wood, chief investment officer of UK-focused hedge fund Kernow Asset Management, joins Merryn this week. We discuss his contrarian approach to investing, where he is short, where he is long, and why he's decided to focus on UK equities.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. Welcome to Meron Talks Money,
the podcast in which people who know the markets explain
the markets. I'm Meren sumsat Web. This week I'm speaking
(00:22):
with Alex Wood, chief investment officer of Kerno Asset Management.
Kerno describes itself as a contrarian investment manager, specializing exclusively
in UK equities, currently about one hundred million pounds in
assets under management. Before co founding Kerno in twenty seventeen,
Alex worked as a fund manager at Downing, a vice
president at Deutsche Bank, and a management consultant at KPMG.
(00:46):
Welcome Alex to Merin Talks Money.
Speaker 2 (00:48):
It's a pleasure, Miron. Thank you very much for your time.
It's a bit surreal, little bit of a career highlight
for me because I've listened to your show and I'm
on it so and I just found out you're half
your cornished as well, So this is this is perfect.
Speaker 1 (01:00):
I mean, this is a career highlight for me as well,
and that so far we have never yet had a
cornish person on who is a value orientated contrarian who
specializes in the UK. It looks like hitting every single
button for this podcast. So we're more excited than you are.
Speaker 2 (01:16):
Gott to tell you hopefully certain quality. But yes, I agree.
Speaker 1 (01:21):
Okay, so listen. Tell me about why you started this fund.
What's the key behind it?
Speaker 2 (01:27):
Oh, it's been my lifelong dream since I've been investing
since fifteen. I enjoy it. I love it. The opportunity
set is amazing in the UK. The number of decent
jobs and places you can practice this craft has been
declining because of the growth of index hugging and businesses
merging and forgetting how to make money. So the opportunity
aligned got big enough and ivy enough to go for it,
(01:49):
and so I did.
Speaker 1 (01:51):
Let's go back to the beginning of what you said
that there aren't very many markets left where you can
be properly active because the rise of passive are slightly
destroyed the ability to do that. Can you talk a
little bit more around that.
Speaker 2 (02:02):
It's more the index hugging. You know, it's a disease.
You know, ten years ago there were four hundred U
came up exaggerating ums a little bit, but the four
hundred UK managers that were doing plus and minus ten percent.
Now you've got forty guys probably doing decent job and
everyone else's plus and minus two on the index, and
that index hugging that lack of conviction makes it very
hard to find a job because if you go join
a big house or a medium house, you're tracked against that,
(02:25):
and if you go too far away, you get fired.
So you know, it's better to fail conventionally rather than
win unconventionally, and you have to follow someone else's philosophy
to have your own philosophy and come out of an
investment bank in your twenties that doesn't exist anymore to join.
I'm not going to use names, but some of the
great training programs that still exists, they just don't give
you that career exposure anymore. There are places the multi
(02:48):
straps are doing a pretty good job of the young
people today, but the dearth of talent and opportunity is
kind of frightening. The flip side of that, it creates
huge opportunity and trend following now is massive. The wisdom
of crowd don't exist of ais to the same extent,
so fundamentals and reality are getting a long way from
each other. And there's a lot of crazy, interesting things,
fascinating things going on today. And I'm chomping at the
(03:09):
bitch on to capsule this and share it with people.
Speaker 1 (03:13):
Okay, that's very interesting. So what you're saying is something
we have heard quite a lot on the part of
the last few years, which is that the closet tracker
never disappeared. There was a period when we all read
a lot about closet trackers and we were infuriated by
what they charged, et cetera, etc. And then there was
a view that gradually that would disappear. But from what
you're saying, the most of the funds left in the
UK that call themselves active funds are really closet trackers,
(03:36):
and that's maybe one of the reasons why active has
such a difficult time in theory. But the other thing
that we have looked at recently is the performance of
genuinely active funds. So if you look at funds with
a very high active share, you tend to find a
much more and much higher likelihood that they will.
Speaker 2 (03:53):
Outperform exactly, I would just caveat that. It's the larger
funds have got larger as opposed to there aren't good
There's still plenty of active, good high quality managers out there.
It's just that the marketing machine has sucked it all
up into the say, the twenty largest, and that proportion
of assets has then flown in. And then you also
have fun flows from interlashal investors pulling from small caps
(04:15):
and all the rest of it. So you have this
quite interesting distortion and Carlstone flows out of acting markets
and all this.
Speaker 1 (04:21):
Yes, but we still need to say it.
Speaker 2 (04:22):
It just creates pockets of opportunity. And you know how
many people really do all the fundamental work and take
a different view out of consensus. You're just not going
to get paid for it. And I love it, so,
you know, looking silly and being ridiculed making money doesn't
go out of fashion. So that's what I'm going to
stick to.
Speaker 1 (04:38):
Okay, And how's performance been.
Speaker 2 (04:39):
It's been good, it's been pleasing. I would have liked
to have made more, but we've we've beaten the pack
by a decent margin. That means we're starting to be
taken seriously. Now we've got to do another five years
of that before we have we earn any sort of reputation.
So yeah, I can ask for more, given how important
it is to beat the competitors. But this buck sustaining
(05:01):
that and have been maintaining that edge is the important thing.
Speaker 1 (05:03):
Okay, so you found that you're in a position where
you could start your own fund. Fantastic, and of all
the markets in the world, you chose possibly the most
unpopular one there is and still is. I would likely
I keep looking at the numbers and thinking this will
come back. People are going to become interested in this again,
It's going to happen. But even the most recent numbers,
the calistone numbers that you're talking about, So where money
(05:26):
is flowing to. We've seen one of the biggest movements
out of UK stocks in record in January and hopefully
that will have turned around a little in February March.
But it hasn't become any more popular in the last
five years. But this is the market that you chose.
Speaker 2 (05:41):
Yes, the causality is probably the other way. I used
to invest in everything since I was fifteen. Then I
specialize in twenty twelve and UK only because I get
the culture of a very fortunate accounting background. I can
get in front of anyone in terms of network, So
it's an area where you can really build an area
of specialism, and part of my philosophy is I spend
as much time analyzing shit sareholders as I do companies.
(06:01):
So my specialism is I understand the flows and a
makeup of a shareholder base very very well. And I'm
buying off to stress sellers and selling to greedy buyers,
and I almost don't need to know about the company
to make money. I do because it's a safety thing
and that's actually the core of what I find interesting
and so it's a product of history why I specialize
in the UK and just quickly touched on the UK.
(06:24):
You know, there's more ten bagglers in the UK than
there's a percentage market cap than in the US. The
distribution of curve, the flatness of the curve means you've
got a lot of high quality, amazingly rated, great businesses,
you know, experience games works, and then you've got a
lot of dogs to make that work. The net result
is you have a pedestrian, frankly boring market that does
four to six percent, but the tails, you know, it's fantastic.
(06:46):
It's a stock picker's paradise. Which is the weird dichotomy
of this situation that when the discounters and closes, you
are articulated earlier.
Speaker 1 (06:55):
I know that you are both long and short and
will come to short later. But what kind of companies
are looking for you? Mainly large caps, small medium cap
I'm guessing down the bottom end of the market cap spectrum.
Speaker 2 (07:06):
We go where the value is, where the biggest opportunity is.
So we have large caps, we have medium and small
today with a bias and medium because of the high
quality business of dominant positions. I imaginedent teams sent out
in a big chunk, and still sometimes we found ERUs.
You've been doing a lot recently on investment trusts. We've
got two investment trust trades on that disappear now. So
we just move where the biggest gap is. Small cap
(07:28):
is currently still I think primed to you talk about turning.
Small cap does turn. That's the best returning asset class
in the world. If it doesn't, then we won't do
a big proportion of it. There's some great large cap businesses,
you know, global businesses on the UK discount. We'll do
them as well, so you know, we paid less for
something and then we trade the catalyst and we'll move
(07:49):
wherever the value is. That's why we call the fund
the navigator and Okay.
