Name: 26.10.Recording 10 Spooky Charts With Ian Lance Esv2 40p Bg 10p Music 10p
Uploaded: 2026-10-29T16:53:13.675Z
Duration: 21 min 14 s
Description: 26.10.Recording 10 Spooky Charts With Ian Lance Esv2 40p Bg 10p Music 10p

Transcript for "26.10.Recording 10 Spooky Charts With Ian Lance Esv2 40p Bg 10p Music 10p": Good afternoon, everyone, and thank you very much for joining us. My name is Roddy Loeffler, and I'm delighted to be joined by Ian Lance, who co heads Red Wheel's global value team. So today, we're gonna be exploring what Ian and the team are seeing in markets, how that's shaping their investment views, and where they're finding opportunities. So please do submit your questions throughout, and we'll try and bring as many of them, to the front during the, discussion. So, Ian, let's start with the broader market backdrop. What stands out to you in markets today? Okay. Thank you for that, Roddy, and, thank you for everyone who's joining us. I thought... I... Usually, actually, for an ex, you felt better, I'll start by looking at, at at bond markets. The the general point that we're trying to make here is that the environment today is significantly different from the one that we faced for the last ten years or so. I think we all know that bond yields trended down for probably thirty years, but we reached that point in 2020 where in some countries they went negative. I think we can all see that with hindsight, that had very severe implications for, investment returns. So things like, obviously, bonds, bond proxies, technology stocks, you know, anything that had a, a long duration to it did very well during that period. And the last five years have been substantially different from that. So, this is chart of the of the, The US ten... Sorry. The UK ten year. As I think we know, you know, that has gone above 5%, and therefore, the conditions today are substantially different from the ones that we face for the last ten years. And I think investors have just got to accept that it's extremely unlikely that what worked in the last ten years or so is going to work in the next ten years, and you and you've got to think about that when thinking about your asset allocation. Just similar sort of story here, but, you know, obviously, this is a this is a quite a dramatic one because this is, the spread of the ten year French, government bond over German bunds. And I guess I guess we can... You know, we've all seen on the news what's going on in France. France has got an equally poor financial situation to The UK and lots of other countries combined with a lot of political unrest, and and therefore, we've got spreads on, on on French government bonds over over bonds back at the sort of level that they were at in the, in the euro debt crisis. So, you know, conditions are are are very, very different in bond markets. What's fascinating, though, is, what one might have thought that this would have impacted the way that equity investors were, thinking about things, but seemingly not because it seems that in the equity market, we are still we are still risk on. So we start here with a chart which is showing US households of equities, and then we're just mapping that against valuation. And the point here is that while the highest valuations ever witnessed for The US equity market, they've got one of the highest allocations to US equities. So people are not reflect... Not adjusting their equity holdings, as a function of the... Of valuation. We can see a similar sort of thing here. So this is basically just looking at cash holdings. And you can see that people's cash holdings, are about basically the lowest level for about thirty years or so. So reflecting extreme bullishness on the future prospects for equities, with with very low cash holding. This is also reflected by professional investors. So what we're looking at here is is margin with with the, largest US hedge funds. And you can see that, you know, they've maxed out on their leverage. So, again, this reflects a sort of very bullish view on The US equities, by by even professional investors in this case. What is absolutely fascinating, though, is that these sort of headline indices actually mask, a lot of what's going on. I think people will realize that The US equity market in particular, is now driven by a small number of stocks. So let me just throw a few stats at you. The top 10 companies in The US market represent 40% of the index. All of them are technology companies. And, of course, they're about to be joined by Anthropic. Another sort of fun fact to show you how how, dominated The US equity market is by a small number of extremely large, companies. I read recently that in 485, so we're just we're just ignoring the largest 15 companies. If 485 of the S and P 500 went to zero, that would include stocks, by the way, like J and J, Walmart, etcetera, the index itself would still be higher than the 2020 peak. I... The index has pretty much just become large tech companies. And if we... I suppose if we start to look slightly under the surface, that's what the chart here is doing. The chart is looking at basically the correlation between equal weighted and cap weighted S and P 500. And because the S and P 500 now is effectively just those large technology companies, that relationship has broken down, and you can see that here in this chart. Another way of looking at it is to actually look at some of the decline within the index. So 55% of the S and P 500 is down, from its high more than 20%. 38% is down 30% or more, 23% down, 40% or more, and 14% down, 50% or more. So within the S and P 500, there have been a lot of stocks have started to have started to fall away. So the headline index index doesn't tell you. And, again, here we're just turning to, I suppose the, the the the the bullishness that there is in technology companies. It's not just the very large technology companies. It's the... You know, here we've got, the performance of the Goldman Sachs nonprofitable tech basket, and we can see that we are... We're basically up at the sort of level that we were at, in in, in 2020. So, you know, extreme levels of bullishness, e... Even in companies which don't don't generate any profit at all. This, I'm sure, a lot of people will be familiar with. This is, this is basically AI CapEx, and we've now reached the point where, that's going to be a trillion dollars of of AI CapEx, in the in the next twelve months. I think we've got to the point where very few people, actually think that they are going to generate a reasonable return on that CapEx. If we look at history, we can sort of map the history of things like railroads more recently, telecom