‘Private investing has become too formal’: Lee and the IC

Investor's [Music] Chronicle hello happy New Year and welcome back to Lee and the IC I'm Alex Newman an associate editor at the investors Chronicle and I'm really pleased to be here in the Ft Studios again for my first conversation with Lord John Lee of 2024 this is our fifth episode so the quick disclaimer I'm about make will be familiar to anyone who's listened before everything we talk about in this podcast is filtered through the thoughts actions feelings and experience of one of the most seasoned person investors in the country which means while our discussion is intended purely as an educational tool we're often giving a couple of angles in the multitude of views that make up a market also nothing in this podcast should be taken as Financial advice or a recommendation to buy or sell shares this month we're going to return to our regular format by taking a deep dive into one of the stocks John owns and how how it fits in with his broader view of the UK economy and current investing options we're also going to discuss some of the biggest changes in investing in the more than six decades John's been managing his own money and concluding with a Roundup of the goings on in his portfolio anyway let's get to it John a very warm welcome to you today and a belated happy New Year how are you doing and happy New Year to you and to all listeners indeed so let's kick off with our Focus stock this month secure Trust Bank which is the one I wanted to talk about so with market value of £130 million this is by some distance the smallest company we've so far chosen for a deep dive and as such I'm just going to assume the listeners aren't entirely familiar with the group though I'm sure many are so just to bring us up to speed could you just briefly introduce secure trust what it does and your involvement as an investor yes well secure trust is a a is a fully-fledged banking business taking deposits from from retail customers and and lending and it has a a very well balanced lending portfolio it has a slightly curious Genesis or origin in that really it was for a number of years uh effectively owned and controlled by our bu not laam the larger banking firm private banking firm Although our buth is is public and uh then gradually developed its independence and uh are both not sold down their stake uh and so now I think right in saying that our buut doesn't have any holding at all in secur TR us so it uh um you know it travels uh and lives independently it's a very basically a very conservatively run business and uh and Bank you I've been I've been in it for um a few years and I paid a couple of years ago up to12 for the shares but um uh with smaller Banks being out of favor and the decline in in in the small cap sector generally um they came down to just over over5 uh and I bought uh again or more um at um at lower prices 575 was my lowest buy to around 600p in other words about half what I was paying two years ago so it's quite extraordinary despite the fact that the you know the business has has grown and expanded so the the net result the current 7 level uh is that I think they are ridiculously undervalued the p ratio is around five or even less than that dependent on what forecast one takes the dividend yield is about 6 and a half% when I was buying it a little bit low it was yielding around 7% uh and they're very very conservative on dividend payout the dividend is covered four times and that's their policy which actually I think personally is a little bit on the excessive side although you know I'm all for for caution and and conservative approach with banks um but I don't think they need four times cover so you know they could release even more if they wanted to by way of dividend which you know would help uh to or could help to bring back the the shares but uh the rating is I think very very low indeed uh and everyone acknowledges that really totally without justification I mean look just looking over the next two or three years you know if they don't manage to get the rating and value up then I think they are very vulnerable to a uh take over from a larger banking or financial business and the other point to make I think is the asset value and this is a hard asset value excluding Goodwill and similar uh is17 a share so we've Got7 nav against A7 pound share price yeah so I mean within UK banking for for for those listeners who might not be Specialists for some years now we've had these these very steep discounts to book value or tangible Book value which sometimes what people look at with with banking stocks and I think I think I'm right in saying that they are well that would put them close to 70% so almost a sort of two-thirds discount hug a huge discount so in other words investors in the markets are saying that this is a business that's only going to destroy asset value or Equity value in in in in the future which obviously we can you know we can come on to and some of the the reasons why a secure trust would would say um that that's not going to happen just to take a step back I suppose the nuts and bolts of this for the you know for a non-bank specialist or someone who's just looking at secure trust and maybe comparing them to more familiar names you know does business finance Retail Finance re real estate back Finance short-term credit and saving accounts these are all pretty standard product lines for a bank so why is why is secure trust like or unlike the High Street UK names that people might be a bit more familiar with well they would say and you know I I I believe them that they are more conservative uh than than most banks you know I think a couple of years ago um you know that