Speaker 1 (07:54):
So many questions I want to didn't we start Let's
go back to the first thing you said about it
recently getting into doing vestment trust and you're right, listener,
the very interested investment trust, and so we what what
are the two that you've brought into.
Speaker 2 (08:09):
One the other one is Amadeo, which is an airline
craft fleecing company. So this nearly went bust and COVID
just for reasons. You can imagine the two clients. One
was very safe and the other one was actually in bankruptcy,
but then that got bailed out, so then the covenants
became good. We got interested in the asset class because
you're trading at a eighty sixty percent discount and the
(08:31):
cash flows are good. The catalyst there was the board
and governments and the other shareholders Metage and Elliott are
incredibly smart investors. And that discount has closed and you've
we were collecting a twenty two percent dividend, it's now
down to thirteen and they've been doing terrific buybacks. So
it's a pretty great assets story, good managed governance, change
(08:54):
and a wind down of the business over eight years
that will hopefully double our money okay.
Speaker 1 (09:00):
That was an example of looking at the other shareholders
the business to find the catalyst for the value to
be released. Yes, yeah, okay. And then the next thing
you said was about large caps and the global UK discount,
and it's interesting, you know, the idea that the UK
has a discount is not generally accepted. Everyone refers to it.
What do you think that discount comes from.
Speaker 2 (09:19):
It's a natural oscillation of markets, of perception of reality.
That's how prices work and story. So the UK out
of two thousand and eight twos and I actually came
up pretty good relatively speaking. And from twenty eleven to
twenty fourteen the UK he was doing incredibly well. You
have to ignore my Eco because it's been absolutely fantastic
in India and China. Those are the outlies if you
were Jim Rodgers picking Macro. But the the Brexit haze,
(09:43):
as I should to be kindly called it, essentially was
a middle finger to the rest of the world, and
that perception caused money to essentially start flighting. And then
you had a Woodford scandal which would have hurt people
having a go cavid and so it's just a general
you know, the natural buyers of UK equities has been
declining and pension funds don't buy it. So the retail
(10:07):
market in the UK's are lower than in terms of
active buying as a percentage is lower than other countries.
So you have to ask if the liquidities are not there,
and then the companies have perception of lack of liquidity
and then they don't ipo. It then starts self fulfilling.
So we're in this self fulfilling, self harmed situation. At
the moment, the companies are amazing. Some of the companies
(10:28):
are still amazing, and it just means you have a
better opportunity to get and it will turn because things
always change. We just don't know when.
Speaker 1 (10:34):
Aw where you still when?
Speaker 2 (10:36):
Yeah?
Speaker 1 (10:37):
What are you holding?
Speaker 2 (10:38):
In the large caps, we've got hiscocks phrases these probably
more than the mid cap ones. We recently come out
of a viva. We've got Burbery, Okay, took us through that.
Burbery went from an embarrassing stock last year to hold
to having a change of management. And that's interesting. So
(11:02):
then you look at the luxury market and well, actually
that's growing and globalization is going to get bigger. It
doesn't feel like it but there's more people and wealth's
going up, and there's more millionaires every day than there's
the day before. Status and security. They don't sell clothes,
they're selling status and that only goes up with globalization.
So the setup is great. The best luxury goods ban's
obviously in Europe, but I don't trade that, so Birbury
(11:26):
happens to be the highest luxury factor company in the
UK for two one hundred. I can't buy Mold because
it's too small than there's a shareholder problem. So the
setups are very very interesting. New management team, great tailwind asset.
Then you're saying, well, they need to make money, and
what's the normal basis for their cash flow, what does
the business valuation look like, and all the fundamentals and
(11:48):
all of that, and you get to about a ten
or twelve billion valuation and the market cap I think
was two and a half or three, which is quite
a big gap. So then you need the setup to
realizing that value, which is essentially what we're trading. It's
the time value of money because this could take five
or eight years to do two three hundred percent and
the stretching might be wrong, and you have to recycle
(12:08):
it once or twice. I've been watching Birbray for fifteen
years and this is the only time I've ever been
able to buy it, that trench coat in that brand.
It's been arounded a long time. And if you can
make me for thirty quid a scarf and select for
one thousand pounds, that's a very high quality business.
Speaker 1 (12:24):
Yeah, we do all like to do that. So this
is the way you look at it on your website.
When you look at your process, it's value, the equity
acquired at the acquired a discount, which is something that
you know everybody wants to do. But then the difficult
bit is finding the catalyst. So what was the catalyst here?
The change of management or a change in the shareholder structure.
Speaker 2 (12:41):
So when I get in, I want to know who
I'm going to sell it to. Birbury's my new games workshop.
So when it's toasted the town and it's winning awards
and all, and they're paying back the normal progressive dipogrant,
we will exit because then the normal buyers are back in.
If you think about the register, you want to have
a proportion of blackwork x X and if the register
(13:02):
is close to what the normal register should look like
it can't move very much. If the register is a
long way and they deliver, then you the share price
can move along towards it. It's a pretty much turnaround,
classic turnaround story. And so you then come out at
the back of that. You need two or three good
years of numbers going up, and then the greed comes
back in, and then you exit and you get the
(13:22):
multiple expansion and the growth.
Speaker 1 (13:25):
In earnings, and you're happy to come out a little
before the top. Leave it for everyone else.
Speaker 2 (13:31):
I would love to be able to time tops and
bottoms perfectly. I've never figured a way to do that
without activism.
Speaker 1 (13:38):
Without activism, so that I mean, it's interesting because you're
that's not something that you're going to be able to do.
So when you join, when you join the shareholder register
of a company, you may be joining one where mcdike
take their investment Cruss. We've just been talking about where
you might have Elliot, etcetera. On the share register, but
they're the activists. You might come in behind them, but
not necessarily of a science to be activist, you're I.
Speaker 2 (14:01):
Think people prefer the quality of argument as opposed to
strong arguing as long as you get past one or
three percent, if there's an activist involved and it's important.
In Burby's case, it's not that important. I'll give you
a live examples. I'm looking at BP now, I'm not
trading it. I don't think it's good enough. But you've
got an activist in there. The CEO will get fired
and maybe the Roles Royce CEO will come along and
take over the BP roll. He's literally at the top.
(14:23):
Can't go any bed at rolls Royce. He must not
take over a BP, which is actually what he wants
to do. That becomes very interesting because BP can be
tidied up and double in value without too much effort
and shouldn't be ashamed of what it is. That setup
is right there and looking that's the stuff that we
look up and we just we wait for these things
to become real where they can hit enough trade ticks.
(14:43):
That wouldn't happen without the activist involving BP being strong
enough to basically get the board to do that. And
I probably won't. It probably won't. Just I'm giving it
you know.
Speaker 1 (14:56):
Won't happen. Yes, So that's that's an examp something that
you would look at and you recognize the value, recognize
the discount, but aren't convinced that there will be a
catalyst in reasonable timescale.
Speaker 2 (15:09):
Yeah, there's hundreds of these and you just watch them.
For me, it's like gardening. So the shorting is the weeds,
the oaks, things that make money, and then it's the
change of weather and what's flowering and what's not, and
just how do you spend your time on the day.
It's about a time. You have to swing at everything
you've put to use your time effectively. And you know,
if I hold Burberry, there's no point me looking at
too many other retailers. I'll get more value go looking
at some pharmaceutical businesses or something.
Speaker 1 (15:31):
Yeah, so there aren't very many of you. I mean
you're the only investment managers like analyst at the company, right,
So how many how many storms can you look at?
Speaker 2 (15:38):
I don't know if we'll no. My co founder was
an ex head of extity research that an investment bank.
