268. Why gold is the original cryptocurrency

27 July 2023 (pre-recorded 23 June 2023)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Staci West (SW): Welcome back to the ‘Investing on the go’ podcast brought to you by FundCalibre. Today’s guest introduces a newly Rated fund, shares his contrarian views on markets and highlights a range of topics including how historical inflation is like building a cake, why gold is the original cryptocurrency and how ESG is causing a divide between the East and West — it’s certainly not an interview to be missed.

Chris Salih (CS): Hello, I’m Chris Salih, investment research analyst at FundCalibre, and today I’m delighted to be joined by Alec Cutler, manager of the Orbis Global Balanced fund which has just been given an Elite Rating. Thank you for joining us.

Alec Cutler (AC): Thanks, great, thank you for having me.

[INTERVIEW]

CS: As I’ve just suggested, this is a brand new fund for our listeners. So, let’s start with a blank piece of paper. Could you give us a brief introduction to the philosophy and how you go about targeting long-term returns?

AC: Sure. This is a moderate risk fund. And, just for a bit of context on Orbis, we are not a fund farm. We don’t create 10 funds a year and, you know, see which ones work and cull the herd each year. We put a lot of thought into the seven or eight funds that we have with the idea that that fund is going to last for in perpetuity, not that it’s going to last for a certain one environment or another environment, that it can be all-weather.

So, with that, as context, the Orbis Global Balanced fund sits beneath our Orbis Global Equity fund, which is a higher risk, straight equity, produce as high returns as you possibly can with less attention to the risk side. Global Balanced is a balance of searching out reward and alpha, if you will, outperformance, but paying attention to trying to produce a moderate risk level that’s sort of on par with a 60/40 benchmark or 60% equities, global equities, 40% global debt. And then we have a fund below that called Cautious, that does the same thing, but 70% global fixed income, and 30% equities.

In order to do that, we spent about two years doing research on the best way to create this fund again, so that it can last and survive and produce a moderate risk portfolio in any kind of investing environment. We came out with some results that make it look quite a bit different and behave a bit different than a typical “60/40” fund. The first one is that we have very wide latitude on our asset classes. So, we can be high equities or low equities, high fixed income or low fixed income. We can also hedge some of the equities, which enables us to buy some equities that might be a bit higher risk, but then hedge out the market risk from that name.

And we have the ability to invest up to 10% in the balanced funds in commodities, which really means gold. We also have the ability to manage and ameliorate some risk by managing the currencies. So, that’s a big difference to a lot of global 60/40 type funds.

The other thing is that each position competes with each and every other position. So, there’s no 40% share that’s in fixed income that someone else manages, and 60% that an equity manager manages, and then we have some commodity person do this, and then we get a different person to do the currency management. Every stock has to compete against every other stock and bond. Every bond has to compete with every other stock. The hedged equities, the equities that have the market hedged out, they have to compete with straight equities or lower-risk moderate equities and fixed income. So, that’s quite different as well.

And what comes out of that bottom-up fight for capital cage match in the portfolio, is our asset allocation. So, we don’t do top-down asset allocation. We don’t scratch our chins and say, you know, we want to increase the equity weight by 10%. We allow that fight for capital amongst the fixed income and equity ideas, that fight for capital determines where that ratio sits. That’s very different. And thus far it’s been, it feels like a better way to go than to try and pretend that we can time markets because we know we can’t.

CS: If you were to google the fund or your name in general, you’d find the word contrarian appears quite a lot. What does that look like in practice for the fund? I mean, we talked about 60/40 just a moment ago – 2022 was a nightmare for it, whether this year’s going to be any better, we don’t know, but you guys actually had a pretty good year last year. Maybe give us an example of some of that contrarianism and what makes you so different to your peers?