they uh decided to become even more conservative um you know being conscious that the economy was going to go through a difficult period and customers are going to go through a difficult period with high interest rates and therefore obviously they wanted to avoid uh excessive risk and and potential bad debts and so they have been very conservative in their lending the four times dividend cover I think you know is indicative of that I can't think of another um Financial Group with with uh that size of uh of cover and also on their unsecured lending it is it is very focused so for example they do specialize in uh in lending on on on jewelry uh and also Furniture uh know where which they believe are are you know that much more uh secure as it were and um less of a risk than uh than other sectors so so within their overall lending they they do adopt and I believe they do adopt you know a far more conservative approach and I suppose compared to the High Street Banks they're not in they're not in the mortgage game in in the way that um you know the sort of NatWest Lloyds Barkley Etc are and as you point out I suppose this is one of the opportunities for the banking sector that if you have a niche product line jewelry um You Secondhand car finance for example and there's not the scale that would interest the appetites of the larger players then that is an opportunity to potentially make above average um uh returns and uh and and good interest income and I think they see they see a clear path ahead to grow the business yeah you know I think they I think in their Capital markets presentation their lending I think was was over the three billion Mark and I think I think you know they're aiming to get it up over the next 2 or 3 years to to 4 billion or something like that so there is a growth plan but hopefully um adopting all along the line the conservative approach with banking in essence it's about lending at a higher rate isn't it than you are paying to your depositors all while managing all these complex things like Capital your cost base and and risk in the case of secure trust their deposits they draw a lot from retail customers via fixed term bonds Isis and access accounts and that's a really competitive market here isn't it and they they can't sit on their hands in the way that you say a Nat West can because NatWest for example can Bank on the inertia of people people's sort of current accounts not wanting to move them how do they how do they navigate something you know that's really a detailed question I think you'd have to ask have to ask them you know obviously I'm a little more broad brush as a um uh as an investor but coming back of course to their the the net asset value of £17 they have a they have quite a lot of Their Own own Capital to to land out as well which obviously is uh is beneficial and I don't believe that they take um deposits wholesale deposits from the from the market generally as it were but I think they've got a very loyal band of of retail depositors who who've presumably be been with them for a long time and uh you know like the I suspect slightly higher rate of interest that they get than they would get from deposits with a bank yeah I noticed um there their their Chairman's Lord fory I was just looking through the annual report whose career as an MP and subsequently as a lord sort of overlapped a little bit with your career in Parliament is is Lord forite someone you you know well or is I I yes I know him well uh he he's um chairman of the association of conservative peers he's a he's probably one of the most respected and active peers at uh Westminster challenges his own government from time to time a and um very much focused on the Financial world uh I think he was with after his ministerial career I think I'm right in saying he was with um Solomon Brothers for right I think that's for a period and um is you know heavily plugged into the to the financial world so I would have thought he brings you know good good guidance to uh uh to secure trust and the the chief executive there David mccre who I talked to from time to time you know he's he's a you know a very a very uh cautious solid solid in the way traditional Banker uh Scottish Banker I believe or even better uh even more cautious uh so all in all I you know I think it's um you know it's a uh an attractive investment story and uh and opportunity uh and is you know I would say a useful holding of mine um delivering me you know a very nice dividend is it a stock that you own as a play on the UK economy or do you just look at it at in terms of the business itself and what it can do rather than a bet on you know the the the UK economic GDP growth or whatever it may be no I'm focused very much on on individual companies and I'm not too too concerned with the the macro aspect because the whole point is is with investing in in smaller cap stocks that that um even if the country isn't booming as it were um you know they can still do very well in the niches that they're that they're in and actually um I would say the majority of my uh small cap Holdings over the last um few months those who reported have actually you know reported that they're trading well you know concurrent Technologies we might talk on a little bit later Hollywood B for example uh Nicholls VMO you know all these have been reporting um quite a good underlying growth in in in profits so um I take the view with with secure trust that there is an opportunity for them to to grow as a niche business fundamentally uh significantly undervalued as far as I can see uh and I've not come across any major negative with them and uh like so many uh in my portfolio small caps in my portfolio um you know I I think that uh