We use four different outsourced research company. We use to
referencing companies, we use a background check company. We have
a quant outsourced product model. So it's a full offering.
I don't our team and research depth. I hope is
(16:00):
an inch wide and a mile deep.
Speaker 1 (16:03):
Do you worry about the operating environment in the UK
in general? Awful lot of smaller companies in particular are
going to have increasing troubles operating in a high tax,
at high cost of employment, high regulation economy, and that
doesn't look like it's going to turn around at any
time soon, which may limit the universe in which you
(16:26):
can invest.
Speaker 2 (16:28):
Am I concerned? I guess I'm a personal level. It's
a bit disheartening. But then I take you know, do
you want to be Singapore and Dubai or do you
want to be Switzerland and Norway? And both of those,
you know, ones heavily regulated, high tax, and the others aren't.
And there's what you want to do is find a
place in society that works. So I think I was
very proud of the UK when I worked in London
(16:49):
because there was a globalization hotbed between great art and
media and business and I'm so close largest city in Europe.
It was like combining the East and West, the time
zone in the immigration and accept It's felt really good
to me. I really enjoyed that narrative as the UK,
you know, grown up. It was a nice place to
be where I've kind of become a bit upset. I
don't want to move into politics. Is that's kind of
(17:10):
less feels less now and we've sort of lost a
bit of the golden goose. If I'm interpreting what you're saying,
and you know, I go abroad a lot and I
hear oh UK's instructural decline. It's not very nice. It's
one on the numbers. But my life would be easier
if more great companies listed Quantum, Cambridge Quantum and we
(17:31):
lost armholdings to America and things. So I'd love to
be part of the next revolution and the great companies
of the future and be able to have that story
over the next ten twenty years. Let's all find a way.
And it's been talking about. This is all very marginal
from an investment perspective. It makes no difference.
Speaker 1 (17:48):
Only must make a difference to profit to earnings. If
employment costs go up and if taxes go.
Speaker 2 (17:54):
Up, oh yeah, But if it's priced in or if
I'm shorting it, then I'll make money on that side.
If the multiple goes from you might you all share
multiple stays fifteen If the market multiple taxes go up
to your point should actually be ten. Then I'll price
everything off ten. So you know, if we have a
dot com boom, then I can do fifty to one
hundred percent a year. If we have an income driven
(18:14):
five percent market, then I might be able to do
fifteen percent per year. So the opportunity to deliver and
the dispersion definitely changes, and I can control that. Would
I like a crazy market, I think not every year.
A stable one makes my job frankly easier. It means
I can keep up and hopefully develop ahead of everybody.
Speaker 1 (18:34):
Let's talk about shorting, so presumably that's that works in
exactly the opposite way. Find something that's overvalued and wait
for a catalysts and then short.
Speaker 2 (18:44):
Yeah, preferably zero. So we do fads, failures, and frauds.
The frauds are the sexy fun one. Our big win
was Wan Disco. We discovered that billion pound forward. We've
got a couple of others or seven others today that
we've identified these criminal enterprises. I feel a bit like man.
I like going after them. We don't do activism, we
don't make them public apart from our investors, and we
(19:06):
just take the money off the table and typically we
wait for them to run out of money, to not
be too clever with it.
Speaker 1 (19:10):
Hang on, does this mean that you are not going
to tell me what your criminal enterprises are.
Speaker 2 (19:17):
I can tell you past case studies, but I will
be shot by my CEO and compliance department. If you're
an investor and you come in, I will tell you.
Speaker 1 (19:28):
Only where you can find out what's the minimum investment?
Why do our listeners have to pay to hear the stuff?
Speaker 2 (19:35):
Fifty? We put out fifty rather than the traditional million pounds.
We wanted to be big enough but not be completely
impossible for people to pretty much invite only on the
platforms that might pass. Some money's in it via a
j bell and we can go direct and it's a
non shore fund as opposed to offshore. We take many
regulation boxes we were physically able to.
Speaker 1 (19:56):
We talked earlier about large caps and the long you
held there, but our listeners are really interested in smaller companies.
Have you bought any new small company positions recently? Small
On mid.
Speaker 2 (20:09):
Last month we purchased Kistos. This is actually our smallest
position on the crity wisely, it's only one hundred million
market cap, which is on the CUSP of what I
can physically buy, tell us about it. So Kistos is
a well and gas company. What's interesting is I think
they're worth three hundred and fifty million and the market
was one hundred. So I did some work, happened to
know the management team for a decent time. Very savvy
(20:30):
op operators own twenty the business. They forty two bagged
the previous similar art incarnation on the previous company called
rock Rose. The old shareholders and here have ridden this
share price down from six quid to a quid. The
shareholder rotation told me that it was near the end
the fundamentals of the business. It's going to double its
(20:50):
production this year, its profits are going to not quite
a double, but get to one hundred million free cash flow,
which is the value of the market cap of the company,
and then the cat lists are getting paid. Is the
reserves they have for the worlds that they're plugging into
will also they regrade them to basically how probable they're
going to get them out, but they put them into
(21:11):
the best bucket, which means they can double their cash
flow between twenty seven and twenty thirty, which hopefully the
market will value in some way and so we should
double our money.
Speaker 1 (21:22):
If that's the case, what's your average holding period? How
long do you give things to come to fruition.
Speaker 2 (21:28):
It's all different, but to averages three years, so it's
further enough away that it's too far for and listener
once you know, yea, at the beginning of the year,
everything's in years, and I'm sure you feel this, you know,
eighteen months is the furthest the brain kind of works.
Three years for us kind of is enough for perceptions
of reality to change and new magical things to happen,
(21:50):
So that works very well. Ten years it is just
too long for my tension span to make money out
of the catalyst. And if you're wrong, you're holding something
for too long.
Speaker 1 (21:59):
Then, but it can also happen very quickly. And one
of the things that we have been talking about on
the pod recently is the extent to which it's now
possible to have much higher turnover than you used to. So,
you know, even five ten years ago, the general idea
was that you should trade as little as possible because
those expenses agent to your performance. But now that it
(22:20):
is really so cheap to trade, that's not really a
thing anymore. And maybe there is a case for much
higher levels of turnover inside active funds, and so instead
of looking at that as a negative, now we should
start looking at as a positive.
Speaker 2 (22:32):
It just depends on the edge you're trading, what value
you're trying to capture. What's your edge? If you're I
will use into training because there are a great manager
that's having a difficult time, but his trading period is
very long and his edge has to work on that
because in your eighty percent of a return in a
year is a rating return. If you're trading incremental growth
of compounding of profit, you need to give it five
(22:55):
ten years become a significant portion of the shareholder return.
Is this impossible to do any the way? If you're
a multi strat, their long term for them is a
week and they're very good at upgrading on downgraded earnings
into news reports every day and that's what they do,
so it makes sense for them to have extreme extreme turnover.
Speaker 1 (23:13):
And Alex, have we've got any gold miners in there?
Speaker 2 (23:16):
Are? We used to doing sentiment which was a Egyptian
guide gold miner that got taken over four months ago,
which was actually pretty good timing on reflection, so I'd
probably be selling it now a new gold high.
Speaker 1 (23:26):
Speed selling gold miners buying them at this point, Yes.
Speaker 2 (23:29):
I'm short to gold miner. Now we're shut. AI were
short copper and gold mining, anything that's really popular, we're
probably short.
Speaker 1 (23:36):
So Alex. When I look at gold, which I've been
keen on for years, I mean decades actually, at this
point tally embarrassingly, it looks like the rest of the
media has suddenly discovered gold as a thing. Central banks
are suddenly replacing their treasuries with gold, etc. But when
you look at the investment situation, retail investors, particularly in
the US haven't really moved into golden Institutional investors certainly haven't.