AC: So, the only other thing that educates us from a macro standpoint is we tend to look at what the market is most worried about, and we tend not to worry about that. So, that’s a very contrarian way to view macro. So, you know, a good example would be seven, eight years ago, no one wanted to own Microsoft [Corporation], Apple [Inc.], Facebook it was called then [now Meta Platforms, Inc.], or Google [Alphabet Inc.], [in] 2013-14-15, they were really inexpensive. In fact, we were buying Apple and Microsoft at 10, 12, 13 times earnings, you know, a super low, cheap multiple for those names because they had failed to produce the earnings growth that people felt was being promised in the [19]’99-2000 era, and they were still kind of digging out from that. And we were buying those names. So, that was a contrarian purchase of growth fee quality stocks.

We sold those names in 2017-18-19, when they were hitting kind of 20, 22 x earnings. And in hindsight, we should have held onto them a bit longer because then they kind of went straight up into Covid and then Covid shot them up even more. But that money would’ve gone into energy stocks in 2018-19 and into 2020, when no one wanted energy stocks and gold miners and copper miners, when the world was becoming fascinated by this notion of only buying things that were high return on invested capital, that’s when we were selling our high return on invested capital names. We want to give the market what it wants, if it’s going to pay a lot for it. And we were looking at low return on invested capital needs.

CS: Does being a contrarian teach you to be very patient as an investor?

AC: You have to be thick-skinned. Not only do you have to be comfortable being alone, you have to be comfortable being alone and have the prospect of being wrong – or really early. So, there’s your patience. But one of the litmus tests for me as a contrarian is if I go to a cocktail party and someone finds out I’m a money manager there, lots of people want to come and talk to you and get some new ideas or something, and when I mention the name, they wander off. That’s a good contrarian name.

CS: Ok. I’m quite interested in the contrarian sort of outlook in this environment. I listened to an interview you did where you were talking about inflation. I mean, obviously, you know, the figures are still going crazy here, interest rates are rising here, and I saw one where you said that the Fed reminds you of your father yelling at the TV trying to change the score in a baseball game. Are you worried that the Fed has not got a grasp of inflation yet and we are here for longer, and what that looks like?

AC: I’m still worried about that. You know, I don’t … the Fed hasn’t got anything right! And I don’t know how far back you want to go, but 2009 Ben Bernanke was asked when he did the first quantitative easing, he was asked if that was just monetising government debt. And he said no, if it was permanent, then it would be, but this is only going to be a year or two. Well, that was 3 trillion dollars, and now we’re at 8 trillion [dollars] and counting. It hasn’t gone anywhere in what, 15 years. It’s only grown.

And then we started with fiscal stimulus in 2020 when the central banks did a major no-no, as the only adult in the political room, telling governments to stimulate and to issue money and put fiscal stimulus out. And the government said, are you sure? You know, the people in government said, are you sure? Yes, we need to do this because we need to spur inflation and we need the economy to recover. And they said, okay. So, they quickly, within like months spent 7 trillion dollars – 7 trillion dollars! Everyone forgets what a trillion is. Like, if you go back a trillion seconds, that’s 30,000 BC. A trillion is a lot. Even today, a trillion is a lot. And we’ve got just all this massive amount of stimulus, and the Fed is sitting there saying, yeah, we’re going to get back to 2%, no problem.

Well, first it was, there is no inflation. Then it was, this is transitory and base effects and all that stuff. And then it was, oh, yes, we do have inflation, but we have the toolbox to get it down. I enjoyed your Chancellor of the Exchequer getting on TV and telling workers to stop asking for raises. I’m like, is that your toolbox? Because that sucks! That’s the worst toolbox I’ve ever heard! But I learned recently that their high confidence in getting back to 2% is that their genius economists, of which they have like 700 in a building that all went to Harvard and Yale and Oxford and Cambridge, all the models that they use have as the terminus 2%. So, every model magically winds up going to 2%, because that’s what the math tells the model to do.

