Investment Trust Show: How fund managers handle “sin stocks”

0:00Well, hello and welcome to this month's money and markets investment trust podcast. I'm Hannah Willifred and I'm here with Dan Coatsworth. How are you doing, Dan? Hi, Hannah. Yeah, I'm doing great. Thank you very much. We've got some good topics covering a whole mix of the investment trust sector today. So excited to dive in. Yeah, we're going to start off today with a chat with Martin Conahan from Murray International who's speaking to us about the moral dilemma of investing in syn stocks, which is a name that always draws a little intrigues. I'm looking forward to that one. We're going to switch tech after that and take a look at what's going on in Japan where there's been some new policy unfolding. Hannah is going to talk to Nicola Takada, who is the managing director of Japan for the AVI Japan Opportunities Trust.

1:01So Hannah is going to talk to Nicola all about how much politics really ends up impacting the market and what changes might mean for Japanese companies coming up. And finally, Dan's going to speak with Stephen Annette's from Invesco Global Equity Income and that is going to be all about the world of dividends. Now, before we jump into talking to these fun managers today on this podcast, now Hannah, I know you've got some really interesting data when it comes to looking at discount. So I think before you get into the nitty-gritty, you better explain to people exactly what a discount is in the world of investment trusts. Yes. So in investment trusts, a discount is basically referring to the difference between the value of the assets that the trust holds and the share price of the trust. So it's, for example, if you have a trust that has 100 pounds worth of assets in it, hopefully

2:05it has more. But it's selling at 99 pounds because people aren't quite sure about the investment. There might be this discount. In investment trust world, this sounds not so good, but it is actually incredibly common as we will soon find out. Does that gives you a little bit of an idea, Dan, anything that... Yeah, no, no, I think it's very good. I mean, that's part of the appeal for quite a lot of investors is actually they can buy shares in investment trusts and potentially pay less than the underlying value of its holding. So I guess it's a bit like going to the shops and going, wow, I can't believe I can get it that cheap, but yeah, you certainly can. So Hannah, what's the data that you've got? What's it telling us? So we took a look at some data from Winter flood and a lot of one thing we like to monitor is sort of how these discounts change over time and it can get us a little bit of a

3:07temperature for how investors are feeling about the investment trust industry as a whole. And what we found this time was honestly that maybe the picture is looking slightly brighter. We took a look at data from kind of the past year compared to where it sits right now. So the current discount for an investment trust at the moment is 12.5%, which may seem quite high, but the average discount over the year is 13.5. So actually there's been a little taming there. Now if you look instead at a weighted average, which is bringing in that sort of how many assets each of these funds hold, actually we're kind of bang on average. So it's an average 6.8% at the moment.

4:07And over the past year, it's also been that 6.8%. So maybe that suggests there's a little more pickup among small trusts. What do you think, Tim? Yeah, well, obviously, you know, the figures that you're quoting are for the entire investment trust universe as an average. But if you look at different parts of that investment trust world, those discounts could be could be wide. In some cases, there's no source. Some actually trade above the value of their underlying assets called a premium. But yeah, I think it makes sense, like behind the scenes when Hannah and I sort of plan in these podcasts, we quite often say, oh, we have to talk about activists again, aren't we? We have to talk about Saba, but just as I was thinking that we were going to get away with it, this issue, obviously, you've got this big activist investor Saba has been putting a lot of pressure on trust to try and do things differently and to close these discounts. Ultimately, that's what it wants to do. So I think you've seen some sleepy trust wake up and do stuff and that has naturally

5:08helped to narrow this discount that we're seeing, you know, fair enough by a small amount, but I'm not surprised to see things sort of picking up, but it doesn't get over the fact that across many parts of investment trust world, you can still buy stuff for kind of what it's less than it's really worth. There are various reasons partly because it could be assets that aren't easily sold, should the investment trust decide, I'm going to stop one day, I'm just return all money to shareholders. It also, you know, certain areas like private equity, people are not quite, they don't believe the stated value of these assets as well. So we won't go into the ins and outs of that, but I mean, what Hannah, what other stuff have you seen in your data then when you're having a look at it? Yeah. So this actually that is really struggling and we've talked about this a couple of times on the podcast about this data really backs it up is the renewable energy infrastructure sector. The energy efficiency part of that sector is trading at average 45.2% discount.

