Transcript: Investment Masterclass — What’s in your global tracker fund?

This is an audio transcript of the Money Clinic podcast episode: ‘Investment Masterclass — What’s in your global tracker fund?’

Claer Barrett
Hi, it’s Claer here. You’re used to hearing me on Money Clinic. But now you can find me in your inbox teaching you everything you need to know about money with my new Sort Your Financial Life Out course. Over six weeks, I’ll help you to make smarter money decisions with tips on budgeting, tax breaks, property, pay rises and investing. In short, everything you wanted to know about managing your money but were far too busy to ask. To find out more and sign up for the course, visit FT.com/moneycourse. That’s FT.com/moneycourse. 

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If you’re new to investing, a starting move suggested by many financial experts is investing in a global equity index fund. It’s an easy and cheap way of making a diversified choice, buying one investment that will track the performance of hundreds of the world’s biggest companies. But if you’ve ever thought, what actually are the companies around the world that I own a tiny slice of, then today’s investment masterclass in global equities is for you. As we’ll find out, the so-called Magnificent Seven make up a huge slice of global tracker funds. They’ve had a blistering year. But can it continue? 

Simon Edelsten
This is the thing which really worries me, that they’ve all gone up together. And when a load of things go up together, they tend to go down together. 

Claer Barrett
Welcome to Money Clinic, the FT’s weekly podcast about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.

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My guest on today’s investment masterclass will be a familiar name to any of you who read the Money section in the FT Weekend newspaper every Saturday. Simon Edelsten’s columns about investing in global equities are an education in themselves. Whether you’re an experienced investor or a total novice, there’s always something interesting to learn. And that’s why I signed him up for today’s masterclass. Simon, welcome to the Money Clinic. 

Simon Edelsten
Claer, thank you very much for having me. 

Claer Barrett
Well, I’m so excited to introduce you to listeners because we chat on the phone an awful lot about different stories in the news. And you’ve worked as a fund manager in the City of London for much of the past 40 years, investing, let’s say, tens of millions of pounds’ worth of investors’ money and travelling all around the world to find the best global companies to invest that money in and grow it. I mean, what a life! Tell us about it. 

Simon Edelsten
Yes. Well, it has been extraordinary. As you say, I started in the City in 1984, which is before what is called Big Bang. And Mrs Thatcher was the prime minister, and she decided to get rid of some of the old-school practices in the City. So I started off working for a stock broker. In fact, my first job interview, I briefly worked for the BBC and they said, are there any perks that you get that we’d need to replace if we give you this job as a stockbroker? I said, well, I used to get a free copy of the Radio Times. They said, oh, we can’t stretch to that. (Laughter) But instead of that, they did give, as people used to give their clocks in the Edwardian area, they did give you a free turkey at Christmas that you could pick up. So it was a totally different world — very male-dominated, a fair number of bowler hats, an awful lot of smoking and drinking.

In its birth stages, there was almost no valuation done of shares. People would know what the companies did, laid off and know the people on the boards of the companies because they were mates or they’d been at school with them. They knew what the dividend yield of the companies was because that was one of the pieces of public information. But things like dividing the share price by the earnings of the company was just starting to be understood. So during my lifetime, starting as a stockbroker at Phillips & Drew mainly, and then going through to running global equities since 2000, one of the things I’ve observed is different schools of thought about how to value shares taking over globally. I mean, this is not just a UK phenomenon. And I’m very much brought up in the school that any share you buy, you start off by trying to work out whether a company is a good company or a bad company. But it’s critical also to work out whether the share price of that company is cheap or expensive at any point in time. You can’t just go from I think this is a great company to therefore I should buy it because if it’s already very expensive, there’s not much point. 

Claer Barrett
Now, your monthly column in the FT about investing, you’ve been doing that for some years now. So I mean whenever I read it, I always learn something that I didn’t know. So at the top of the show, what are the lessons that you’re keenest to pass on to Money Clinic listeners today? 