It doesn’t make any sense to us – and we’re not macro. I didn’t get my degree in macroeconomics; I’m a naval architect, an engineer. I slept through my macroeconomics classes at Wharton; it was not what floated my boat. But if I look at it very simplistically as an engineer, and I think about it as a cake, I’m like, okay, 2% they say is normal healthy inflation for an economy. But what else is going on in the world? You had 40 years of rates dropping, from [a] peak of 15% on the 10-year in 1981. 40 years later, 20% of the debt in the world is in negative yield, it’s been going up since then – so, dropping rates for 40 years is deflationary? Now it’s going up, that’s an inflationary impulse. So, here’s my cake 2%. Now I add a layer on, I don’t know, because I’m not a genius, I don’t know if that’s adding 50 basis points per year in inflation or on your basis points per year, but it’s not negative or zero.

Then you had Reagan and Thatcher crushed the unions in ‘81 and ‘85. Reagan, the air traffic controllers and Margaret Thatcher, the coal miners, pretty famous. That was the peak in union power. Unionisation in the US hit its lowest level ever in 2021. At the same time, the polling popularity of unions is at the highest level it’s been since 1965. And unemployment’s at a very low level. Unions are getting more powerful. You’re starting to see the pendulum swing the other way on union power. That’s another layer on our cake above 2[%].

Defence spending. So, when I graduated from the Naval Academy and was commissioned as an officer in the Navy, the Berlin Wall went down and we kind of looked at each other like, okay, what’s our job now? We all joined up to fight the Russians, and now we have nothing to do. That ushered in a 35-year period of ‘peace dividend’. So, defence spending dropped and dropped and dropped.

Defence spending is counterproductive; building a tank does not make anything more efficient. It enables you to have productivity. It enables you to have ESG. It enables you to have blue hair if you want to have blue hair. But it doesn’t add to your productivity. And so, defence spending in Europe and the UK for instance, defence spending in the UK in 1989 was 4.2% of GDP. It bottomed below 2% in 2018/19, and now it’s starting to creep back up. All of Europe dropped – anywhere, everywhere in the world; the US dropped from 6.5% to 4%. That has all turned. All that entire turn is inflationary because it’s not productive. So, that’s another layer on our cake.

But the best layer … So, well, let me hit this first. Some people like to talk about productivity and technology, and technology – you know, you can say all that stuff, but technology makes everything cheaper. And that’s deflationary. No, what you’re confusing with that is all the outsourcing we did to China. So, we moved to more of a tech economy and a service economy in the US. We moved all the dirty stuff to China where it was cheaper to do. That’s all coming back. So, that the rate of exodus was post-China joining the WTO in 2001, that started coming back after Trump put sanctions on China. So, 2018/19, you’re seeing a big ramp up in infrastructure spending in the US as everything gets reshored back to a more expensive place. That’s inflationary.

Tech: the only real spurt in tech-driven productivity gains, was between 1995 and 2005. 1995, if you remember, was when Wintel* was born. So, it was Windows ‘95 and the Pentium chip, plus email and the very beginning of the internet. So, you had a massive, we went from, you know, doing things by hand and mail to doing things by computer and email. And we had the internet to look stuff up, we didn’t need research assistants or go to LexisNexis terminal at the library. That, in my mind … So, that productivity stopped in 2005. We still talk about it as if it was great and is great, but that productivity technically stopped in 2005 and it rolled over in 2012, and you think about 2012 – what happened? The iPhone, and Facebook bought Instagram. So, everyone went from being productive on their computer, sending out emails to having a phone and looking at their phone and looking at cat videos, instantly. And all our kids stopped studying and started trying to figure out different hairstyles. And you know, why their friends are having more fun than they do.

[*Slang for the collaboration between Microsoft Windows and Intel producing personal computers.]

CS: You’ve made a very unhealthy cake there, let’s put it that way, with a number of layers to the cake.

AC: The cake, it’s getting bigger! But there is one last one that’s not a pendulum swinging. So, all of these, you can say are like Kondratiev* waves – remember when people used to talk about Kondratiev waves? – these are 30, 40, 20-year cycles. The one that’s not a cycle at all is the fight against global warming. That’s brand new, right? That’s a brand new one, and it could be bigger than all of the others.