6:16So that is, that is what we would call a yellow sticker deal for sure. So you know, I, it's an interesting one, you can see why, you know, there's been a lot of changing sentiment towards ESG and maybe a kind of flip away from the sustainability focus. But to me, that discount is quite shocking, you know, to know that the value of those assets is there and people just don't seem interested. So yeah, that one's, I suppose it was expected, but it always, the, the degree of the discount always catches me by surprise with that one. Yeah. I mean, it's firmly saying this is unloved. This is royally unloved, isn't it? So I mean, it is, while some of those renewable energy investment trust offer really big dividends,

7:17it's still not enough to attract buyers and people just don't, don't want to look at this space. They've got, they're finding opportunities elsewhere and it's putting more pressure on these, these trusts in this space to, to do something. What are they going to do? We're kind of expecting lots more consolidation of this being some, some activity in that area. Not everything's gone through, but yeah, it's really, it's tough going if you're, if you are already investing that space and you're holding those things, you're probably scratching head going, this is not quite working out as I thought it was. But yeah, you know, obviously, when we see some, some, you know, movement in that area, we'll definitely be talking about that more on this trust, on that sort of, this trust version of this podcast. Yeah, I imagine the fund managers are scratching their heads as well, but, well, a little quiz for you now, Dan, can you guess the sector that has the smallest discount? Oh, crikey, that's a good question.

8:20So smallest discount, are you talking discounts or are you talking premiums here? Unfortunately, no premiums to be found, so no premiums, okay, small discounts, I mean, a lot of investment trusts have little methods that they can do to try and keep that discount as small as possible, they keep buying shares. And so I'd say, I don't know, UK equity income space, that one was in the mix on the lower side. But our lowest one was actually structured finance debt. So apparently that is a, that is a sexy topic that's drawing people in at the moment. Yeah, it's not quite what I expected. It's very niche though, isn't it? I mean, I, it's definitely not sort of the, the sort of the mainstream area that your average investor would look at has to be very specialist there. Yeah, yeah, absolutely. Well, hopefully that gives you a little flavor for what's going on in that field.

9:23I didn't know if you had any kind of specific trust that were jumping out to you. Yeah, I mean, just before we move on, there was just a few I was worth mentioning. One is fidelity, special values. So over the last year, it's average to 2.8% discount. I mean, that's, that's tiny, but what's interesting, it's now trading on a 1.7% premium. So this shows that investors are, they're looking around and they're kind of a bit spooked by what's going on America, what's, you know, nervousness about tech, fidelity, special values, investing UK companies and ones where it thinks that the market's got it completely wrong, that they're worth a lot more than the market's attributing. So that seems to be in flavor, you know, catching people's attention at the moment. So you can perhaps understand why it's on a premium. The other one is on, on healthcare, over the last year that there was an average discount of 14.3% across the space, that's narrowed to 11.6%. But in certain, certain sort of situations that the discounts really narrowed, a couple

10:25of the ones that sort of flag was RTW, lowest discount over the last 12 months was just about 35%. That's narrowed to 12% now, it's a big gap as close. The other one is polar capital global healthcare, 9.1% is the lowest discount over the last 12 months. It now trades in a 1% premium. And you know, if you're a regular listener to this podcast, it's probably no coincidence to know that we featured people from both polar capital global healthcare and RTW the other day. So if you not heard those interviews, they do explain why things are really sort of picking up for them now. And just so people get a gauge of how kind of impressive it is to trade at a premium in this space. I did a little counting and found only just over 30 trusts that traded at a premium. There's over 350 trusts in the universe, so it is quite the achievement at the moment. And we actually have one of those trusts speaking to us today.