(23:58):
You're just not seeing those big flows in to the
ETFs beginning, but not really there. So it doesn't look
to me like gold is suddenly super popular. It feels
like it's more at the beginning than the end.
Speaker 2 (24:09):
I think it's a fair observation. So i'm gold physically personally,
because you know, it's a bet on government's collapse every
hundred years. I think gold probably close should be five
or ten thousand pounds if you look at the what
it brings, and it's been replaced by perceptions of other
safe assets and other extremes. Bitcoin. Where we are with
(24:33):
it is it's an enduring asset that that's great, but
it doesn't do very much apart from protect and over
the last given the last five years, you would have
thought there would be a lot more protection going on
and it hasn't really been that bashion of safety, and
then we'd have the inflation boom. So you know, there's
definitely an argument to have it as a balanced portfolio,
(24:55):
and it would be strange not to particularly a family office.
In terms of trading it, we just look at the company,
so you know, if the company's got a catalyst and
they're overvalued on it or they're undervalued, then great. In
terms of the commodity price, we can just hedge it out,
so I actually don't need to worry about the price.
We are actually shorter gold mine today, which kind of
sort of makes sense because they're currently in the high
part of the cycle. The ball case I've just given
(25:17):
you in gold in general that has then taken multiple
expansion and the gold prices their outputs aren't going to
go up and if anything, they've got some problems. So
really really interesting situation. I suspect our spilly looking at
it in ten years times. It's one that's worth spending
some time on. It's one of the easier assets to
keep a track of.
Speaker 1 (25:35):
Alex. I'm just going to guess here, but are you
holding bitcoin too?
Speaker 2 (25:40):
No, I wouldn't hold bitcoin.
Speaker 1 (25:43):
You wouldn't.
Speaker 2 (25:43):
It's not a listen on the UK stock market and
it's a massive No.
Speaker 1 (25:46):
I meant personally you said you hold gold. You said
you hold gold personally, it is Bitcoin is something that
you would hold personally.
Speaker 2 (25:52):
So I did buy it in twenty twelve, and I
did buy a house with the money. So I'm probably
a bit of a hypocrite here, but I did it
knowing that it was worthless and it was a bit
of fun. It's a fascinating example of I spent every month.
I used to buy one thousand pounds and whatever from
trainers and if her can find invest in it, I
used to put a thousand pounds in it to take everything.
(26:14):
It's a good way to find new things. If I've
heard about it, probably a bit late. It's a young
person thing early if it's an old person thing. And
so it's a fascinating way to plug in and pay
attention to the world, and bitcoin is a fantastic It's
putably a bit deep here, but example of how story
can be the entire valuation of something. It's not prices
of perception of reality, and story can have the and
(26:36):
religion have infinite value.
Speaker 1 (26:38):
Okay, so bitcoin is all story, but that doesn't make
it not valid.
Speaker 2 (26:41):
That's a much quicker, more particularly worth of putting it.
Speaker 1 (26:45):
Let's just talk a little about the difficulties of investing
like this, because, as you said earlier, it makes you
feel a bit silly a lot of the time. It
makes you feel unpopular, makes you feel like you're not
with the crowd. And here you are sitting in what
I think and I hope you think as well as
once in a gener origin an opportunity to buy into
a rather amazing market at a very low price. But nonetheless,
no one has agreed with you for years. It's tough.
(27:07):
So a lot of being a good fan manager is
really about being able to sort of weather that emotional difficulty,
isn't it.
Speaker 2 (27:14):
I totally agree, and it's something that it took me
a long time to fully appreciate. Part of the reason
why Ed and I own the business is to defend
against that. Partly when I live in Cornwall, it's probably
overdoing it, but it is to manage the lifestyle and fitness.
Like an athlete, You've got to look after your brain.
There's only so many decisions you need to make as
a decision based business. Those decisions need to be very good.
(27:36):
There aren't many of them that need to be very good.
You need to be in the best headspace possible to
do that, and to defend yourself from because you're going
to be wrong a lot and ask you and contrain
the way I do things. Actually I'm wrong most of
the time in terms of going to a party, so
that that can't get you and make you a negative person.
(27:57):
Triumph for the optimist. So I've set it up in
a way to protect to myself and I think that's
to apply in different ways for different personalities. And really
it comes down to is the performance and the game
more important to you? Is it making money and looking
clever and safe more important? And I think most people
will be risk averse and should go for the second.
To do the first one is kind of not worth it,
(28:17):
like the return on headache in any business, And so
there's something either wrong with you or you've got a
point to prove.
Speaker 1 (28:24):
You make it sound really quite hard.
Speaker 2 (28:27):
The big change for me here is I never used
to speak to the investors, so it was really obvious,
just make money, do the best trades. Right now I
have investors. I don't want to let people down. I
talk to very very clever people who give me opinions
that I have to try and.
Speaker 1 (28:38):
Ignore, and then you have to explain yourself to them
when things go wrong.
Speaker 2 (28:42):
That's hard, Oh do we do. We're very transparent to
the degree that we can. Actually, one of my best
friends is despite us making loads of money, he's flat
because every time the market goes up he buys more
and every time it goes down herself, and it's you know,
it might change our relationship. And I've actually not let
a lot of my friends come in for this very
reason and managing other people as well. You know, I
(29:03):
come in the morning and I talked about Birbury earlier.
I started buying Bibery at fifteen quid. I was buying
it for a year and doubled it at seven quid. Fortunately,
but along the way emotionally taking people on you that journey,
you don't realize it until you have to do it.
It's very on reflection, it's easy, but at the time
it's incredibly hard. You really are running into a by
(29:25):
I run into a burning building and then buy the
lands to redevelop it the next day in effect. But
telling someone whore running into a burning building is not
that attractive to most people. Even so, But if you're
going to change the world, and do you think special
hard and it's got to be hard, you're so glad
you did that. Yes, life dreaming, I'm very very lucky.
And there's are so much more that we want to do,
(29:46):
so so much more.
Speaker 1 (29:48):
But let me ask you one last question. And you
didn't have time for bread for this, so if you
haven't got an answer, it's all good. But are you
reading anything at the moment that you would recommend to
our listeners.
Speaker 2 (29:58):
Thinking in Bets is what I'm reading right now on
my table. That's very good. It's it's an ex actually
world series poker player lady who then started doing touring
and speaking to fund managers and CEOs about making a
good decision and the outcome. We're actually unrelated. So you
make a decision and the outcomes bad, you feel like
(30:19):
you've done something wrong. It's called resulting. Making a decision
is the important part, and that's the process you want
to work on. The outcome of probabilities is a separate point.
But emotionally it's very hard because you focus on the
outcome whenever you talk about a case study, not the
quality of the decision. And it sort of reinforces poker
players get this, and that's quite an interesting reinforcement idea.
(30:40):
You want good quality idea, good quality decision and positive
or you know, I like out If you have a
bad quality idea and you get a positive result, actually,
that can be a very dangerous situation because you then
might try and repeat it.
Speaker 1 (30:55):
Yeah, okay, that sounds great. I haven't read that. I
will get that, and I suspect a lot of the
listeners well as well. Alex, thanks very much for coming up.
Speaker 2 (31:03):
It's been a real pleasure. I really enjoyed it. Thank
you for the good questions, and I hopefully you'll meet
you and call more next time.
Speaker 1 (31:09):
Yeah, that would be great. That would be great, but
not at the Seale Sankstuary. Thanks for listening for this
week's Maren Talks Money. If you like us, show, rate, review,
and subscribe. Wherever you listen to podcasts, I keep sending
questions or comments to Merron Money at Bloomberg dot net.
You can also follow me and John on Twitter or x.
I'm at marinas W and John is John Underscore STEPIC.
