How old bears can make you poorer
James Henderson, Portfolio Manager of Henderson Opportunities Trust, talks about why listening to old bears regarding the UK market can end badly.
6 minute read
Back in the 1970s and ’80s, when double-digit inflation was the scourge of the UK economy, our role models for innovation and entrepreneurship were arguably Sir Clive Sinclair and Arthur Daley.
Sinclair created an electric recumbent tricycle that we were told would revolutionise transport – it had a top speed of 15mph, suffered from a short battery life and struggled up hills. Daley was a dodgy businessman in a popular ITV comedy-drama.
I have been reminded of these characters recently while grumpily reading supposedly leading economic commentators running down modern Britain. Most are getting on.
As someone who remembers the ’70s and ’80s first hand, I am no junior myself. But I like to think I have resisted the temptation to become an old pessimist.
The older we get, the more cautious we can grow about investment risk. This is because we have less time to recover losses.
We also become more prone to what psychologists label “rosy retrospection” – remembering the past more favourably than it perhaps deserves. By comparison, the present looks poorer; tomorrow more dangerous.
I come across this a lot. It has taken root and is harming our smaller companies. Investors have been reducing exposure to UK stocks and to small-cap companies in particular. In the past five years the Alternative Investment Market (AIM) of small companies has fallen by 30%.
The Woodford saga did not help – fund managers are now under greater pressure to increase liquidity in portfolios, and that means selling down small caps. The result is that vital equity finance is not reaching the promising UK businesses that need it.
Investors must stop paying too much attention to these ageing bears. I see so many reasons to be confident. We have more universities than we did, all of them more focused than ever on producing research that matters and getting it into the marketplace – known as “research knowledge transfer”.
Our creative industries – worth £100bn a year to the UK economy – are world-leading, and week after week I meet entrepreneurs building exciting businesses that are creatively tackling the world’s problems and meeting people’s needs. Here are just two of the innovative businesses in our portfolios now:
Accsys produces soft wood treated with a strong vinegar-like solution that renders it as good as or better than hard wood. After some early production challenges, it is now building a plant in the US in partnership with the Eastman Chemical Company.
AFC Energy makes portable power generators fuelled by hydrogen. It has just signed a joint venture with Speedy Hire to get them operating on construction sites and at events across the country.
UK shares are arguably cheap – and those of smaller companies especially so. Private equity buyers know it – we are seeing record buyouts as they snap up bargains. Last month we saw law firm DWF sold at a big premium to its share price. US investors are also on the prowl. They spot companies here selling at price/earnings ratios that look frankly ridiculous in comparison with what similar companies trade at in their markets.
This situation cannot last forever. I believe momentum will swing the other way – and when it does it could do so sharply.
There are lessons to learn here. At the risk of undermining my own credibility, I would counsel that age does not guarantee wisdom. Experience is helpful, but it can also bring baggage. Be careful who you are listening to and be on the lookout for those who might encourage you to be too cautious. Fear can seriously erode your wealth. What I do know from my experience of inflation is that you have to be invested in risk assets to counter rising prices.
Similarly, be aware of your own prejudices and rosy retrospection. I like to spend time with younger colleagues who are not afraid to challenge me and question my decisions. I call it reverse mentoring.
Of course, I could be accused of having too rosy a view of the present. Maybe there is further for UK smaller company share prices to fall. But the risk looks asymmetric to me – the opportunity much greater than the danger.
James Henderson is co-manager of the Henderson Opportunities Trust.
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