[**In economics, Kondratiev waves (also called supercycles, great surges, long waves, K-waves or the long economic cycle) are hypothesized cycle-like phenomena in the modern world economy. It is stated that the period of a wave ranges from forty to sixty years, the cycles consist of alternating intervals of high sectoral growth and intervals of relatively slow growth. Source: Wikipedia]

Jeremy Grantham tried to put a number on it, and he’s very pro-green in electrification, but he puts a number of a hundred trillion dollars on it that we have to spend. And that spending is not productive. It is counterproductive. It might be very productive for reducing carbon, but that’s not part of an economic activity number. That is, if you take a cement factory and you say, you can no longer use natural gas to make the cement – it takes a lot of heat to make cement – you can’t use natural gas, you have to use electricity. Now, if it was more efficient to use electricity, they would’ve used electricity to begin with. So, we know that it’s less efficient to use electricity. First of all, it costs a billion dollars to change that plant over. That cement manufacturer needs a return on that, so, he’s going to amortise that through his prices. And then it’s going to be more expensive to make that cement with electricity. So, the price is going to go up for that. ‘Greenflation’, whether it’s cement or tarmac roads – I don’t know what we’re going to build our roads out of when we don’t have oil – whatever you look at in the process of your life, that is all going to be more expensive. So, the hundred trillion dollars is just the ante. And then everything you do off that is less efficient.

CS: I’m going to factor this all in and sort of go, you don’t have much trust in the Fed as recession [is] going on in the background. What does a contrarian look at when it comes to recession and opportunities when everyone else is panicking? Are you looking at battered areas in the market and going, ‘bargain time, let’s go to A, B and C’?

AC: We’re looking at what the market’s giving us and – as good contrarians and value investors always do – and as I said before, sometimes that’s growth stocks. Right now it is not. Right now it is very much value stocks, mid caps, small caps, especially places like the UK, where they’re completely ignored. And we now have our pick of the litter. So, when you have your pick of the litter, you can then do a bit of an overlay on top to try and reduce your risk to inflation. And you can increase your trend line growth rate. So, you’re always going to be buying a cyclical, but if you can trend that trend line growth rate up, you’re running less risk.

CS: I was going to say, are there any other areas apart from the UK the likes of, is that just one focus or a number of others where you feel that, you know, for lack of a better term, the stock’s been battered to a point where they’re attractive?

AC: Certain utilities in the US, particularly on the gas side.

Japan looks really, really interesting. Japan’s been getting cheaper and cheaper for a long time. And talk about a long haul! I mean, 40 years ago, we had zero weighting in Japan, and people thought we were crazy because the global index was 35% weighted in Japan. Now Japan I think is 4%. And the stocks are really attractive. And the government has now come around to the fact that they need a strong equity market and are pushing very corporate and equity-positive regulation. So, we actually have a catalyst in Japan. We’re very overweight in Japan.

Korea is looking at Japan and saying, well, we can’t let you get away with this. So, you know, Korean banks sell for 0.3, 0.4 times book [price] because the government has treated them as utilities to support the exporters. And now they’ve realised that all they’ve done is increase the cost of capital for the entire economy, because the banks are so poorly structured, and they’re trying to restructure the banks so that they can be competitive globally. That’s going to help the whole economy, but it helps us when we’re buying up most of the banks in Korea.

CS: I think I read something where you were talking about going underweight the US. There may be obviously reasons for that. I think it’s what, what is it now, the valuation’s about 70% of global stock value or something along those lines? Is that the principal reason you’ve gone underweight the US market? Is there another reason for it?

