For All Seasons

• 24 April 2023
• Barry Mendel

We have just completed a comprehensive and detailed research trip to Europe, starting off with a Conference in Vienna, onto Zurich and Geneva (and being there on the day that Credit Suisse was no more) and then spending a week in London, some 55 meetings in total.

Our last visit was a week before the Pre-Covid lock downs in March 2020 and how things have changed in the past 3 years is remarkable. To say we are now living in a different universe compared to then would be an understatement and so the purpose of this report is to present to you opinions which in turn will help our investment processes and, no doubt our returns.

It goes without saying that we prefer a face-to-face meeting in order to explain their views. The summary below is in point form and should not be relied upon until a meeting with your BMF Wealth Director.

We do point out that the numerous points listed below are those made by the experts at the various meetings and, in some cases, they differ with our views.

One clear lesson learnt – we at BMF Wealth outperformed fund managers, portfolio managers and most indices and, while we always knew that what we do is good, it became apparent that we were ahead in our thinking, our diversification and our results.

Our first stop was Vienna where we spent 3 days at a Private Equity conference with one of the leading Private Equity Groups in the world. We have been invested with them over the past 7 years and our investments with them include Private Equity, Private Global Real Estate and Private Global Debt.

I will summarise only the most salient points from the conference:

1. Asset managers need to reposition their businesses from Passive management to Active management- the days of Passive Management are over. [We have always been Active – Passive is not in our vocabulary!
2. We are being affected by 3 Super Disruptors which are AI (Artificial Intelligence), Metaverse and Block Chain – we need to adapt.
3. There are 3 Giga Drivers to the economy-Digitization, New Living and Sustainability
4. Private Market allocations should be increased as they offer Entrepreneurial Vision, Management Expertise and Experience, a Proven Platform and Diversified End Markets
5. There are strong tailwinds in the next 10 years- Business in the Cloud to grow by 6 times, Doubling of Tech speed, massive Defence spending and that some science fiction is now becoming science fact.
6. We are Investing in Volatility, and increasing Asset Allocation to Alternatives
7. For the past 30 years we have had Globalization which gave us Growth- now this is reversing 
8. The most important, keep the Asset Allocation right.
9. The final conclusion- Private Markets are the New “Traditional Asset Class”, Offence is the New Defence, and completely Rethink All Asset Classes and Asset Allocations 

Our next stop was Zurich and meeting with one of our strong Private Banks (not Credit Suisse!):

1. Alternatives more interesting than general Equities 
2. Concentrate on the Risk Part of the Portfolios
3. Inflation will end up structurally higher by year end
4. Manage the Risk carefully
5. Gold should be included in portfolios 

Then onto Geneva where we spent 2 days with 2 of our Private Banks:

1. Financial Stress to be contained in the short term but there will still be higher inflation 
2. This is not a fantastic environment for equities generally
3. Wait until there is a signal from Central Banks on lowering interest rates and inflation before buying more equities 
4. 2024 to be good for the AUD
5. Have a small position in Gold
6. Inflation and higher interest rates to be more persistent 
7. Quality is most important 
8. Positive on the UK even though there could be a recession 
9. USA will go into recession while Europe will avoid it
10. Watch for Long term themes such as Security, Cyber, Key Commodities, Technology Innovation, Water and Energy Efficiency 
11. Italy and Germany have already stated that they will not make only Electric Vehicle cars from 2035 – cracks in this area are beginning to happen

And now onto London where we met with 12 different fund managers with each manager organizing approximately 4-5 presentations on different areas of investing. We also met with 2 renowned global economists, a London Wealth Manager and 3 prominent UK Property Specialists.

It would take a book to cover all the topics. We would gladly do in a meeting with you if requested but, for now, some pertinent take aways to stimulate your and our thought processes:

1. Believe the UK market is cheap – Dividend yield is 3.8%, Earnings Yield is 10% and Dividend cover is 2.5 times
2. Good opportunities in FTSE 250 even though it is still struggling
3. Commercial UK properties have had a great run for 40 years but now having some problems due to Covid, Brexit, Mini Budget and higher interest rates
4. Environmental legislation is changing and ALL buildings must attain an A rating (minimum B+) – both the buildings in which we co-own are A rated but, only 10% in the City have an A rating
5. More positive on UK and Europe than USA
6. Pound to appreciate from 1.22 to 1.35 to USD
7. Should portfolios be FX hedged, at least for Cash and Fixed Interest?
8. Ireland is a poster child on real estate and banking crises for the past 15 years and they are concerned that Australia may be going the same way
9. Prefer investing in TIPS than USA Bonds
10. USA Equities are fully valued
11. Sentiment in the UK economy is very poor but things are not as bad as the sentiment implies
12. UK companies reported better results than expected
13. Still have a high conviction in Energy going forward
14. The concept of the Dullness Dividend- ensure that all companies are paying a dividend 
15. UK pension funds now only invest 2.6% in the UK market- 20 years ago it was 30 %. There is now lobbing to Government that UK Pension funds must invest more in the UK
16. FTSE 250 is trading at a 20% discount
17. Generally negative on markets over the next 12 months and more bullish thereafter
18. Tech companies are cutting staff as economies are slowing
19. Private Equity has done better than Listed Equity but it is now thought that Private Credit is preferable
20. Oil prices to go higher over time especially in the second half of 2023
21. USD to weaken 
22. Copper is liked because it is a Macro Trad
23.  Invest in Commodities 
24. History shows that real interest rates need to be higher than inflation in order to reduce it- therefore expects rates to go higher
25. In the world of rising interest rates, the premium for owning illiquid assets has gone up
26. BE READY for opportunities and the concomitant volatility 

We look forward to discussing aspects of the research that may interest you and benefit your portfolio.