Spring Investment Conference 2024 Write-Up
We are pleased to share an overview of our recent investment conference. This report includes key insights from the presentations from our panel of internal and external speakers. Whether you attended the conference or were unable to join us, we hope this article provides valuable insight into the current investment landscape.
Spring Conference 2024
Attendees at the recent Hawksmoor Spring Investment Conference heard insights into investment strategies, psychological factors influencing investment decisions, and geopolitical implications from a panel of internal and external speakers.
Speakers emphasised the importance of team collaboration when creating portfolios, and knowledgeable investment management to navigate market fluctuations. They also discussed emerging markets, including the next generation of frontier markets, why UK assets are looking attractive and the ongoing conflict between Russia and Ukraine.
Building investment portfolios
Ben Conway, Chief Investment Officer and Head of Fund Management at Hawksmoor opened the event drawing parallels with investment management and the architecture of Nicholas Hawksmoor, the English Baroque-style architect who contributed to Westminster Abbey, Blenheim Palace and Castle Howard in the early 18th century, and from whom the company takes its name.
“He didn’t get much credit for these buildings when he was alive as much as he does now, but he was very humble, and he was a fantastic team player and collaborator. However, these buildings became unfashionable very quickly.
“In terms of good investment results, you’ll see that’s really key – you’ve got to be willing to be unfashionable at times to achieve truly outstanding results. These buildings, for example, really have stood the test of time.”
He likened investment portfolios to buildings – both need good, solid foundations and the right materials.
Ben continued that another important feature for investment firms is to recognise their circle of competence.
“We spend most of our time researching potential investments. These include equities and the closed ended landscape known as investment companies or investment trusts.”
Investment is more than just research, he explained. The team also engage with boards to preserve the value of clients’ investments. He emphasised they do not engage to behave like activists, but will do so, if necessary, as part of their fiduciary duty.
“We also contribute to the wider financial services and asset management ecosystem via lobbying for changes in regulation or legislation when we see it is needed. We do far more than researching equities or funds.”
‘A UK equity fund manager’s dream’
Turning to equity opportunities in the UK, Ben said although investors have been concerned about upcoming elections – and UK prime minister Rishi Sunak confirmed the July General Election as the conference took place – these tend to be big events for news outlets but not markets.
“Elections happen every five years and in Western democracies like ours, where both parties are quite close to the centre, the commentary can overstate their importance for financial markets.
“I will risk sounding complacent when I say this particular election is perhaps one that we need to be the least worried about because both Conservative and Labour recognise the importance of harnessing and encouraging the power of capital markets in this country.”
He added the Labour plan for financial services (https://labour.org.uk/updates/stories/financing-growth-labours-plan-for-financial-services/) “reads like a UK equity fund manager’s dream” as it says the market is undervalued.
“This is extraordinary for politicians to say but it is. UK companies are being taken over by foreign companies or private equity, while others are thinking about de-listing or moving to foreign exchanges. And policymakers want to do something about this – the British ISA was a signal of this. Politicians know the Treasury is extremely indebted and they want to harness the financial services sector and especially equity markets to fulfil the growth ambitions of the country.”
He concluded the team are “extremely bullish” on the outlook for UK assets.
Direct exposure
Next up was George Salmon, Senior Investment Analyst at Hawksmoor, who discussed the advantages of investing directly into equities alongside funds, while examining investor behaviour. He highlighted how holding direct stocks was a point of differentiation for Hawksmoor and said there are two real benefits: firstly, it gives greater control over portfolios.
“When we outsource to a fund, we outsource to that fund manager’s opinions, beliefs, and selections that ultimately dictate what the underlying exposure is. If you have a client that has particular desire to be exposed to a certain theme or sometimes in the case of ESG, not exposed, investing directly in individual stocks will give us a greater degree of control.”
The second benefit is cost.
“Funds take a small percentage charge every year. Sometimes these add up to high costs, sometimes they’re lower. Often they can be worth it, but sometimes they aren’t. Individual equities do not attract these same ongoing charges so holding these will reduce the amount of money you have to pay for the service.”
George explained what the team look for in terms of stocks highlighting the quality of the product, the quality of the balance sheet, a company’s track record and its valuation.
“If you deliver an outstanding product, you can charge a premium. Then you can generate a good margin and get good cash flow. Cash flow gives you options – to buy other businesses, invest in R&D, increase your marketing budget, for example – and provided you can maintain your balance sheet you can reinvest back into the business and the cycle continues.
“We look for businesses that have a track record of being capable of doing that and demonstrate resilience too – they’re not just going to outperform in the good years, they need to hold up when the economy takes a turn for the worse as well.
“Valuation is a key consideration – we do not want to be overpaying for investments.”
George also shared some insights into investor behaviour and explained how as humans we are sometimes conditioned to be our own worst enemy.
“When markets are going up, people get optimistic and hopeful, and end up in a frenzy –sentiment can really boil over when markets are rising. When that turns, people can be in denial for a short time, and then if markets keep falling, they transition through depression, worry, despondence…
“This cycle of emotions means people are inclined to buy at the top of the cycle and sell at the bottom. That’s just how humans are built as decision makers, and it is something we need to manage. There will be times of turbulence and pitfalls in the future but in my view having a knowledgeable and experienced investment manager with a similarly knowledgeable and experienced team can only be a good thing as far as managing these ups and downs is concerned.”