AC: I think that the percentage of the global equities at 67% is a very crude measure of whether something’s overvalued or not. Clearly, Japan at 35- 40% of the global market was crazy. The US at 67% – I think when I started in this business, it was maybe 38%, so, not that far off doubling. You could look at it that way and say that the US has gone out of control. You can look at the multiples and say that, you know, 22, 23 multiple on US earnings is out of control; certainly, super expensive.

But remember, we’re just bottom-up. We just can’t find many names in the US that can compete with the names we have elsewhere. The names that do compete in the US are some energy stocks like Kinder Morgan [Kinder Morgan Tejas LLC], that owns 40% of the pipelines – natural gas pipelines – in the United States. Names like Cinemark [Holdings, Inc.] a movie theatre chain in the US that people thought was going to be dead because of streaming and Covid. It is far from dead; everyone’s going back to the movies. So, it’s kind of oddball names like that in the US.

CS: Okay. Just again, going back to that contrarian theme. I mean, obviously after a sort of dearth of opportunities, the bond market’s come to life, what is your take on the bond market at the moment in general? Are you attracted to, I mean there is a clear attraction to it, but, you know, are you pensive about the long-term attraction of bonds? Maybe just give us a brief insight into where you see that and how that plays into the portfolio.

AC: Sure. So, the bonds are … they’ve repaired themselves from being just pure, reward-free risk where there’s just no upside when you’re getting 60 basis points a year in interest for nine years of duration risk. That was just nuts ,and fortunately, as I said in the beginning, we had the flexibility to not go there, whereas a lot of 60/40 type funds have no choice. They just have to pick the best of the 10-year Treasury bonds. We found gold to be much more attractive. Gold has performed much better than those bonds.

But what we’re seeing now, the fixed income weighting three years ago would’ve been 10% in cash basically. We do have a 10% minimum, it just would’ve been cash or corporates that we know really, really well and know we’re going to get paid back. Now it looks a lot more like 10% in TIPS – so, Treasury Inflation Protected Securities – that are yielding 1.6% to 2% real, plus all the inflation until the bond is due. So, that’s us saying, we don’t buy that inflation’s only going to be 2% on average over the next five, seven, and nine years. We think it’s going to be quite a bit higher. So, we can protect our clients with TIPS that way and give them a real return of at least something of 2%.

From there, there are some corporates that are able to compete with equity opportunities and we still have some short-dated debt. So, you know, one-year Treasuries yielding 5.5% ‘aint bad. And I think a lot of people are scared of those one-year Treasuries because if you’re running a bond fund or you’re running a fixed 60/40 fund, you have reinvestment risk big time, right? So, 5.5% for a year is not great if you’re going to have to reinvest at two. We have every asset class that we can invest in after one year. So, we have much, much less reinvestment risk running the Balanced fund the way we do.

But still, all in all, with the inflation expectations stuck at 2% out 2 years, 4 years, 5 years, 10 years, 12 years, 30 years, people still believe the Federal Reserve, when they say that we’re going to 2% inflation, no problem. It’s not going to be until the faith in that disappears, so that implied inflation rate goes to 4% or 6%, that bonds will truly be attractive versus equities. Or the Fed saying, ‘you know that 2% thing? Well, we realise, there’s a layer cake over here of new inflationary impulses, and when we put those in the hopper, it’s actually 4.5%.’

CS: History shows once you reach, what is it, past 5% on inflation [then] it takes a number of years to come back down, doesn’t it? I mean, obviously history is not a guide at all but there is an example of that. You mentioned gold, it’s now the largest single holding, or it was one of the largest single holdings. You had no allocation to it until 2018, I believe. [AC: Yes.] Interesting. I think I heard you also describe it as the first crypto because it was issued by God. Maybe tell us what the attraction is specifically today. Is it currency? What for you is the standout characteristic for gold in the portfolio?