11:29We're exciting stuff. Murray International is one of those trusts that's trading at a premium. And they're going to talk to us a bit about the moral dilemmas of investing with so-called syn-stocks, namely companies involved in tobacco, alcohol, weapons, and more. Exciting stuff, didn't? Yeah, I think a lot of people often feel guilty if they're investing in companies that have potentially harmful products or services, but there are others who are, they're happy to invest in any type of company if it makes some money. And I guess it all depends on your own personal beliefs. There isn't a right or wrong way, but it is a fascinating topic to debate. That's why I thought it would be useful to get a fund manager onto the podcast, to get into the nitty gritty. So I've personally selected a manager who isn't sort of going out there. It doesn't have an ESG environmental social governance mandate. It's not really has huge lists of exclusions on where they can and can't invest. So it doesn't mean to say that they don't have any morals either.

12:32So we'll obviously, and that will become clear when you hear this interview now. Right? I'm looking forward to this one. Let's hear what Martin Khan had to say from Murray International Trust. So I think there's an issue that some investors face when they're looking for opportunities. And that's around sort of the ethics of investing. And moral dilemmas that they might come across when they're looking at certain companies. So I wanted to talk about this subject and bring on someone who's got some interesting viewpoints about this and also looking at some of the holdings in their portfolio. They've definitely obviously gone through that thought process. So this is Martin Khanahan from Murray International. So Martin, thanks so much for coming onto the podcast. Good to see you. Oh, thank you very much for having me done. So I think obviously, as an investor, in your fund, you've got various things that people potentially would call synstocks, so exposure to things like the tobacco industry.

13:34So I'm just wondering, you're there to help run a portfolio. Are you sort of just literally just focused on the revenue and the profits that any company might make? Do you ever actually take a moral view or whether it's right or wrong to back certain industries? It's an interesting question. I mean, Murray International Trust, first of all, just to kind of illustrate, we don't market the fund or the fund itself isn't labeled as an ASG or a sustainable fund. But when it comes to looking at the companies that we do invest in and can invest in, we don't exclude any area of the market from consideration, but while we are looking at things that you point to, you know, things that create new and balance sheets and dividends, it's an income fund, all of that stuff is very, very important. You know, we do also look at where a company sits with regards to its policies and its

14:37risks and opportunities as it relates to, you know, ESG issues because we do believe, you know, those things can't be material, both positively and negatively to the business. So in the hope of understanding the company and a big believer that if you don't understand the business, you can't really hope to attribute what you think that company might be worth. We do consider such issues, but we do look across the industries, whether that makes us moral, and I guess that's for others to decide. But yeah, we're doing invest across the industries as you, as you're quite rightly pointed out. I just wondering if you thought that sort of fund managers need to have morals because essentially, if you're managing other people's money, whether that's an open end of fund, it's got, you know, investors money or what, if it's an investment trust, you've got shareholder's money, you know, should the investors actually decide where, where their money is put in terms of sort of a moral perspective, or, you know, should you, you know, be acting

15:40on their behalf and thinking, you know, taking sort of the broad viewpoint, you know, representing the group rather than perhaps an individual who might have a different viewpoint. Well, I think that's really against a little bit different, you know, tick my international again as an example, we have, you know, tens of thousands of investors and there's never been an exclusionary screen or ESG tilt label put on the portfolio. Now, you know, some investors might have issue with, you know, environmental side of things and might avoid, you know, oil and gas companies. Some people might not like mining companies for labor issues or health and safety issues. Some people may have issue with animal testing as it relates to pharmaceuticals or cosmetics or bad business practices or, you know, product recall issues, all this sort of stuff. So getting a consensus amongst our investor base would be, I think, quite difficult. And I do ultimately, to your point, think that it is clients that drive where, you know,