Simon Edelsten
The absolute key thing for me is quite what a privilege it is to be allowed to buy shares at all. And you actually end up owning a bit of this company and you’re sitting there looking at your shares (inaudible), looking at your statement and there are all these people running around working like fury, trying to make you wealthier. I mean, it is the most extraordinary privilege. It’s also something of an obligation that, you know, you are a part owner of the business. You have a vote. You can write letters to the company saying whether you approve of what they’re doing or not, you can turn up. Your vote may be a very small vote, but it’s still, I think, correct to take it seriously that you’re part owner of a business that the management are employed to run on your behalf and that that’s the set-up. So I do think owning equities is a great privilege and also a fantastic way of saving money compared with any other way. I can’t imagine why anyone would want to invest much of their money in things like government bonds, which are rather dull instruments or let alone anything like bitcoin or anything like that. Why not own a part of a real business run by real people which exists in the real world? And the other amazing thing about businesses is you start reading their history and you realise businesses survive wars, they survive changes of government, they survive what are called financial crises. I mean, not all of them, but an awful lot of British businesses. You can check them out that they’ve been going for 200 years. They’ve toppled along. And it’s because of those clever people sitting there trying to run them, trying to look after the shareholders and the staff and the customers and all the hard work they put in to try to make sure these businesses survive. 

Claer Barrett
This is a much more active approach to investing, listeners, than you may be used to if you have got mostly passive global equity index trackers in your portfolio. But I’m excited to get cracking. But before we do, an important disclaimer: we are going to be talking about the merits and otherwise of investing in different shares on the show today. But the usual rules apply. Nothing we say should be interpreted as an endorsement or recommendation to buy a particular stock. You need to do your own research. And it goes without saying: when you invest money in the stock market, your capital is at risk.

Now, Simon, just because you’ve stepped away from the world of fund management doesn’t mean that you’re going to stop investing, of course. And for the last 20 years of your career, you have been very, very focused on these big, gigantic global companies. Why do you think that big is beautiful? 

Simon Edelsten
Well, I used to think that big was beautiful until it got very, very big. So I launched the ultimate Global Select fund, I think, 12 years ago now, and the companies which currently dominate the global equity market were all listed. They were doing quite well and they were quite . . . they were more expensive than the average stock in the world, but you shouldn’t be surprised that they were. Companies like Apple and Microsoft and Amazon were fairly well known as being very profitable, certainly well known as being very high-growth. But what’s happened over the last 12 years is that these companies really dominated performance of all equity markets. And now for the index tracker funds, which just buy exactly the number of shares that there are in the index, those companies, they’re called the Magnificent Seven. 

Claer Barrett
For the record, that’s Apple, Microsoft, Nvidia, Alphabet, Meta, Amazon and Tesla. 

Simon Edelsten
You add them all up, starting with Apple, which is 5 per cent of the world’s market capitalisation. So 5 per cent of all your money going into a tracker fund goes into Apple and then about 3 per cent, I think, into Microsoft and Google and so on and so forth. You end up with 26 per cent, I think, of all your money going into one set, one group of stocks. All of which are very fine companies, most of which don’t really give you a vote because they’re often controlled. All of which are very correlated. And this is the thing which really worries me, that they’ve all gone up together. And when a load of things go up together, they tend to go down together.

You mentioned earlier, the great thing about a global tracker fund was that you could have a diversification of the best companies around the world. That was true 12 years ago. Today, you don’t get so much diversification. You get an awful lot of American tech stocks and then really not very much of the other things that balance the portfolio out and which I think are essential, particularly now that inflation’s back and dogging us, which has not been a big feature of the last 12 years. 

Claer Barrett
On a more positive note, the reason that Microsoft has been in the news so much over the past few weeks is because of OpenAI. Now the technology world is moving into the next phase with AI, artificial intelligence. It’s gonna be a really big part of the story going forward. And Microsoft is keen to claim its share of the spoils. 

Simon Edelsten
More than its share, I think the market is quite rightly convinced that Microsoft has got further down the track on commercialising artificial intelligence. And for Microsoft to find itself at the cutting edge of this is a great credit to them and their management. I mean, because there are other companies like Google who, I think, people would have expected to have been at the forefront and they seem slightly behind at the moment. 

Claer Barrett
Now, what do you think the big global themes are going to be for the next few years, the next decade, that will be of supreme importance for investors? No doubt inflation is one. 

Simon Edelsten
Yes, I’m afraid inflation has a habit of sticking around and so looking for equities which can cope with inflation is rather different from looking for equities, which enjoy almost zero interest rates, which are . . . The unusual situation, if you like, was the last 10 years where interest rates are practically nothing. But people have got very used to that. So there’s quite a big adjustment, I think, still to come. 

Claer Barrett
Hmm. And how about climate change? I mean, that’s an issue that really bothers many Money Clinic listeners. But of course, they also want to make a return. 