AC: Yeah, so, I came out, I was getting frustrated. I made the mistake of going down the rabbit hole and arguing with crypto bros who called, you know, Bitcoin is the new gold. And then they started calling Bitcoin your father’s crypto, you know, when they were into Dogecoin and Litecoin and all these other things. But I had to explain to them that, you know, everything that you describe about your crypto is modelled off gold. Like the algo[rithm] for Bitcoin is modelled off gold. So, you keep shaming gold, but your crypto is modelled off gold. And if gold is so bad, why is it that every time you show a picture of your crypto, it’s a gold coin?! But it doesn’t matter, you can’t say anything to those people online. But my last parting shot was, look dudes, gold is the first crypto, gold is the crypto issued by God. And I’d rather have that than Bitcoin who no one will put their hand up and say they authored. And I actually wound up writing a white paper on gold, and it’s written by one of the apostles on Day One when he created the earth. The eighth day he created gold.

CS: Does that mean on the eighth day of created gold, that it’s unlikely that you’ll ever see it leave the portfolio again? Or is there a scenario where you’ll quite happily get rid of it?

AC: Quite happily. I didn’t hold gold until 2018, never in my entire investing life. And it wasn’t until the gold miners started going out of business. I mean, they all took on too much debt. Typical miner cycle: the gold bugs book took on a bunch of debt, bought a bunch of mines that weren’t very good, and the price of gold dropped, and they started going out of business. The output of gold dropped and, you know, just a classic supply-demand situation. But I’ve kept it because that was also the beginning of just unfettered money printing.

And, you know, I mentioned currencies before, you know … In thinking about currencies and risk, part of our job on the risk side is to maintain the purchasing power of the portfolio. And with the Fed going from zero to 9 trillion dollars on its balance sheet and the government just handing out 6 trillion dollars in a year, and every other country looking at the US and saying, well, I want to do that too. And then, just a few weeks ago, the Republican House signed off on the government running up another 4 trillion dollars in debt. So, going from 32 trillion dollars in debt to 36 trillion dollars in debt, all of that has to go somewhere. And it used to be, … you know, when we studied economics – I didn’t sleep through all the classes! – if you issue enough money, the value of that money versus hard goods goes down. That does happen. That’s what we’re seeing now with inflation. It’s a monetary effect.

CS: We should be buying gold before everyone gets a wheelbarrow to carry their wads of cash in etc. etc, in a world of hyperinflation, etc.

AC: Potentially. And we were talking about 10% in gold and gold miners. This is not a gold bug fund, loaded up with tons and tons of gold. But it does have a lot of real things in it because it’s not just gold that goes up when you’re debasing your currency. It’s anybody that is making any thing, whether it’s copper or semiconductors … got a lot of semiconductor exposure.

CS: Just quickly want to touch on one other thing before we talk about the pricing of the fund or the cost of the fund. Geopolitical concerns or this theory of de-globalisation, which has been talked about a lot. How do you view that, again as a contrarian looking for opportunities?

AC: So, people think the Cold War ended in 1989. I don’t think – if you now look back at China and Russia – I don’t think they signed on to that. I think they rather enjoyed the western world thinking that there was this peace dividend. We are right on the leading edge of, some people will call it Cold War II, I’ll call it the resumption of the Cold War. We’re seeing a bifurcation east and west. We’re seeing, you know, when you talk about friend-shoring, like that’s bifurcation talk. It started out with nearshoring or onshoring, reshoring, but now it’s friend-shoring, and this also wraps into another vector is coming in from the ESG movement.

The whole developing world is really, I believe, ticked off at the West with ESG, because the western world – I won’t say we, because it may not be you or I – look at ESG , in particular global warming, and say, ‘We need to solve the global warming problem, use less energy, developing world. Everybody’. And for us, that means we buy a higher efficiency air conditioning unit. For the 70% of the world that has never flown on an airplane and has never even thought of having an air conditioning unit, they look at that and say, you guys create way more carbon than we do, use way more energy than we do. And you’re telling us that we can’t get a gas powered moped so I can go eight miles and get a better job [and] commute. And that’s really offending to us.