16:41where their funds are ultimately invested, I think the majority of, you know, ESG or sustainable funds that, you know, were launched over the last 10, 15 years, they were done so in response to a client demand for that in which is the way it should be. I mean, should the investment managers have more, which I would talk to be doing, we should. But I do believe that it's ultimately really driven by, you know, the end client demand. Now, have some portfolio managers and of some investment houses really nailed their, their beliefs to the mass just they have. And again, that, that's fine. But I don't think they're necessarily exclusive outcomes. I think, you know, it's really the client that, that drives what we do because it is their capital at the end of the day. Yeah. So in, I noticed in your portfolio, you've got a stake in cigarette maker, Philip Morris. So obviously, you know, a really big business, really well-known, incredibly profitable. For some people, they would never dream of wanting to invest in such a company because

17:44of the harmful nature of its products. So I just wondering, why do you sort of feel comfortable holding this stock? Is it simply because, you know, as a business, it's been incredibly successful. And that's kind of what you want to hold as an investor. I mean, it's about both, you know. So again, we don't, we don't have any ESG overlays or exclusionary screens. It is ultimately a company that we believe will help us deliver the investment objective. And that is the thing that we promise that we will deliver for shareholders. Now, you know, Philip Morris has been quite transformative in terms of what it's done with its business model. You know, over the last several years, over 40% of its products are its revenues. Now, sorry, are coming from what it would seem to be reduced risk or even smoke less products. And that's, you know, quite an incredible transition that that company has overtaken, undertaken, you know, over the last few years. Now, again, other things that we want to need to keep on top of with regards to Philip Morris.

18:45Of course, it is. You know, we want to monitor where they sit with regards to their agricultural labour practices. You know, are their contracted farmers receiving 11 wage? You know, we want to look at the supply chain and the sustainable tobacco supply chain framework. You know, have they completely eradicated child labour from their supply chain? And in those instances and in those areas, we find that Philip Morris has very, very robust practices in place. And they are very, very open and transparent and having that debate with us. Where they take, you know, start falling foul of their responsibilities in those areas in such serious matters like trial labour, you know, like, you know, their supply chain of their farmers would we take issue with that and question the investment? Yes, we would. But in our experience with the business as part of its transition to reduce risk and less harmful products,

19:45we've always had a very open dialogue with them. But you've also got a stake in the oil producer total energies. I mean, obviously, you know, there's a clear need for its products and services, but obviously on the flip side, there's naturally some people saying, look, you know, this company's not great for the environment, there are alternatives. You know, what, what, what about something like that? Obviously, we've had the oil industry try to do more sort of renewable energy and stuff, but quite a lot of them sort of a roll back on that sort of strategy. Again, I presume you're just, you're simply looking at, you know, here is a business. It generates lots of cash flow. That's exactly what we want. I mean, again, it's a little bit of both. And you would have to ask, well, why have the companies rolled back on those, those investments? It is because demand. Now, going back to, you know, why we invest in total energies is that it, again, helps us deliver that investment objective. It's a company that's got nice dividend and a growing dividend and it's done about nearly 13% per annum in the last 10 years. But to your point, I think, if any business is going to be an important component

20:49of the energy transition, then alongside pure play renewable energy companies and utilities, surely, you know, the oil and gas and exploration companies will be an important part of that discussion. They have the assets, you know, they have the scale to do it. And if they're end product is ultimately threatened by the transition, then they would make that. And total energies and a lot of the European exploration and production companies have been at the forefront of that. You know, they investing about 16 to 18 billion dollars annually out into 2030. Between four and five billion dollars of that every single year as he marked towards, you know, low carbon energies like, you know, biofuels and hydrogen. And they've been really, really quite impressive. And on top of their own targets for reducing their, their scope one and two emissions of reducing them by about 35% over the last, you know, 10 years. They reach their, you know, methane reduction target of 50% one year early. So, you know, it's, it's a more complex position to be perfectly honest.