Simon Edelsten
Yes. So my global equity fund, we had quite a large chunk of the money dedicated to businesses which help with energy transition. But I’m afraid one of the tricky things about investing is that you do have to keep an eye on the relationship between the government and private capital. I’m afraid that the returns in the industry have started going down now that government’s pushing taxpayers’ capital into wind farms. So the last thing you saw was no private company, just as government’s saying we’re going to go and do all this, we’re going to do net zero, we’re going to force it all through. What’s happening on the other side of this, I’m afraid, which is an unintended consequence but it does happen a lot, is businesses retreat. They say we can’t invest our shareholders’ money in this if governments are gonna insist that we don’t make a good return out of it. If the government wants to taxpayers’ money, that’s fine. But don’t expect us to turn up. So notice nobody bid for any of the offshore licences. So, you know, hopefully energy transition carries on. I think it’s quite clear that a lot of the promises made about the speed of it were fantasy. There wasn’t proper planning. This is a massive job to do. It will take decades, but trying to make money out of it in equities, I’m afraid, requires an awful lot of careful analysis. 

Claer Barrett
So when it comes to investment strategy, you often hear investors say that they are a growth investor or a value investor. Now, markets are a bit of a turning point, as you said, with interest rates, inflation. Could we be seeing a bit of a turning point between growth and value as an investment strategy? Tells a little bit about what they are.

Simon Edelsten
Yes, so growth stocks, which include the so-called Magnificent Seven, these technology stocks, they’ve done fantastically well during a period of very low interest rates and inflation, and they’ve ended up on very high valuations, to my mind. When you have persistent inflation, companies with more hard assets often protect your savings against inflation a bit better. It doesn’t make them growth stocks. It just means that, in my view, a little bit more of your portfolio might be allocated to companies which have real assets where the value of those real assets will go up. 

Claer Barrett
Give us some examples. 

Simon Edelsten
So the classic examples here are companies like property companies . . . 

Claer Barrett
Very out of favour at the moment. 

Simon Edelsten
 . . . which everyone . . . Not just out-of-favour, but almost nobody talks about them any more. But for anyone who remembers the 1970s where there was much worse inflation than we’ve had today, as long as your property didn’t go bust, a lot of property companies were very indebted in the late ‘60s. Many of them did go bust. But the ones who survived, or even just house prices, kept up with inflation perfectly well. So it is quite intriguing to me that the tech companies are just on an all-time high on valuation and share price and have done nothing but go up for 12 years, and property companies have collapsed in value. 

Claer Barrett
Any other areas of the market that you would classify as a value investment that investors have been a bit neglectful of in the last decade? 

Simon Edelsten
The best area in the world for value investing by far is Japanese equities. And Japan, of course, hasn’t had inflation. It’s had deflation, but now they have a bit less deflation and possibly a bit of inflation. And that’s very exciting for Japan that it may come out of the slump it’s been in since the 1980s. So again, Japanese companies are starting to reorganise themselves, raise their profitability. You get a lot of company for your money. That’s how I like to think. 

Claer Barrett
You get a lot of company from your money. I like that. Simon. Now, even if listeners don’t want to stockpick or choose shares and individual companies to have in their personal portfolio, you still think that there’s a benefit of knowing how a fund manager like you would run the rule over these companies and say whether you think they’re cheap, expensive, whether they’ve got a future, whether they’re worth hanging on to. 

Simon Edelsten
Absolutely. Whenever I buy a share, the way I was brought up to think about it is whenever you buy a share, you’re taking your own money out of the bank. And you’ve got to feel some comfort that that share price you’re paying is supported by some sort of long-term value. That value might be from assets, as in the case of a property company. That’s a value-investor way of looking at it. Or it may be from earnings. Most often it is from earnings. 

Claer Barrett
The profits of a company. 

Simon Edelsten
Yeah. And so if, like me, you believe that the share price has to be paid back out of those profits over the next decade or two, I’m afraid, adjusted for inflation, which is where it gets a little bit more complicated, then you look at the relationship between the share price and the underlying cash flow. Now, companies unfortunately do not produce cleaned up cash flow per share figures. What they produce is something else called earnings per share. 

Claer Barrett
EPS. 

Simon Edelsten
Which is not quite the same thing, but it’s close. It’s certainly a very good starting place and it’s certainly where I start whenever I’m looking at whether a company is good value for money or not. I should just add on, the other place to look, which I know a lot of investors are interested in, is part of those earnings are paid out as an annual dividend. 

Claer Barrett
Like a profit share. 

Simon Edelsten
Exactly. So you can also look at the dividend yield. In fact, not just look at it. You can receive the dividend yield if you’re a shareholder. That dividend will get paid into your bank account. And so it’s real money. It’s not just something announced by accountants. 

Claer Barrett
And just to do the maths on that, so say a share of a company costs £1, they declare a dividend of £0.06 for the year and that’s paid to you, that would be a dividend yield of?