it's sort of an each-way bet that either they will grow and develop or a predator will will will come along and this 2024 could well be the year of the Takeover banking shares have always been a main stay of of the of the UK Market at various sizes and scales have you always adopted that approach to this sector in terms of sizing and a niche Focus or have you invested in banks at both ends of the scale no I haven't invested in larer Banks the the High Street Banks why why is that basically because they are uh and have been subject to government interference uh uh if you recall uh you know there was a there was a a directive uh that Banks shouldn't pay any dividends for example during the pandemic during the during the the pandemic and so you know there there is I think you know a much greater governmental influence um uh there as it were whereas the niche players have a a rather greater degree of Freedom uh and you know if we if we get a change of government you know a more left of center government comes in uh then I would have thought uh if anything they'd be probably even more involved or more potentially controlling so uh I tend to stay clear of the the High Street Banks but uh uh you know a niche Bank like secure trust within my overall portfolio uh is you know is quite um uh comfortable for my my point of view is an interesting point I think because that's it's a criticism often leveled at the the UK banking sector that you know because of its very tight connections to the property Market that it is this kind of Quasi State um uh sector and very hard to unpack its relationship with government going you know going forward but um but you know stepping outside the the very very high-profile Banks maybe maybe a way for investors to sort of Play Finance which is that that certainly is is more my focus sure so I mean Bank shares you know might be a constant you know throughout your investing career or in the market but a lot else has changed John and and that kind of brings me to the topic I wanted to talk to you about this month which is I suppose in Broad terms the modern history of private investing and the changes you have seen since you started managing your own money I mean there have been lots of big Innovations in the world of private investing in I suppose the past half century but the the rise of and we've not really talked about this much on the podcast before the rise of passive investing and indexation and I suppose the demise of the private investor that that is involved might be the biggest of those changes Warren Buffett once said that Jack Bogle who founded Vanguard the the index provider had you know had done more for the individual American investor than anyone in history do you share that enthusiasm for the way that um indexation and and the popularization of passive inv vesting has has drawn more people are in or or has that been to the detriment of I suppose broader investing private investing culture well I I I think as far as as far as most people are concerned uh you know having vehicles like Vanguard and um and others where where larger funds uh track or handle people's money as it were obviously it makes it easier for people and you know therefore one can well understand you know the growth of those of those vehicles but I do think personally it's a Pity and um you I I've certainly Endeavor to do what I can to to encourage the personal investor uh and the private investor and sadly um those taking their own decisions have been in Decline and uh I I would accept that but I think it I think it's a Pity because I think people most people do assume that um that one needs to to spend aug huge amount of time to handle one's own portfolio or it's extremely difficult or extremely complicated whereas you know I personally believe that um uh there are only two things that you need for successful investing and that is patience and Common Sense and patience is the is the most important and of course sadly with many of the small caps they have required a lot of patience really with the way they have drifted down in in in value over the last two or three years uh and th I believe at the moment you know do present a considerable buying opportunity and then of course I think regulations have also played a part as well you know there's far less Freedom now um for stock broking firms are similar to you know to recommend individual stocks um you know they have to be approved by their by their you know credit committees or investment committees individuals in broking firms are very reluctant to put their neck out when I first started in stock broking many years ago you know the the your partner would buy a line of shares in X and then in the afternoon you know phone a home Rage of clients and say look I've bought you know this line of shares I really you know like the story I really think you should have some so there's a much more personal involvement and you know today it's much more formalized and much more institutional I think it's a great pity really and also I think on a on a on a broader canvas uh you know I think I think we all accept that Financial education are schools separate topic you know is really very limited at uh at best nothing has really encouraged the the retail investor and then uh to another hobby horse of mine you know I really do think it's a tragedy that that our main TV channels indeed virtually all our TV channels have never covered the stock market or investment opportunities and we've got some great businesses in the UK um which would make very insting television uh and you know present great investment opportunities but but these really aren't brought into people's homes and uh so I think you know that the