Demographic challenges in emerging markets
Redwheel’s James Johnstone, Co-Head of Emerging and Frontier Markets Team, joined the conference to provide some insight into more developing markets, particularly the next generation of frontier markets.
He explained how incredibly successful emerging markets have been over the past century with the restructuring of Japan, the emergence of Southeast Asian Tigers, and the manufacturing of goods and electronics in China – today China is the second largest economy in the world with $18trn under its belt. However, unfortunately we are getting towards the end of that cycle, James added.
“A huge amount of stock market performance from the countries we currently refer to as emerging markets happened very, very quickly.
“In many ways, emerging markets have done what they are supposed to do and now form an incredibly large part of the index.” He added that around 85% of an emerging markets index is covered by four countries: China, India, Korea and Taiwan.
As is commonly known, Taiwan and Korea are at the heart of semiconductor manufacturing and there aren’t many internet devices without a chip from these regions. However, Korea and Taiwan also have a demographic challenge – for example, the Korean birth replacement ratio is 0.7 and countries need to be at 2.1 to have a sustainable population.
“The one definite thing I can say is emerging markets as we currently call them will have a flat population over the next 25 years.
“But we have a huge amount of opportunities if we look at the next generation, those that are in the very early stages.”
He added the world often thinks about these countries – Chile, the Philippines, Vietnam, Thailand, Egypt, Kenya, Mexico and parts of the Middle East to name a few – as part of the problem but the opposite is true.
“Over the next 30 years the world is going to wake up to the fact the solution to the world’s problems is going to be found predominantly in these countries.”
Commodities will be one of the drivers of this, James added, particularly with the transition to net zero and demand for metals such as copper.
“In 2,000 years of human development, we’ve used 800 million tonnes of copper. To get anywhere near net zero by 2050, the world needs to use 800 million tonnes of copper over the next 25 years. If you think about electric vehicles and wind turbines, they are electric intensive and therefore metal intensive. And the beneficiaries of this insatiable demand for commodities is going to be countries such as Chile, Nigeria, Qatar, Ghana, Zambia etc.”
Nuclear weapon arms race
The final talk of the conference was by Frank Gardner, author and BBC Security Correspondent who shared insights from his recent trip around the Baltics with the Estonian prime minister.
He shared his thoughts on the conflict between Ukraine and Russia and more pertinently how President Putin is not afraid to keep reminding the world Russia has 5,500 nuclear warheads.
“We don’t need Russia economically, we’ve managed to divest ourselves after its full-scale invasion in February 2022 and found other markets for gas and oil.
“But what Russia does have, which concentrates minds in Washington and capitals all over the world, is an awful lot of nuclear warheads.”
Frank explained the repercussions of a tactical nuclear weapon detonation by Russia go beyond being an isolated event.
“For 79 years, we have had a nuclear moratorium but what Russia has hinted at more than once is if the West pushes them too far, sends too much to Ukraine, talks about deploying troops on the ground there, then they might be tempted to use a tactical nuclear weapon.
“A strategic nuclear weapon in today’s scenario would be a city flattener, while a tactical one could be a small one on a battlefield or a Ukrainian village going up in a mushroom cloud in a microsecond.
“But also, that moratorium, that bit of surface tension that has not been broken for 79 years, would be broken. Remember we have rogue states – North Korea has got at least 20 nuclear warheads, and Iran keeps saying they are not working towards building one, but a lot of people think they are.
“Then we are going to see Saudi Arabia acquiring nuclear weapons, then Turkey will want them, then Egypt, then the Middle East – is this really a part of the world where it’s a good idea to have a nuclear arms race?
“There is a lot of pressure on Russia not to do this.”
Turning back to the conflict in Europe, Frank said Ukraine is losing the war. Russia is getting all the ammunition it needs from North Korea and is pulling up old stock, which will be enough to overwhelm the Ukrainians, he said.
Furthermore, even though the Russian army is poorly led, poorly equipped and poorly trained, it is fully armed and there are simply so many of them.
“There’s enough of them to deliver enough firepower and the Russian methodology of fighting war is a heavy reliance on artillery, and then send wave after wave of inventory in to take over the rubble after they have flattened the city.”
On the other side, Frank said Ukrainians have sadly made a number of “bad, strategic mistakes”.
“They expended, wasted, squandered some of the best troops on trying to defend places that really didn’t matter and still lost them.
“The other big mistake to my mind is they have been far too cautious mobilising their own people.”
He pointed to the emphasis on preserving the economy and keeping tax money coming in, and making the minimum age of conscription at 27.
“The average age of a soldier in Ukraine – and we are talking about people who are fighting in the trenches on the frontline – is 43. There are many older people, fathers and grandfathers, who are simply not fit enough or agile enough to be able to fight in a way a 21-year-old would.”
Even if Putin is removed, Frank believes the war will continue to go on for some time and in the short-term predicts another “winter of discontent” for Ukraine as Russia blacks out its electricity plants, demoralising the Ukrainian population into begging the government for a peace deal.
Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca. org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS.
This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The information and opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC24158.
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