Simon Edelsten
Six per cent.

Claer Barrett
Exactly. So it’s similar to interest in a bank account the way that that is calculated but just applied differently.

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OK. Well, I’ve got some really great questions that listeners have sent in to put to you, Simon. Now, the first one, from Financial Planning Jim, via Instagram. He says, this is why we believe that ordinary investors should be putting their money with active managers. In the vast majority of cases, a passive global equity tracker is going to give them a better outcome over the long term, studies show. 

Simon Edelsten
Yes, I completely understand why investors buy tracker funds. The one thing you know about tracker fund is that the annual fees will be much, much lower than for an active manager. So an active manager has to prove that he can beat a tracker fund for you to get a better return after those fees. And the only thing in life which is certain is investment management fees and death, I suppose, would be the Mark Twain type quote. And trying to find an active manager who you’re confident will beat the index is very difficult. That said, going back to some of the remarks I’ve made earlier, I do think a tracker fund is not the whole of a solution these days, just because the index itself, which you are buying, seems to me to be quite unbalanced. But that’s just my opinion. And so I think that one can get better diversification. And I think people do understand diversification, even though they may find it difficult to build it in for themselves. So it could make sense at the moment if you just want to buy tracker funds, not have all of it in a global equity tracker fund or US equity tracker fund, which is where that imbalance is really strongest. But to spread the money around, probably with a little bit more in a UK tracker fund or possibly even a Japanese fund where the value for money is much better. 

Claer Barrett
Well, funny you should say that, Simon, because our next few questions reflect that exact anxiety. We’ve got Sarker, who has asked via Instagram: How can I best diversify away from the Magnificent Seven but stay in US stocks? And Sam C on Instagram, he says: How can I ensure my portfolio is properly balanced across geographies and industries when so many global funds are really heavily weighted towards the US? 

Simon Edelsten
Yes. So well, on the second question, you have to find an active manager who looks for better value for money. If they are looking for companies which have more current cash earnings compared with the share prices, you would expect them to have less in the US than they used to have. If they haven’t, then they’re probably not doing that active management job of looking for value for money as much as you expect them to. But there are many active managers. I’m sure that you’ll be able to find some which are less heavily weighted towards the big 10 global stocks. The other thing is, by the way, all fund managers, all active fund managers have to show their top 10 holdings. 

Claer Barrett
Hmm. On the fund fact sheet. 

Simon Edelsten
On the fund fact sheet. So if the top 10 holdings looks suspiciously like the biggest stocks in the index, then you’re not getting very much active fund management and you’ll find some are and quite a few aren’t. But it is not difficult to find people who are doing active management, particularly at the smaller houses, the less well known houses where the fund manager isn’t trying to run ridiculously large amounts of money. I think that this is another key point. So some of the boutique fund management names make it easier for an active fund manager to be really active. Whereas if you’re working for one of the world’s biggest fund management companies, it’s very difficult to put that sort of money into the market without earning huge amounts, Microsoft and Apple, because you’re trying to run so much money, you’ve got to put it somewhere. So you end up owning these enormous stocks, whether you think they’re good or not.

The first question you had, that’s much harder for me to answer — trying to stick with America without the Magnificent Seven. The normal way of doing this would be to think about buying a US small company fund. 

Claer Barrett
OK. 

Simon Edelsten
Smaller companies in America, by the way, generally defined as any company up to, I think, some definitions take it up to 50bn, which make the big bigger than the biggest companies in the UK. So these are not minnows. They’re not. So a US smaller company fund is not like a UK smaller company, which is really small. But all the same, there is a reasonable chance that the American economy will have a bit of a slowdown, that it’s not over the inflation, that interest rates may stay up. You’ve just got an election coming up and US smaller companies are not that cheap compared with smaller mid-caps around the rest of the world. But that’s the classic way of doing it. You get more mid-caps, what I’d call a mid-cap, and less big-caps by switching. Some of these funds related to the Russell index rather than the Standard & Poor’s index. Generally they call the US small company fund, but some of them would be called Russell-related funds or Russell trackers, of course. 

Claer Barrett
OK. Well, that’s something for listeners to look into. The subject of fees we’ve spoken about before. Now, obviously you are paying more for an active fund and it’s no guarantee that a higher fee means better performance, as I’m sure many listeners would have found out. Do you think that the investment industry is due a bit of a wake-up call on the fees that active funds are charging? 