lack of Television involvement has has played a quite a big part in this one medium which which did used to do this I to extent still does the the print media I was just looking back kind of to the beginning of your career as a as a private investor to the the early 60s and you know reading accounts of Jim Slater's capitalist column in the in the telegraph I mean it seems that that that was a moment where private investing really captured the popular imagination obviously the the circulation of of daily newspapers was a lot wider and therefore there's a kind of network effect there of more people reading about exciting shares but other the same time that was a time of higher frictional cost to private investors you know broken fees and and the like was that popularity really evident at the time do you think and and and what has changed is it is it a case of that was the you know the the gym SL capitalist column was at the time the equivalent of I don't know Crypt Mania in that there were you know he was able to for for a period able to spot you know very high Rising shares and no one can do that forever and actually patients will always Wayne once the you know the the optimism subsides I think there it's probably true I think there has been a you know a decline in in um well there been obviously decline in in in readership of traditional newspapers anyway as it were but within that I think there has has been a a decline in the in the in the city sections I mean there are one or two exceptions but I think you you're you're right I think also sadly over the years in this country for for a mix of reasons we haven't really developed and encouraged the sort of the entrepreneurial uh uh investor uh or businessman I think for example in America um the stock market is is much more frequently talked about um you know by your average person and you only have to look at the numbers of people who who who go to uh Warren Buffet's AGM as it were thousands to hear you know the great man talk not obviously things haven't been helped obviously by things that have gone wrong like the Woodford Saga uh for example but as I say I think I think the excess of of of Regulation and and I'm I'm all for for you know protecting against you know serious and gross abuse but I think overall it's gone too far and and this is why I come back to uh you know the the sort of the the total failure of of Television which was after all the dominant media and still is as far as um many people with with money or money to invest uh is concerned you know all this has has played a part uh and I know there've been delegations to see the Chan of xeer and from the city you know to try and encourage him to to something to actually you know bring about a a change in mood and there's been a suggestion of a uh an Isa that should be just British or Britain focused to try and encourage UK investment to stimulate the the stock market so there are a number of things that that that that can be done but I agree with you that there has been a a decline in in uh in the in sort of private investing uh and I hope that somehow we can reverse that just to recent that the suppose the the the long-term passive story just by Devil's Advocate a little bit I mean when it comes to the kind of investing you do John I wonder if some people might ask the question you know one why not settle for the market average because you know over time that tends to be better than just putting it in in a in a in a savings account and buy buy a cheap Global or UK Equity track or whatever it is and and you know just spend more time doing non-investing things so I suppose that's that's one question the other one you know you like businesses that conservatively uh managed one I suppose conservative approach to the management of one's own personal finances is to say well I like this intellectual exercise of investing it make you know I feel really engaged in the world and and and learning lots lots all the time and and how the world changes but I'm worried about overweighting my own ability to sift through the tsunami of information and price points and valuation cases P es and just sifting that Market's worth of companies and information is it seems so daunting that I'm just going to delegate it to you know a passive product which sort of filters in a in a you know in an average way for me can you understand I can understand that totally you know obviously a lot of people have gone down that route and will go down that um uh that route but of course they pay for it uh you know there are initial upfront fees in investing in these products and then usually an annual fee uh I mean fees have as a a generalization been coming down because I think the feeling was that fund management you know was too lucrative but uh I think there is a there is a a clear decision that individuals have to make um are they are they you prepared to spend a little time on their own portfolio do they enjoy taking their own decisions uh and and learning uh or or um do they essentially want someone else to do it for them uh and uh you know that is a fundamental decision that that people have to take now in my case for example you know I I you know I I love the individual businesses that I'm involved in uh you know I live them I breathe them I keep in contact with them uh if anything uh I think I could be criticized probably for being too loyal to many of the companies or some of the companies uh that I'm in that I'm invested in but uh you know nevertheless to me I've had a a huge amount of satisfaction and pleasure and interest from being a uh private investor you know I like to think I've done overall as well if not a little better than I would have done uh had