21:52If you do want to have a discussion around how we've ended up where we're at and where we go, you know, we do have to incorporate consumers, you know, we are the most direct signal for, for demand. Now, have what exploration and production companies lobbied and pushed and built infrastructure that makes it. They sort of default choice. Yes, of course, they have. But in my view, you know, consumer sort of they, they pull demand. The, the MP companies will push supply, but they both operate within a, an environment that is created by government and policy and you'd be to have a sort of complex dialogue and views on all three to judge how we've got here to then have a view in terms of how we move things forward from this, this point. I mean, did, I mean, I know obviously you, you stress quite a throughout this interview that you're, you're not a specific ESG investor. But just just more broadly, I wondered if you have any sort of viewpoints about the sort of the ESG world,

22:55because it felt like maybe 10 years ago, there's a lot of interest in it. And you rightly said that some of these sort of ESG specific investment sort of products were created because of the consumer demand. But it sort of, the interest seems to sort of faded way more recently. And I wondered if that, do you think that's because at the end of the day, you know, if you're investing, you want to make money and, you know, realizing that, you know, for an oil company, you could probably make more money with oil and gas, you know, your core business than going to renewables. And equally, you know, some of these, these tobacco companies are switching to less harmful products. Even defense companies, they're talking about, you know, you know, they're there to try and help people to protect people. So, you know, do you think that this ESG craze is sort of, it will just just completely go away, but, you know, we don't need to judge a specific investment process simply on, you know, whether it's directly looking for it, sort of, you know, things that do good for the environment or society.

23:58Well, actually, it's just about taking a view on individual companies and making sure they're doing the right thing where possible. I mean, I think, I think certain managers and certain funds and certain investment houses that, you know, will have a more advanced model viewpoint than the rest of the market. And they will stick with that to your point. I think some areas of the market have subsequently moved on to whatever the next, you know, craze may be. And I wouldn't say that ESG craze has, you know, it had, it had an experience quite a considerable amount of growth, which has reduced a little bit. But I don't think that has gone away. I think those certain funds, certain managers will continue to do what they do. But yeah, that area that is looking for the next craze for one of a better expression, you know, they will always move on to something else. I mean, what was the best, they're one of the best selling products in Europe last year. It was, you know, you repeat the fence ETFs and leverage ETFs.

24:59You always have areas of that within finance. The market is quite good at, you know, thinking about what the next best thing is. You know, as mentioned, they may be approached as ESG isn't something separate that sits over here. It's a, it's a core part of your investment process. It's a core part of understanding what a company does and what the risks are inherent within the business and the opportunities. I mean, certainly things like, you know, the energy transition and Philip Morris, as mentioned, it's served you to be part of that along with the company and watch them transition and help them transition. If that ultimately longer term, you know, helps their, their business. The defense side of things, and again, this is just a personal opinion, I sort of sit more on the side of things that that's potentially more of a flimsy argument. One would need to be kind of asking themselves why there was a shift on the sort of ESG perspective on defense companies. You know, is it, as a result of I accept that the world was a far more fragmented place at the moment, but is it now just as a result of the,

26:06the bowens of dollars and pounds that have been earmarked for defense spending and the, the resultant impact on their businesses and share price. You know, before I did discuss that, an energy company can transition that a tobacco company can launch safer products at an alcohol company can, can produce low in no alcohol alternatives. I'm not really aware of a just risk weapon, their ultimate at the same to do one thing and it was my understanding that that was the main issue. With regards to this sustainability of those business models, but again, that is just a purely personal opinion for us that my international yesterday's kind of cornerstone essential part of yes, looking at the profits and the revenues and the management team in the business model and it's it's alongside that isn't a separate thing anymore. Well, Marty, thanks so much for talking to me. It's been actually brilliant to get your thoughts on the podcast. So thank you very much for coming on my pleasure. Thanks for having me. Thanks again to Martin Connayenne from Marie International for coming on the podcast now we're going to shift gears a little bit. We're going to look at changing political situation in Japan and how this might be affecting markets.