(31:29):
This episode was hosted by Me Maren's Sunset webs, produced
by Summersidi and Moses and our executive producers Brendan Francis,
Newnan production supportant sound designed by Blake Maple's and special
thanks of course to Alex Wood
Bloomberg Audio Studios, Podcasts, radio News. Welcome to Meron Talks Money,
the podcast in which people who know the markets explain
the markets. I'm Meren sumsat Web. This week I'm speaking
(00:22):
with Alex Wood, chief investment officer of Kerno Asset Management.
Kerno describes itself as a contrarian investment manager, specializing exclusively
in UK equities, currently about one hundred million pounds in
assets under management. Before co founding Kerno in twenty seventeen,
Alex worked as a fund manager at Downing, a vice
president at Deutsche Bank, and a management consultant at KPMG.
(00:46):
Welcome Alex to Merin Talks Money.
Speaker 2 (00:48):
It's a pleasure, Miron. Thank you very much for your time.
It's a bit surreal, little bit of a career highlight
for me because I've listened to your show and I'm
on it so and I just found out you're half
your cornished as well, So this is this is perfect.
Speaker 1 (01:00):
I mean, this is a career highlight for me as well,
and that so far we have never yet had a
cornish person on who is a value orientated contrarian who
specializes in the UK. It looks like hitting every single
button for this podcast. So we're more excited than you are.
Speaker 2 (01:16):
Gott to tell you hopefully certain quality. But yes, I agree.
Speaker 1 (01:21):
Okay, so listen. Tell me about why you started this fund.
What's the key behind it?
Speaker 2 (01:27):
Oh, it's been my lifelong dream since I've been investing
since fifteen. I enjoy it. I love it. The opportunity
set is amazing in the UK. The number of decent
jobs and places you can practice this craft has been
declining because of the growth of index hugging and businesses
merging and forgetting how to make money. So the opportunity
aligned got big enough and ivy enough to go for it,
(01:49):
and so I did.
Speaker 1 (01:51):
Let's go back to the beginning of what you said
that there aren't very many markets left where you can
be properly active because the rise of passive are slightly
destroyed the ability to do that. Can you talk a
little bit more around that.
Speaker 2 (02:02):
It's more the index hugging. You know, it's a disease.
You know, ten years ago there were four hundred U
came up exaggerating ums a little bit, but the four
hundred UK managers that were doing plus and minus ten percent.
Now you've got forty guys probably doing decent job and
everyone else's plus and minus two on the index, and
that index hugging that lack of conviction makes it very
hard to find a job because if you go join
a big house or a medium house, you're tracked against that,
(02:25):
and if you go too far away, you get fired.
So you know, it's better to fail conventionally rather than
win unconventionally, and you have to follow someone else's philosophy
to have your own philosophy and come out of an
investment bank in your twenties that doesn't exist anymore to join.
I'm not going to use names, but some of the
great training programs that still exists, they just don't give
you that career exposure anymore. There are places the multi
(02:48):
straps are doing a pretty good job of the young
people today, but the dearth of talent and opportunity is
kind of frightening. The flip side of that, it creates
huge opportunity and trend following now is massive. The wisdom
of crowd don't exist of ais to the same extent,
so fundamentals and reality are getting a long way from
each other. And there's a lot of crazy, interesting things,
fascinating things going on today. And I'm chomping at the
(03:09):
bitch on to capsule this and share it with people.
Speaker 1 (03:13):
Okay, that's very interesting. So what you're saying is something
we have heard quite a lot on the part of
the last few years, which is that the closet tracker
never disappeared. There was a period when we all read
a lot about closet trackers and we were infuriated by
what they charged, et cetera, etc. And then there was
a view that gradually that would disappear. But from what
you're saying, the most of the funds left in the
UK that call themselves active funds are really closet trackers,
(03:36):
and that's maybe one of the reasons why active has
such a difficult time in theory. But the other thing
that we have looked at recently is the performance of
genuinely active funds. So if you look at funds with
a very high active share, you tend to find a
much more and much higher likelihood that they will.
Speaker 2 (03:53):
Outperform exactly, I would just caveat that. It's the larger
funds have got larger as opposed to there aren't good
There's still plenty of active, good high quality managers out there.
It's just that the marketing machine has sucked it all
up into the say, the twenty largest, and that proportion
of assets has then flown in. And then you also
have fun flows from interlashal investors pulling from small caps
(04:15):
and all the rest of it. So you have this
quite interesting distortion and Carlstone flows out of acting markets
and all this.
Speaker 1 (04:21):
Yes, but we still need to say it.
Speaker 2 (04:22):
It just creates pockets of opportunity. And you know how
many people really do all the fundamental work and take
a different view out of consensus. You're just not going
to get paid for it. And I love it, so,
you know, looking silly and being ridiculed making money doesn't
go out of fashion. So that's what I'm going to
stick to.
Speaker 1 (04:38):
Okay, And how's performance been.
Speaker 2 (04:39):
It's been good, it's been pleasing. I would have liked
to have made more, but we've we've beaten the pack
by a decent margin. That means we're starting to be
taken seriously. Now we've got to do another five years
of that before we have we earn any sort of reputation.
So yeah, I can ask for more, given how important
it is to beat the competitors. But this buck sustaining
(05:01):
that and have been maintaining that edge is the important thing.
Speaker 1 (05:03):
Okay, so you found that you're in a position where
you could start your own fund. Fantastic, and of all
the markets in the world, you chose possibly the most
unpopular one there is and still is. I would likely
I keep looking at the numbers and thinking this will
come back. People are going to become interested in this again,
It's going to happen. But even the most recent numbers,
the calistone numbers that you're talking about, So where money
(05:26):
is flowing to. We've seen one of the biggest movements
out of UK stocks in record in January and hopefully
that will have turned around a little in February March.
But it hasn't become any more popular in the last
five years. But this is the market that you chose.
Speaker 2 (05:41):
Yes, the causality is probably the other way. I used
to invest in everything since I was fifteen. Then I
specialize in twenty twelve and UK only because I get
the culture of a very fortunate accounting background. I can
get in front of anyone in terms of network, So
it's an area where you can really build an area
of specialism, and part of my philosophy is I spend
as much time analyzing shit sareholders as I do companies.
(06:01):
So my specialism is I understand the flows and a
makeup of a shareholder base very very well. And I'm
buying off to stress sellers and selling to greedy buyers,
and I almost don't need to know about the company
to make money. I do because it's a safety thing
and that's actually the core of what I find interesting
and so it's a product of history why I specialize
in the UK and just quickly touched on the UK.
(06:24):
You know, there's more ten bagglers in the UK than
there's a percentage market cap than in the US. The
distribution of curve, the flatness of the curve means you've
got a lot of high quality, amazingly rated, great businesses,
you know, experience games works, and then you've got a
lot of dogs to make that work. The net result
is you have a pedestrian, frankly boring market that does
four to six percent, but the tails, you know, it's fantastic.
(06:46):
It's a stock picker's paradise. Which is the weird dichotomy
of this situation that when the discounters and closes, you
are articulated earlier.
Speaker 1 (06:55):
I know that you are both long and short and
will come to short later. But what kind of companies
are looking for you? Mainly large caps, small medium cap
I'm guessing down the bottom end of the market cap spectrum.
Speaker 2 (07:06):
We go where the value is, where the biggest opportunity is.
So we have large caps, we have medium and small
today with a bias and medium because of the high
quality business of dominant positions. I imaginedent teams sent out
in a big chunk, and still sometimes we found ERUs.
You've been doing a lot recently on investment trusts. We've
got two investment trust trades on that disappear now. So
we just move where the biggest gap is. Small cap
(07:28):
is currently still I think primed to you talk about turning.
Small cap does turn. That's the best returning asset class
in the world. If it doesn't, then we won't do
a big proportion of it. There's some great large cap businesses,
you know, global businesses on the UK discount. We'll do
them as well, so you know, we paid less for
something and then we trade the catalyst and we'll move
(07:49):
wherever the value is. That's why we call the fund
the navigator and Okay.