I invested in you know through a some form of um uh of um uh of larger fund but um each to their own that has to be basically the the message but uh I'm all for encouraging more private investors and I mean we should make the point as well passive investing it's not just a oneway street is it there's there's often sub decisions to make within that you know how much you allocating to various passive themes or or or kinds of assets so it's not it's not necessarily A straightforward as it's not well it's not necessarily straightforward and then of course you know certain um uh individuals who who are regarded as investment stars um dra attract a huge amount of following or or take a company like Scottish mortgage for example you know which set a tremendous track record uh and everyone was therefore saying you know we must put money in Scottish mortgage and commentators were saying that and and I know many many people who you know bought Scottish mortgage you know to me Scottish mortgage had a great record but I thought uh that that really its best days were in the past right h and a lot of people who went you know in the last 2 or three years have you know lost significant amounts of money now you know Scottish mortgage may well welcome again probably will but um you know I I'm not sure the Glory Days uh of yesterday will be replicated another big maybe the final big shift I just want to touch on um has been well at least until a couple of years ago has been for 40 years of generally falling rate environment I mean we're now back on a more historically normalized footing for interest rates if um you know if you believe what many economists investors now think is going to persist for for the for the coming years what have you made I suppose of this 40-year window and maybe the more important question here is have you found your pre 1980s investing muscle memories sort of kicking back in now that we're in a high interest rate environment I know you said you don't always pay attention to the the macro it's not a determinant for your inves well I remember I remember in my in my stock broking years we're going back I think to the 19 the 1960s early 60s interest rates were up to about 15% and I I remember some you know some huge debentures and loone stock uh uh yields uh at that stage so over my uh 60 70 years of uh of investing uh you know I've seen interest rates up and and down you know one seen uh three or four significant bare markets but o overall I like to think that uh you that that one has seen a growth in in uh uh inequities uh and a growth in in dividends as well and certainly you know I've uh benefited over the uh o over the the years but obviously interest rates um do play a big part and of course now we we are in a I think it's accepted that we're now going to see a falling of uh of interest rates but obviously this is subject to the the world situation and it's a dangerous world out there so many flash points point the world as a Tinderbox I'm afraid but in so far as uh commentators are agreed on one thing it is that we are moving to a lower interest rate period and and you know there should be some interest rate Cuts during 2024 now that's going to mean that private Equity business is going to be able I think to to um uh to use debt cheaper debt to actually become more active and fund and finance uh takeover bids and similar and that's why I think that 2024 could well be uh a uh a year of of the Takeover and certainly I'd be surprised and disappointed if uh you know come December this year um uh you know I I haven't hadn't been on the receiving end of of one or two uh takeovers because when I look through my portfolio you know I realize that so many are are are vulnerable because of the uh the low level of of UK small accounts particularly just to I suppose round that point on which I I neglected to do earlier on secure trust I mean you would obviously have to pay a premium if you were going to buy that business but £130 million for a profitable UK bank fully fully regulated fully licensed doesn't seem like a huge price for you know Visa V Mars buying Hotel Shaker they obviously want to do something different with that business if you had a very big entity looking to make splash in the UK potentially that's um you know it's almost a rounding error isn't it well you're paying 130 million for uh for we believe uh hard assets of of probably you know probably 300 million or something like that so uh um there's a lot to go at yeah but I suppose that the point being that you know the asset of a bank license which is hard to come by is is never really factored into the no that is that is quite true and and so um you know we'd obviously be looking to I would have thought if there is a a predator there it would probably be an existing um uh bank or an existing you know financially approved business as it were because um uh yes as you say people no one could just wander in from the street and however wealthy and just buy a bank without any any um uh vetting or approval these days and and that's a good thing so let's conclude as we often do with a Roundup of of the going on in your portfolio let's start with treat which we discussed at length in our second episode in October I mean since then we've had a bit of change in the uh in the SE suite and full year results have you you've been following things yes absolutely so I I uh I was pleased that you know profits came out broadly as expected and uh the dividend was edged forward very very slightly as it were although obviously it's on a a low dividend yield but um you know I've got considerable confidence in the new Finance director so the new Chief ex or he's in technically in chief executive Ryan