spending in 2000, when this amount of capital expenditure goes in in such a short period of time, inevitably, it leads to, poor returns for shareholders. It can also be quite good for consumers, as pro... As overcapacity comes in and prices fall, but in... It usually is not particularly good for shareholders. What I find really interesting is that, we've actually gone from situation where people are... Were worried about, are are these companies that are gonna make a decent return on this investment. So in some cases where people are now beginning to worry about the solvency of these companies. The chart that you're looking at here is the, is basically the credit default swaps for Oracle, the five year credit default swaps Oracle. And you can see that that's up at 300 basis points now. A more extreme example of this, that, again, I'm sure most people might have heard about recently is a a US company called Corewave. We recently issued a a bond. They had to issue that bond at 9.75%. These are twenty thirty one notes. When you're having to issue, credit at nearly 10%, that tells you that the market is is worried about your solvency. Those bonds have immediately fallen and now yield 16%. The credit's full swap of Core Wave now trades, 1,100 basis points. That is pricing in a 60% probability of default. So we've gone from sort of, as I say, worrying about just all these companies that are gonna make a return. So in some cases, worrying about actually whether they're gonna be able to supply. So some interesting things going on. So I suppose as as final final slide for me and now then... And then I'll pause and take some questions. I... I've been investing for thirty five years. I've I've been investing for quite a long time when when TMT came around. So to my mind, AI is is equally as big above all as TMT, in my opinion. And and and I see a lot of similarities with what is going on today, with what happened in 2000. And as as I show here with with with other previous bubbles. And I I I really think that investors might need to start to look at where they are invested today and just try and focus on how much how much of a bet on the AI trade have you got, and you need to look across passive, active, and even credit portfolios as well. The AI bet, I think, is everywhere, and people need to think, very hard now about trying to diversify away from some of that. Brilliant, Ian. Thank you. So turning to the strategy, can we maybe now look at the role that global value can play in diversifying equity exposure? Yeah. I mean, so so when we set this up, Roddy, we we didn't want it to just be another me too far. We actually wanted it to be providing a solution to, the issues that a lot of people were facing. And the issues we... Was we saw them was that people had a lot of exposure to The US, 75% of MSCI World today. Within that, lots of exposures tech, lots of exposure to growth, lots of exposure to mega cap. And we thought if we produced a sort of genuine value strategy, that would give people the ability to diversify away from that. And I think you you can see here, a couple of things. Number one is performance has been good. The the... This this chart here is actually to the end of, September. And and if I updated this to to basically, last night, year to date strategy actually up 21%. The index is up about 11 and a half percent. So despite the fact we've had big underway to The US and big underway to technology, we've managed to produce returns in excess of the wider benchmark. And and, also, I think it's also just worth pausing and just just kind of repeating those numbers. So in the in the month of October, the index itself has gone down a little bit because that's being dragged down to a certain extent by some of the sell off in the AI names. And at the same time that the index has been going down, the strategy has gone up from 14 and a half to 20 and a half percent. So, as things stand today, the strategy is actually moving, you know, in the in the opposite direction of of, I suppose, the... A a basket of AI stocks. The the the headline returns have been good, but I think what we're really proud of actually are these, which is the risk adjusted returns. And if you, if I just maybe draw out a couple of figures here, if we start with start down in the bottom right hand side there. Just look at figures like our upside capture has been about a 110%, downside capture 72, max draw down six. And I think maybe another thing that I would point out is you... You've just seen that the strategy itself has gone up significantly more than the market, and yet we've been running with a beta of point six. You can see that there in the in the center. So we'd be running with a significantly lower beta than the market and yet outperforming the market. And I think I think that is because we have added genuine alpha. So you can see there that the annualized alpha has been over 9%. So, we like to think... You know, we're we're we're quite proud of these numbers, and we we we think we have been able to do a very good job for our investors so far. Slide here. A client actually asked us to produce this recently, and it basically shows the correlation of the strategy to a basket of AI stocks. And, obviously, if you're at one, you're perfectly correlated. If you're at zero and no correlation, and if you're... Where we are today, we are at negative point eight. We are negatively correlated to a basket of AI stocks, and we really have seen this on on days that the the AI stocks are selling off. We're often finding lots of stocks within our portfolio are going up two, three, 4%. It does feel like there's a big rotation going on around the market. People rotating out of semiconductor stocks, the the hyperscalers, etcetera. And they're trying to get into what you might loosely call AI losers, so the likes of Accenture, Adobe, etcetera, etcetera. And, of course, there there... There's an interesting liquidity mismatch going on there because people are selling down multi trillion dollar, tech stocks and trying to get that money into 10 to 20,000,000,000 market cap companies, and clearly are beginning to drive share prices up. But but but but, again, I think this is a quite a powerful point. The fact that we are, you know, at the moment, negatively correlated to a basket of AI stocks. Maybe we pause there and your slides have generated a fair number of questions. So maybe if I summarize few of them. But... So maybe the first one here is, so amid the debate around AI valuations, is there any evidence that enthusiasm is beginning to unwind? Or sorry, that the enthusiasm is beginning to unwind? Yeah. We think there is. We think