Speaker 1 (07:54):
So many questions I want to didn't we start Let's
go back to the first thing you said about it
recently getting into doing vestment trust and you're right, listener,
the very interested investment trust, and so we what what
are the two that you've brought into.
Speaker 2 (08:09):
One the other one is Amadeo, which is an airline
craft fleecing company. So this nearly went bust and COVID
just for reasons. You can imagine the two clients. One
was very safe and the other one was actually in bankruptcy,
but then that got bailed out, so then the covenants
became good. We got interested in the asset class because
you're trading at a eighty sixty percent discount and the
(08:31):
cash flows are good. The catalyst there was the board
and governments and the other shareholders Metage and Elliott are
incredibly smart investors. And that discount has closed and you've
we were collecting a twenty two percent dividend, it's now
down to thirteen and they've been doing terrific buybacks. So
it's a pretty great assets story, good managed governance, change
(08:54):
and a wind down of the business over eight years
that will hopefully double our money okay.
Speaker 1 (09:00):
That was an example of looking at the other shareholders
the business to find the catalyst for the value to
be released. Yes, yeah, okay. And then the next thing
you said was about large caps and the global UK discount,
and it's interesting, you know, the idea that the UK
has a discount is not generally accepted. Everyone refers to it.
What do you think that discount comes from.
Speaker 2 (09:19):
It's a natural oscillation of markets, of perception of reality.
That's how prices work and story. So the UK out
of two thousand and eight twos and I actually came
up pretty good relatively speaking. And from twenty eleven to
twenty fourteen the UK he was doing incredibly well. You
have to ignore my Eco because it's been absolutely fantastic
in India and China. Those are the outlies if you
were Jim Rodgers picking Macro. But the the Brexit haze,
(09:43):
as I should to be kindly called it, essentially was
a middle finger to the rest of the world, and
that perception caused money to essentially start flighting. And then
you had a Woodford scandal which would have hurt people
having a go cavid and so it's just a general
you know, the natural buyers of UK equities has been
declining and pension funds don't buy it. So the retail
(10:07):
market in the UK's are lower than in terms of
active buying as a percentage is lower than other countries.
So you have to ask if the liquidities are not there,
and then the companies have perception of lack of liquidity
and then they don't ipo. It then starts self fulfilling.
So we're in this self fulfilling, self harmed situation. At
the moment, the companies are amazing. Some of the companies
(10:28):
are still amazing, and it just means you have a
better opportunity to get and it will turn because things
always change. We just don't know when.
Speaker 1 (10:34):
Aw where you still when?
Speaker 2 (10:36):
Yeah?
Speaker 1 (10:37):
What are you holding?
Speaker 2 (10:38):
In the large caps, we've got hiscocks phrases these probably
more than the mid cap ones. We recently come out
of a viva. We've got Burbery, Okay, took us through that.
Burbery went from an embarrassing stock last year to hold
to having a change of management. And that's interesting. So
(11:02):
then you look at the luxury market and well, actually
that's growing and globalization is going to get bigger. It
doesn't feel like it but there's more people and wealth's
going up, and there's more millionaires every day than there's
the day before. Status and security. They don't sell clothes,
they're selling status and that only goes up with globalization.
So the setup is great. The best luxury goods ban's
obviously in Europe, but I don't trade that, so Birbury
(11:26):
happens to be the highest luxury factor company in the
UK for two one hundred. I can't buy Mold because
it's too small than there's a shareholder problem. So the
setups are very very interesting. New management team, great tailwind asset.
Then you're saying, well, they need to make money, and
what's the normal basis for their cash flow, what does
the business valuation look like, and all the fundamentals and
(11:48):
all of that, and you get to about a ten
or twelve billion valuation and the market cap I think
was two and a half or three, which is quite
a big gap. So then you need the setup to
realizing that value, which is essentially what we're trading. It's
the time value of money because this could take five
or eight years to do two three hundred percent and
the stretching might be wrong, and you have to recycle
(12:08):
it once or twice. I've been watching Birbray for fifteen
years and this is the only time I've ever been
able to buy it, that trench coat in that brand.
It's been arounded a long time. And if you can
make me for thirty quid a scarf and select for
one thousand pounds, that's a very high quality business.
Speaker 1 (12:24):
Yeah, we do all like to do that. So this
is the way you look at it on your website.
When you look at your process, it's value, the equity
acquired at the acquired a discount, which is something that
you know everybody wants to do. But then the difficult
bit is finding the catalyst. So what was the catalyst here?
The change of management or a change in the shareholder structure.
Speaker 2 (12:41):
So when I get in, I want to know who
I'm going to sell it to. Birbury's my new games workshop.
So when it's toasted the town and it's winning awards
and all, and they're paying back the normal progressive dipogrant,
we will exit because then the normal buyers are back in.
If you think about the register, you want to have
a proportion of blackwork x X and if the register
(13:02):
is close to what the normal register should look like
it can't move very much. If the register is a
long way and they deliver, then you the share price
can move along towards it. It's a pretty much turnaround,
classic turnaround story. And so you then come out at
the back of that. You need two or three good
years of numbers going up, and then the greed comes
back in, and then you exit and you get the
(13:22):
multiple expansion and the growth.
Speaker 1 (13:25):
In earnings, and you're happy to come out a little
before the top. Leave it for everyone else.
Speaker 2 (13:31):
I would love to be able to time tops and
bottoms perfectly. I've never figured a way to do that
without activism.
Speaker 1 (13:38):
Without activism, so that I mean, it's interesting because you're
that's not something that you're going to be able to do.
So when you join, when you join the shareholder register
of a company, you may be joining one where mcdike
take their investment Cruss. We've just been talking about where
you might have Elliot, etcetera. On the share register, but
they're the activists. You might come in behind them, but
not necessarily of a science to be activist, you're I.
Speaker 2 (14:01):
Think people prefer the quality of argument as opposed to
strong arguing as long as you get past one or
three percent, if there's an activist involved and it's important.
In Burby's case, it's not that important. I'll give you
a live examples. I'm looking at BP now, I'm not
trading it. I don't think it's good enough. But you've
got an activist in there. The CEO will get fired
and maybe the Roles Royce CEO will come along and
take over the BP roll. He's literally at the top.
(14:23):
Can't go any bed at rolls Royce. He must not
take over a BP, which is actually what he wants
to do. That becomes very interesting because BP can be
tidied up and double in value without too much effort
and shouldn't be ashamed of what it is. That setup
is right there and looking that's the stuff that we
look up and we just we wait for these things
to become real where they can hit enough trade ticks.
(14:43):
That wouldn't happen without the activist involving BP being strong
enough to basically get the board to do that. And
I probably won't. It probably won't. Just I'm giving it
you know.
Speaker 1 (14:56):
Won't happen. Yes, So that's that's an examp something that
you would look at and you recognize the value, recognize
the discount, but aren't convinced that there will be a
catalyst in reasonable timescale.
Speaker 2 (15:09):
Yeah, there's hundreds of these and you just watch them.
For me, it's like gardening. So the shorting is the weeds,
the oaks, things that make money, and then it's the
change of weather and what's flowering and what's not, and
just how do you spend your time on the day.
It's about a time. You have to swing at everything
you've put to use your time effectively. And you know,
if I hold Burberry, there's no point me looking at
too many other retailers. I'll get more value go looking
at some pharmaceutical businesses or something.
Speaker 1 (15:31):
Yeah, so there aren't very many of you. I mean
you're the only investment managers like analyst at the company, right,
So how many how many storms can you look at?
Speaker 2 (15:38):
I don't know if we'll no. My co founder was
an ex head of extity research that an investment bank.
We use four different outsourced research company. We use to
referencing companies, we use a background check company. We have
a quant outsourced product model. So it's a full offering.