govender who came in as Finance director from uh ABF Associated British Foods uh and I think he was instrumental in bringing down the the the debt very substantially and reducing the headcount in treat by about 14% I I don't see any great growth uh this year certainly not in the you know the in the in the first part but I think longterm you know treat is is well positioned I think the opportunities particularly because I you know obviously keep in touch with them I think the opportuni particularly in the uh I mean they're very big in America the the UK and and us are pretty well equal I think in many respects but the potential in in China is for them I think is very considerable um there are some huge privately owned drinks businesses in China that we've never heard of uh and uh I think there I think treat see a considerable opportunity there there for them so um although the shares have come down quite a lot they've started to recover uh and I'm very much firmly aboard but you know here again um the present capitalization does make them vulnerable yeah second though I suppose it's a cluster of of companies here given the large role they've come to play in your portfolio it would probably be remiss of me not to check in on the life insurers the MGs aivas LGS and Phoenix I think you have some exposure to yes all is I mean particularly given how how much interest rate expectations have swung around the last few months but more generally just because of their their heft within your portfolio what's uh what's what's been your take there have you been trimming things have you been adding to positions or uh neither neither adding nor reducing but but certainly maintaining yeah uh and um you know I feel very comfortable being in being in that grouping m& being invested in that grouping m&g of EV legal and general Phoenix um you know I think the prices uh have been edging up so they us have been coming down a little but even so are still very very attractive you know I'm obviously waiting as a private investor for you April May because most of these companies have got December year ends so you you know you actually get the dividend the real dividend flow coming through in in in April May and um you know some of those payouts are going to be you know very substantial and I I I'm looking forward to um you know to from most of them modest dividend increases on an already high yield uh so I feel very comfortable with having them in my portfolio particularly of course in my Isa where it's all taxfree and and that's the cash cow that you you would look to redeploy potentially into into other other companies correct that um uh at the moment uh you know I'm able to reinvest the majority of the the the dividend income within the ISA and so you get the benefit of compounding um so uh you know in the old days looking back uh when when Tak take overs you know were more frequent and I think I've said before that I've been on receiving end of about 60 takeovers or take privates that's given new liquidity as it were to to buy into new companies or add to existing ones but now obviously a really good dividend flow does a me to do that I I think one of the companies you said you you recycled some of the m&g um dividends into last time or the interim dividend was concurrent techology corre so this the the Colchester headquartered designer manufacturer of ruggedized embedded processes to a range of markets on a very downbeat day for markets they had put out a pretty strong trading update saying the revenues and adjusted profits would exceed expectations you've been you obviously pretty bullish on this this company John we're also hoping to have their CEO miles Adcock join us on the podcast um next month what what did you make of their trading update I was very I was very pleased I think that um you know they they just talked about the overall figures as it were but I think there are a number of underlying stories within concurrent and what is happening even in terms of orders and development you know following on from their acquisition of um Philips Aerospace in the US giving them a base there because you know their their businesses is I think around 90% export from the UK um the majority of biggest Market is America and American defense and obviously all defense stocks um really had a good a good run um you know the as I said before you know the the world is is very very dangerous uh defense spend in so many countries is increasing uh and um you know it's it's it's an ill wind as they uh as they say but um miles I think what I know has has actually really transformed concurrent um and Chang things dramatically uh in terms of sort of uh speed of product development uh in terms of um um bringing in as he believes you know better quality people overall making the acquisition in the US uh and I think they're now you know on the runway as it were and I I'd be very disappointed if if um you know they didn't really fly over the next you know two three four years but miles hopefully in February and the podcast will tell us more yeah I'm really looking forward to it and uh yeah of seeing one of your uh investment relationships uh uh in person lots to explore in that episode which of course can include any questions you'd like to put to John or miles I suppose if you want to get in touch uh to ask us questions directly on concurrent you can do that by emailing me at alex. Newman f.com until then all that's left for me to say is to thank you for listening thank you John again for your thoughts and time today my pleasure and to thank our producer Mar athor for all her work behind the soundboard until next time

2024-02-01 05:22

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