27:18Hannah spoke to Nicola from AVI Japan Opportunities Trust about how things are changing and what investors need to think about. So let's hear that interview now. Hi, Nicola, how are you today? I'm well, thank you. How are you? I'm doing very well. I'm been looking forward to this one. I think it's going to be a really interesting chat. So we are recording this days after the snap election in Japan. So there's a lot of change going on. Do you want to start by just giving us a little bit of an explanation, Nicola, of what this snap election means? What now the two thirds majority means for the Liberal Democratic Party in Japan? Yes, I think the point of it is it's actually a really important turning point for politics in Japan overall. You may know that we've had a bit of a revolving door of philosophical leadership over the past few years. And this is the I think fourth Prime Minister in five years that we've had in Japan. There's also been relative stalemate in terms of policymaking.

28:26And what the two thirds majority in the low house means is that the low house has sort of constitutional superiority over the upper house, even then the names would suggest otherwise. And what that means is that with this two third majority, Prime Minister Takahi and the LDP party can effectively pass through any bill they want almost. And what the market is expecting, as you can see by the strong rally that we've had since then, is that Takahi will put through some physical stimulus. She's already talked about a relatively large bill that she wants to pass through in terms of the budget. She is known to be pro market. She is known to be pro corporate governance reform. And so the market has responded very positively to that. And I think it is important because this is the largest majority we've seen in the lower house since since the end of the war. So it's a pretty significant moment for Japan.

29:28And Takahi has been in sense October, correct me if I'm wrong on that, but what makes you think that she will be the one to stick when we've, yeah, there has been this revolving dorm. I think she is, she is starting on really strong footing in terms of popularity with the voters. And she has shown with this snap election that she has a lot of support internally within within the government as well. I think she is, she is a personality. She is a very strongly opinionated. She's very clear cut with her messaging. And I think all of that has served to shake up the status quo within within Japanese government. Of course, you know, we have to mention the fact she's also the country's first female prime minister. And so she in and of herself is the son of fine, that change that's happening in Japan. And I think people are expecting, expecting change one way or the other for that way.

30:34They're expecting her to come out with a strong mandate one way or the other. Yeah. And looking at Japan from the outside, it does seem like she has quite a big hill to climb. They have the largest public debt in the world and also an aging population. So it is, she's got her work cut out for her there. What so far do we know about her general approach to economics? So she has said that she is a, she is a proponent of responsible fiscal spending. Yes, you're right. You know, Japan has famously got very large, very large debt. But I think importantly what differentiates Japan from other countries is that that debt is a majority domestically helped. But the other, the other thing is that she is quite expansionary in terms of her monetary policy, you know, whether that means she's going to be a log ahead with the bank of Japan is something that we still, we still need to wait and see.

31:36I think she has dialed back a little bit around her rhetoric of fiscal spending and being being sort of the be all an end all of her corporate policy. For example, she was talking some months ago about a two year hiatus on the consumption tax within Japan, she's sort of gone very quiet on that recently. And so perhaps now that she has such a strong majority and she is in power, she will temper her rhetoric a little bit. I do know is that within the equity market, she has a strong focus area around certain sectors, she's mentioned artificial intelligence, she's mentioned defense spending. She has really, she has really focused on bringing Japan back to the forefront in terms of being a tech leader on the global stage. She also know that she has a good relationship with the US and hopefully that will that will mean some some additional benefit for Japan going forward.

32:42She is she is someone who is very market friendly, I would say she positions herself that way. And from our perspective as activists investors and sort of, you know, a strategy that specializes in constructive engagement. The fact that she was a protégé of Prime Minister Abe, who of course came out with Abonomics and was the real, the real starter of corporate governance reform in Japan. We are very hopeful that we will continue to see development around corporate governance reform. At the same time, we know that even outside of Prime Minister Takachi, the Tokyo Stock Exchange is still very much focused on it. There is a corporate governance code revision going on as we speak this year. So there's a lot happening, even outside of what Prime Minister Takashi Takachi is is going to be pushing forward. And she has over the years been very clear that she thinks, for example, Japanese corporates have too much cash on the balance sheet.