Simon Edelsten
Yes. I’m afraid this may sound a bit like a gamekeeper turned poacher, but I do think that fund management fees should be coming down. Not just are coming down, but should be coming down. They’ve come down a lot in my career. Twenty years ago, a lot of British unit trusts were sold with a 1.5 per cent management fee. These days, most people have an i class unit which most people can access, which will charge about 75 basis points per annum on a global equity fund, sometimes a bit more on a smaller company fund. The trouble is that the amount of outperformance of the active fund managers over the last three years just hasn’t been good enough on average to justify that. And so I think not surprisingly, an awful lot of retail investors are shifting to passive funds. As I said earlier, I think I can understand why. I think it’s entirely reasonable for many people to have a lot of their passive funds in their savings mix, but I do think it’s wise for them to have an allocation to active funds because they’re keeping an eye on value for money for you, in a way in which the passive funds don’t. But the fee rate people are prepared to to be charged to wait for those moments when the active funds outperform has to be lower so that people are more patient. I suspect what will happen over the long term is active funds will outperform by enormous amounts, but for very short periods of time. If you (inaudible) to me, it’s a question of setting up a structure where people can . . . People don’t feel that the wrong fee’s being charged while they wait. 

Claer Barrett
OK. Last question for me now. I promise. Investors, we learn from our mistakes, don’t we? It would be wonderful, Simon, if you could tell us about your best and worst investments in your career and what you learned from these and what Money Clinic listeners could take from this. 

Simon Edelsten
Well, the most money I’ve made for investors in the global fund I’ve run for the last 12 years, and actually I own this share for most of the last 20, goodness, 25 years is actually Louis Vuitton, fantastic business, products I have no understanding of at all . . .  

Claer Barrett
I was gonna say. You’re more of a barber man . . .  

Simon Edelsten
Run by a (inaudible) people. (Laughter) But very very well run. Clearly a business that is, which has been built by a brilliant set of individuals. But as it, at something that, you know . . . French people are just terribly good at this stuff and they built it out of talent and hard work and financial discipline, and it makes people happy. You know, I don’t understand why people would go off and pay that amount of money for those goods that . . . 

Claer Barrett
People do. 

Simon Edelsten
People do. And it’s very reliable. And, you know, seeing people happy to buy your product, happy to pay a very big mark-up for your product, but always aspiring to do it, you know, and that’s what economic growth is really made of. And so sticking with that company through thick and thin has been very, very profitable indeed. As a large company, I think it’s now the second-biggest company in Europe. It was the biggest company in Europe for a while. It has been cheap at some points and expensive at some points, but it’s never been so expensive that it felt that one needs to move away from it. And so it has been a buy and hold. Most of the best decisions are a buy and hold. 

Claer Barrett
And on the flip side? 

Simon Edelsten
On the flip side, unfortunately, one will always get the quality of a business wrong from time to time. And even now, 12 years after the event, I completely believe that the Yellow Pages would go on to the internet and be successful. I thought, you know, surely the Yellow Pages in the UK, which was spun out from British Telecom, became a business called Yell — I thought it should not be beyond the reach of man for all of these phone numbers and websites of all the small businesses in the UK to be put on a site called the Yellow Pages site and for people to pay advertising rates and they would have no printing costs. They wouldn’t have to deliver this massive great fat book and everything would be marvellous. Anyhow, went bust. So you have to be diversified because your assessment of the quality of business, you’ll always get some wrong. 

Claer Barrett
Deborah Meaden said a similar thing a few weeks ago . . .  

Simon Edelsten
And the gap to my assessment of Yell and my assessment of Louis Vuitton wasn’t that big. And one’s a great success, and the other one’s a complete, complete write-off. So that’s why you should never get overconfident about any stock, just in terms of your ability to work out where it will be in 10 or 20 years’ time. 

Claer Barrett
Well, Simon Edelsten, it’s been a privilege to have you in the podcast studio. I really enjoyed talking to you about global equities. If people want to read Simon’s column, we’ve put a free link to his latest one in today’s show notes, which looks at inflation and how different companies around the world are learning to handle it.

That’s it for this episode of Money Clinic with me, Claer Barrett, and we hope you like what you’ve heard. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. If you’re interested in being part of a feature episode and want some expert money advice, then just email us. Our address is money@ft.com. You could also take a peek at our website FT.com/money, grab a copy of the FT Weekend newspaper on Saturdays, or follow me on Instagram. I’m @ClaerB.

Money Clinic was produced in London by Philippa Goodrich. Our editor is Manuela Saragosa. Sound design is by Breen Turner, and you heard original tunes this week by Metaphor Music. Cheryl Brumley is the FT’s global head of audio. And finally, as I said before, the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.