there is. So, there have been a a a number of events in the last couple of months that that tend to suggest to me, that this bubble is in the process of the pop... Of popping. So let me start with some quite large share price drops. There was a... There's an Australian company called NextDC. Couple of weeks ago, there's a large data center operator quoted in Australia. Couple Couple weeks ago, that fell 45% in one day, after some disappointing news. There was a, an AI company called Elise in South in South Korea. They IPO'd recently. And despite the fact that IPO was was meant to have been very heavily oversubscribed, that fell 30% on its first day. We've seen during the the months of sort of July and August SK Hynix down 55%, Samsung down 40%, among some of the other technology companies off their highs. Core is 70% of its high. Nevius 50%. Iron 70% of its high. So that means a pretty big share price drops. So those tend to suggest to me that investors are beginning to question, question these businesses. I think another thing you can look at is just declining interest. So there was a, this company in The US called Firmus, that's backed by NVIDIA that was playing in an art... It's an AI infrastructure company. That was playing an IPO. They canceled their IPO, due to lack of interest. There's... There have been rumors recently, haven't they, that the anthropic valuation is is is sort of maybe coming back a bit. OpenAI have obviously delayed their IPO. So, again, just suggestions that, some of the appetite for for these companies is beginning to wane. So, yeah, I I I think we are seeing genuine signs now of this. Very good. So since the launch of the strategy and after the kind of strong run we've seen in financials, where might the next pockets of value emerge from? Yeah. This is really interesting actually because, one of the things that contributed to the strong returns of funds in the early days was a large exposure to financials banks specifically. So we own things like ABN AMRO, BNP Paribas, Charter, etcetera etcetera. And, you know, a lot of those companies doubled and even trebled, throughout the time that we hold them. And the chart that you're looking at here is sector allocation over time. The top gray line there is the exposure to financials. And you can see we go back a couple of years ago, that was nearly 30%. But what we've done is as we felt that those stocks were becoming fully valued, we basically taken money out of them. And you can see that... As you see that gray line trending down, you can see that today that the exposure to financials is about 14%. So we basically broke the profit in in lots of those financials banks in particular, and we've rotated it into other areas. And very important to say that those other areas are what we believe is low value today. So the aggregate valuation of the fund hasn't really changed over this period of time. What we've done is rotate it around the market to where we see the value. So where we've been putting the... That that money that came out of financials. I... There there were times when I thought I would never say this, but the the largest sector in strategy is consumer statements. So lots of those, lots of those companies which were I wanna say, beloved by quality great fund managers five or six years ago, have massively derated over the last five years or so, and have now come back into the value territory. And so over the last sort of six months or so, we bought, things like prop Hines, James Smucker, and even, dare I say it, Diageo. And therefore, the the the the allocation to consumer staples has gone up. Another fascinating area has been, I I... We we sort of tend to dub these companies AI losers. The the market can sometimes be quite simplistic, and it basically says... It it calls one group of stocks winners and the other group losers. In this case, we've got our AI winners. So if you're you're SpaceX, you're an AI winner and you go and trade on over a 100 times sales. But then the AI losers have... The share prices have been really smashed, and they fall into very, very low valuations. So, again, in the last sort of six months or so, we've been able to pick up companies like, Accenture. So global IT consultancy, one of the leading global IT consultancies in the world, trading on a single digit price earnings ratio, similar to a story with, Adobe, Capgemini, etcetera. So, the exposure to technology has gone up, but by basically only what we we regard as the very, lowly value part of of of the market. I think this is this this is quite an important one as well. So for those of you who know our process well, you'll know that what we do is we try to estimate normalized earnings of company that we are buying. So we we look five years out, estimate normalized earnings, come up with the intrinsic value of that business. And, normally, we're looking for businesses where we think there's at least 50% upside to intrinsic value. What we've done here is that we... We've basically taken the, the weighted average upside to intrinsic value of the portfolio over time, and then we've sort of mapped it for you over time. And you can see that this is using the left hand scale. You can see that over time, it is basically averaged around about 60% upside, which is kind of what we would want and what and what we would expect. You can see that, you know, there were times, like, after the Liberation Day rally when the the portfolio went up and, therefore, the upside to intrinsic rally went down. Our response to that is to kind of rotate the portfolio. You can see the the gray bars at the bottom of turnover, and you can see that sort of burst of turnover where we basically are starting to rotate out of some of the more fully valued things into where we see the value in the market and the upside to intrinsic value goes up. So, you you know, the the the amazing thing here is that despite the fact that the, you know, the strategy is up sort of close to 90% since it was... It it was launched, the price earnings ratio of the strategy is still under 10 times, and the upside to intrinsic value on the portfolio is still, you know, above 60%. So there is still plenty of value in this portfolio today irrespective of the fact that it that it has done well. Thank you, Ian, very much for your time. I think that... That's a good a good a point as any to to wrap up today's webinar on. Many thanks to everyone who's dialed in to listen to us live. If indeed we weren't able to get to your question, we will do our very best to, follow-up post the recording. And thank you all once again for for dialing in and for your interest in the strategy. Thank you.