I don't our team and research depth. I hope is
(16:00):
an inch wide and a mile deep.
Speaker 1 (16:03):
Do you worry about the operating environment in the UK
in general? Awful lot of smaller companies in particular are
going to have increasing troubles operating in a high tax,
at high cost of employment, high regulation economy, and that
doesn't look like it's going to turn around at any
time soon, which may limit the universe in which you
(16:26):
can invest.
Speaker 2 (16:28):
Am I concerned? I guess I'm a personal level. It's
a bit disheartening. But then I take you know, do
you want to be Singapore and Dubai or do you
want to be Switzerland and Norway? And both of those,
you know, ones heavily regulated, high tax, and the others aren't.
And there's what you want to do is find a
place in society that works. So I think I was
very proud of the UK when I worked in London
(16:49):
because there was a globalization hotbed between great art and
media and business and I'm so close largest city in Europe.
It was like combining the East and West, the time
zone in the immigration and accept It's felt really good
to me. I really enjoyed that narrative as the UK,
you know, grown up. It was a nice place to
be where I've kind of become a bit upset. I
don't want to move into politics. Is that's kind of
(17:10):
less feels less now and we've sort of lost a
bit of the golden goose. If I'm interpreting what you're saying,
and you know, I go abroad a lot and I
hear oh UK's instructural decline. It's not very nice. It's
one on the numbers. But my life would be easier
if more great companies listed Quantum, Cambridge Quantum and we
(17:31):
lost armholdings to America and things. So I'd love to
be part of the next revolution and the great companies
of the future and be able to have that story
over the next ten twenty years. Let's all find a way.
And it's been talking about. This is all very marginal
from an investment perspective. It makes no difference.
Speaker 1 (17:48):
Only must make a difference to profit to earnings. If
employment costs go up and if taxes go.
Speaker 2 (17:54):
Up, oh yeah, But if it's priced in or if
I'm shorting it, then I'll make money on that side.
If the multiple goes from you might you all share
multiple stays fifteen If the market multiple taxes go up
to your point should actually be ten. Then I'll price
everything off ten. So you know, if we have a
dot com boom, then I can do fifty to one
hundred percent a year. If we have an income driven
(18:14):
five percent market, then I might be able to do
fifteen percent per year. So the opportunity to deliver and
the dispersion definitely changes, and I can control that. Would
I like a crazy market, I think not every year.
A stable one makes my job frankly easier. It means
I can keep up and hopefully develop ahead of everybody.
Speaker 1 (18:34):
Let's talk about shorting, so presumably that's that works in
exactly the opposite way. Find something that's overvalued and wait
for a catalysts and then short.
Speaker 2 (18:44):
Yeah, preferably zero. So we do fads, failures, and frauds.
The frauds are the sexy fun one. Our big win
was Wan Disco. We discovered that billion pound forward. We've
got a couple of others or seven others today that
we've identified these criminal enterprises. I feel a bit like man.
I like going after them. We don't do activism, we
don't make them public apart from our investors, and we
(19:06):
just take the money off the table and typically we
wait for them to run out of money, to not
be too clever with it.
Speaker 1 (19:10):
Hang on, does this mean that you are not going
to tell me what your criminal enterprises are.
Speaker 2 (19:17):
I can tell you past case studies, but I will
be shot by my CEO and compliance department. If you're
an investor and you come in, I will tell you.
Speaker 1 (19:28):
Only where you can find out what's the minimum investment?
Why do our listeners have to pay to hear the stuff?
Speaker 2 (19:35):
Fifty? We put out fifty rather than the traditional million pounds.
We wanted to be big enough but not be completely
impossible for people to pretty much invite only on the
platforms that might pass. Some money's in it via a
j bell and we can go direct and it's a
non shore fund as opposed to offshore. We take many
regulation boxes we were physically able to.
Speaker 1 (19:56):
We talked earlier about large caps and the long you
held there, but our listeners are really interested in smaller companies.
Have you bought any new small company positions recently? Small
On mid.
Speaker 2 (20:09):
Last month we purchased Kistos. This is actually our smallest
position on the crity wisely, it's only one hundred million
market cap, which is on the CUSP of what I
can physically buy, tell us about it. So Kistos is
a well and gas company. What's interesting is I think
they're worth three hundred and fifty million and the market
was one hundred. So I did some work, happened to
know the management team for a decent time. Very savvy
(20:30):
op operators own twenty the business. They forty two bagged
the previous similar art incarnation on the previous company called
rock Rose. The old shareholders and here have ridden this
share price down from six quid to a quid. The
shareholder rotation told me that it was near the end
the fundamentals of the business. It's going to double its
(20:50):
production this year, its profits are going to not quite
a double, but get to one hundred million free cash flow,
which is the value of the market cap of the company,
and then the cat lists are getting paid. Is the
reserves they have for the worlds that they're plugging into
will also they regrade them to basically how probable they're
going to get them out, but they put them into
(21:11):
the best bucket, which means they can double their cash
flow between twenty seven and twenty thirty, which hopefully the
market will value in some way and so we should
double our money.
Speaker 1 (21:22):
If that's the case, what's your average holding period? How
long do you give things to come to fruition.
Speaker 2 (21:28):
It's all different, but to averages three years, so it's
further enough away that it's too far for and listener
once you know, yea, at the beginning of the year,
everything's in years, and I'm sure you feel this, you know,
eighteen months is the furthest the brain kind of works.
Three years for us kind of is enough for perceptions
of reality to change and new magical things to happen,
(21:50):
So that works very well. Ten years it is just
too long for my tension span to make money out
of the catalyst. And if you're wrong, you're holding something
for too long.
Speaker 1 (21:59):
Then, but it can also happen very quickly. And one
of the things that we have been talking about on
the pod recently is the extent to which it's now
possible to have much higher turnover than you used to. So,
you know, even five ten years ago, the general idea
was that you should trade as little as possible because
those expenses agent to your performance. But now that it
(22:20):
is really so cheap to trade, that's not really a
thing anymore. And maybe there is a case for much
higher levels of turnover inside active funds, and so instead
of looking at that as a negative, now we should
start looking at as a positive.
Speaker 2 (22:32):
It just depends on the edge you're trading, what value
you're trying to capture. What's your edge? If you're I
will use into training because there are a great manager
that's having a difficult time, but his trading period is
very long and his edge has to work on that
because in your eighty percent of a return in a
year is a rating return. If you're trading incremental growth
of compounding of profit, you need to give it five
(22:55):
ten years become a significant portion of the shareholder return.
Is this impossible to do any the way? If you're
a multi strat, their long term for them is a
week and they're very good at upgrading on downgraded earnings
into news reports every day and that's what they do,
so it makes sense for them to have extreme extreme turnover.
Speaker 1 (23:13):
And Alex, have we've got any gold miners in there?
Speaker 2 (23:16):
Are? We used to doing sentiment which was a Egyptian
guide gold miner that got taken over four months ago,
which was actually pretty good timing on reflection, so I'd
probably be selling it now a new gold high.
Speaker 1 (23:26):
Speed selling gold miners buying them at this point, Yes.
Speaker 2 (23:29):
I'm short to gold miner. Now we're shut. AI were
short copper and gold mining, anything that's really popular, we're
probably short.
Speaker 1 (23:36):
So Alex. When I look at gold, which I've been
keen on for years, I mean decades actually, at this
point tally embarrassingly, it looks like the rest of the
media has suddenly discovered gold as a thing. Central banks
are suddenly replacing their treasuries with gold, etc. But when
you look at the investment situation, retail investors, particularly in
the US haven't really moved into golden Institutional investors certainly haven't.
(23:58):
You're just not seeing those big flows in to the
ETFs beginning, but not really there. So it doesn't look
to me like gold is suddenly super popular. It feels
like it's more at the beginning than the end.