So, now you look at the world is bifurcating. It’s not the old Cold War world. Some people are switching sides from, from the early eighties. But a big chunk of the developing world is kind of going to the eastern bloc. I think, in part because, the West has been patronising and been dictatorial in how it’s gone about some of this ESG stuff and the COP 26 and COP 28. You do this, you do that, ‘Oh yes, we’ll give you some money’, but we really won’t. They haven’t. So, not only are they not meeting their climate change goals, but they’re not giving the money to the developing world that they promised, so the developing world can develop with less carbon emissions.

So, I think this global bifurcation is happening, it’s real. We have 7% of the portfolio in defence stocks. We bought most of them before, well before the invasion in 2022. We bought them when they were depressed – European ones – depressed because of social taxonomy was going to come out and it was going to put a tax on the defence contractors, which made so little sense to us that we bought them at single digit earnings multiples as they dropped, went down 40% in preparation for this.

As soon as Putin invaded the Ukraine, magically the defence stocks popped off the ‘social ill’ chart, rightfully, and they doubled, but their earnings have gone up 200% <laugh>. So, and we see this as not a flash in the pan, we don’t think that Ukraine is going to get resolved anytime soon. And Ukraine could be just a warm-up to what we could see in the South China Sea and the Sea of Japan.

CS: I’m going to leave, it’s definitely last but not least. So, obviously one of the facets of this fund is it has a unique charging structure to sort of align yourselves with the clients. I’m basically going to step back and give you a minute or two to just talk us through how it works and how you align yourselves with your clients in terms of performance and returns.

AC: Okay, so let me put it this way. If we perform in line with the benchmark – the 60/40 index – which you can buy, which an investor can invest in, we’re not worth our salt if we can’t beat that. So, we don’t want to get paid anything. We get paid nothing. Zero. If we outperform that – which, by the way, would put us in the what, top 40th percentile of managers because the average manager against any benchmark underperforms, we would get paid 40% of the outperformance … let me rephrase that … 40% of the outperformance would go into a bucket, into a reserve bucket. And if we continue to perform well, that bucket would start building up. We would drain a fee from that, at a fairly slow rate – I think it’s 30%, I didn’t review my notes for what it is in the UK, but I think it drains at a rate of 30% per year – and if we subsequently underperform, it drains back to the fund at 40%, it shifts back to the fund at 40%. So, it’s kind of like, if you think about a plumbing system, it acts as a bit of a head tank. So when you’re outperforming a lot, some of that goes into a tank and then when you subsequently underperform, it goes back in to try and fill up the void that’s being created by the underperformance. What I really like about it as the portfolio manager, is it takes the relative performance from being like this – very uneven – and it chops off the tops and the bottoms and smooths that out a bit.

CS: It also takes uncertainty away, doesn’t it, in terms of performance. You know, what you’re getting; if this fund performed, it takes some money, but if it doesn’t, it doesn’t. Quite simplistic in a way.

AC: It is simplistic in a way. And what we set out to do, and this isn’t, I’m not trying to be a marketing guy, but because it wasn’t from a marketing standpoint, we wanted to create the most aligned and fairest fee we could that was still economic. I mean, we could create a fee that just gives the fund 20 basis points a year. Like, well that would be nice, but that’s not economic. You wouldn’t give us a rating <laugh> because it’s, we’re going to go out of business. So, we think that this is … you can’t get any higher alignment. So, if you’re looking to tick boxes and we think it’s imminently fair because we have to outperform by quite a bit before we even get an industry standard fee. Full stop. And if we outperform way more than that, nobody seems to complain. If we subsequently underperform, that watermark sticks at the high relative performance mark. So, we don’t get paid anything when we’re underperforming – nothing. And we think that’s fair too. We don’t want to get paid.

CS: Well with that, and the fact that you don’t want to get paid, I’m going to leave it there and say thank you very much for your time today.

AC: I’m not quite sure that’s fair to leave on that point, but okay, very clever, very clever! Thank you for having me.

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