Speaker 2 (24:09):
I think it's a fair observation. So i'm gold physically personally,
because you know, it's a bet on government's collapse every
hundred years. I think gold probably close should be five
or ten thousand pounds if you look at the what
it brings, and it's been replaced by perceptions of other
safe assets and other extremes. Bitcoin. Where we are with
(24:33):
it is it's an enduring asset that that's great, but
it doesn't do very much apart from protect and over
the last given the last five years, you would have
thought there would be a lot more protection going on
and it hasn't really been that bashion of safety, and
then we'd have the inflation boom. So you know, there's
definitely an argument to have it as a balanced portfolio,
(24:55):
and it would be strange not to particularly a family office.
In terms of trading it, we just look at the company,
so you know, if the company's got a catalyst and
they're overvalued on it or they're undervalued, then great. In
terms of the commodity price, we can just hedge it out,
so I actually don't need to worry about the price.
We are actually shorter gold mine today, which kind of
sort of makes sense because they're currently in the high
part of the cycle. The ball case I've just given
(25:17):
you in gold in general that has then taken multiple
expansion and the gold prices their outputs aren't going to
go up and if anything, they've got some problems. So
really really interesting situation. I suspect our spilly looking at
it in ten years times. It's one that's worth spending
some time on. It's one of the easier assets to
keep a track of.
Speaker 1 (25:35):
Alex. I'm just going to guess here, but are you
holding bitcoin too?
Speaker 2 (25:40):
No, I wouldn't hold bitcoin.
Speaker 1 (25:43):
You wouldn't.
Speaker 2 (25:43):
It's not a listen on the UK stock market and
it's a massive No.
Speaker 1 (25:46):
I meant personally you said you hold gold. You said
you hold gold personally, it is Bitcoin is something that
you would hold personally.
Speaker 2 (25:52):
So I did buy it in twenty twelve, and I
did buy a house with the money. So I'm probably
a bit of a hypocrite here, but I did it
knowing that it was worthless and it was a bit
of fun. It's a fascinating example of I spent every month.
I used to buy one thousand pounds and whatever from
trainers and if her can find invest in it, I
used to put a thousand pounds in it to take everything.
(26:14):
It's a good way to find new things. If I've
heard about it, probably a bit late. It's a young
person thing early if it's an old person thing. And
so it's a fascinating way to plug in and pay
attention to the world, and bitcoin is a fantastic It's
putably a bit deep here, but example of how story
can be the entire valuation of something. It's not prices
of perception of reality, and story can have the and
(26:36):
religion have infinite value.
Speaker 1 (26:38):
Okay, so bitcoin is all story, but that doesn't make
it not valid.
Speaker 2 (26:41):
That's a much quicker, more particularly worth of putting it.
Speaker 1 (26:45):
Let's just talk a little about the difficulties of investing
like this, because, as you said earlier, it makes you
feel a bit silly a lot of the time. It
makes you feel unpopular, makes you feel like you're not
with the crowd. And here you are sitting in what
I think and I hope you think as well as
once in a gener origin an opportunity to buy into
a rather amazing market at a very low price. But nonetheless,
no one has agreed with you for years. It's tough.
(27:07):
So a lot of being a good fan manager is
really about being able to sort of weather that emotional difficulty,
isn't it.
Speaker 2 (27:14):
I totally agree, and it's something that it took me
a long time to fully appreciate. Part of the reason
why Ed and I own the business is to defend
against that. Partly when I live in Cornwall, it's probably
overdoing it, but it is to manage the lifestyle and fitness.
Like an athlete, You've got to look after your brain.
There's only so many decisions you need to make as
a decision based business. Those decisions need to be very good.
(27:36):
There aren't many of them that need to be very good.
You need to be in the best headspace possible to
do that, and to defend yourself from because you're going
to be wrong a lot and ask you and contrain
the way I do things. Actually I'm wrong most of
the time in terms of going to a party, so
that that can't get you and make you a negative person.
(27:57):
Triumph for the optimist. So I've set it up in
a way to protect to myself and I think that's
to apply in different ways for different personalities. And really
it comes down to is the performance and the game
more important to you? Is it making money and looking
clever and safe more important? And I think most people
will be risk averse and should go for the second.
To do the first one is kind of not worth it,
(28:17):
like the return on headache in any business, And so
there's something either wrong with you or you've got a
point to prove.
Speaker 1 (28:24):
You make it sound really quite hard.
Speaker 2 (28:27):
The big change for me here is I never used
to speak to the investors, so it was really obvious,
just make money, do the best trades. Right now I
have investors. I don't want to let people down. I
talk to very very clever people who give me opinions
that I have to try and.
Speaker 1 (28:38):
Ignore, and then you have to explain yourself to them
when things go wrong.
Speaker 2 (28:42):
That's hard, Oh do we do. We're very transparent to
the degree that we can. Actually, one of my best
friends is despite us making loads of money, he's flat
because every time the market goes up he buys more
and every time it goes down herself, and it's you know,
it might change our relationship. And I've actually not let
a lot of my friends come in for this very
reason and managing other people as well. You know, I
(29:03):
come in the morning and I talked about Birbury earlier.
I started buying Bibery at fifteen quid. I was buying
it for a year and doubled it at seven quid. Fortunately,
but along the way emotionally taking people on you that journey,
you don't realize it until you have to do it.
It's very on reflection, it's easy, but at the time
it's incredibly hard. You really are running into a by
(29:25):
I run into a burning building and then buy the
lands to redevelop it the next day in effect. But
telling someone whore running into a burning building is not
that attractive to most people. Even so, But if you're
going to change the world, and do you think special
hard and it's got to be hard, you're so glad
you did that. Yes, life dreaming, I'm very very lucky.
And there's are so much more that we want to do,
(29:46):
so so much more.
Speaker 1 (29:48):
But let me ask you one last question. And you
didn't have time for bread for this, so if you
haven't got an answer, it's all good. But are you
reading anything at the moment that you would recommend to
our listeners.
Speaker 2 (29:58):
Thinking in Bets is what I'm reading right now on
my table. That's very good. It's it's an ex actually
world series poker player lady who then started doing touring
and speaking to fund managers and CEOs about making a
good decision and the outcome. We're actually unrelated. So you
make a decision and the outcomes bad, you feel like
(30:19):
you've done something wrong. It's called resulting. Making a decision
is the important part, and that's the process you want
to work on. The outcome of probabilities is a separate point.
But emotionally it's very hard because you focus on the
outcome whenever you talk about a case study, not the
quality of the decision. And it sort of reinforces poker
players get this, and that's quite an interesting reinforcement idea.
(30:40):
You want good quality idea, good quality decision and positive
or you know, I like out If you have a
bad quality idea and you get a positive result, actually,
that can be a very dangerous situation because you then
might try and repeat it.
Speaker 1 (30:55):
Yeah, okay, that sounds great. I haven't read that. I
will get that, and I suspect a lot of the
listeners well as well. Alex, thanks very much for coming up.
Speaker 2 (31:03):
It's been a real pleasure. I really enjoyed it. Thank
you for the good questions, and I hopefully you'll meet
you and call more next time.
Speaker 1 (31:09):
Yeah, that would be great. That would be great, but
not at the Seale Sankstuary. Thanks for listening for this
week's Maren Talks Money. If you like us, show, rate, review,
and subscribe. Wherever you listen to podcasts, I keep sending
questions or comments to Merron Money at Bloomberg dot net.
You can also follow me and John on Twitter or x.
I'm at marinas W and John is John Underscore STEPIC.
(31:29):
This episode was hosted by Me Maren's Sunset webs, produced
by Summersidi and Moses and our executive producers Brendan Francis,
Newnan production supportant sound designed by Blake Maple's and special
thanks of course to Alex Wood
Host
Merryn Somerset Webb
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