33:48They need to be more efficient. They should probably pay their pay their employees more. All of these things are upro group and pro corporate Japan. So we are hopeful. Yeah, and you know, touching on this corporate governance bit that is a change that's been talked about in the past couple of years for Japan. And obviously there's some big names in Japan that seem like quite ahead of this, you know, in terms of change. But a lot of the other business, it seems like this is being taken a lot more seriously now than maybe even five years ago. What do you see as the largest shifts in this? What are the changes that if you, you know, walked into one of these board meetings? What are you seeing now that you were not seeing five years ago? I think there is a sense of urgency. And I think there is the sort of both a carrot and a stick perspective for the companies.

34:50So five years ago, for example, yes, there was the corporate governance code. Yes, there was the stewardship code, but it was more a set of guidelines. There weren't really any, any negatives if you didn't hear from them. Now what has happened is, as you know, a couple of years ago, the Tokyo Stock Exchange really shook things up. They started publishing a name and shameless of companies that they felt were focusing on their corporate value and those who weren't. They started tweaking the listing requirements for companies in Japan. They started making recommendations or requirements, for example, around investor relations and shareholder communication. So they would say, you need to put out any important information in English and Japanese at the same time to give non-Japanese speaking investors access to similar information, for example, you need to have a investor relations person.

35:52You need to put out a department within your company, and it's really been this move towards pushing shareholders far higher up the priority less than they used to be. And all of that has been really motivated by, again, this sort of name and shame culture, which the Tokyo Stock Exchange has brought on. What they are implying by that is, for example, if you are a company that has for a long time had low valuations and they very specifically have said your price to book ratio is below one, you need to be able to explain why that is if you have cross shareholdings, you need to be able to explain why that is. And if you have, we believe in the future, they're going to say, if you have excessive amounts of cash sitting on your balance sheet, you need to explain why that is. And if you can't, there is this implication that there will be some kind of negative negative reaction by the Tokyo Stock Exchange. Will it be a relegation to a different part of the index? Will you be kicked out? The other thing in the other part of this puzzle that has become really important is the rise of private equity.

37:02So, as you can imagine, if you are a company that is very cheap, as a loads of cash on the balance sheet, is like a decent company that maybe has been under managed over over the past 10, 15, 20 years, you are looking to look very attractive for privatization. And what happened two or three years ago is they changed the guidelines around takeover proposals to make things a lot more aligned with how they are in other in other markets. And that has really opened up the market to private equity and that in and of itself again is a potential, you know, negative for companies because they don't want to be taken over possibly they don't want to be privatized. So, this impetus to change and the sense of urgency has really come through because what they're feeling from all sides is pressure. And I think this is what Prime Minister Abe did very well and he was very clever about it. He understood that Japan is a consensus driven culture.

38:04So, he didn't just say, okay, we as the government are going to pressure you and you need to do this or that he got the Tokyo Stock Exchange, he got the FCA, he got all the large asset owners like all the big public pension funds to sign up to this corporate governance change as well. And so these companies are feeling the heat from every single angle, not just from foreign activists, but also from the domestic asset owners as well as the regulators and the government. Yeah, that's really interesting in it. I feel like that is where you always see the change start to happen is when there is that pressure from all sides and there is a chance that it is really going to start affecting business. Yeah, it's interesting to see that that's that is starting to shift things. And then the last thing I have for you is, you know, I always find, especially when I have discussions about elections in the UK or the US.

39:07There is a lot of talk about change and then after a couple months, the markets seem to decide that actually things have stayed kind of the same. Do you think in this market and because of the unique conditions in Japan, is there a chance for real movement or do you think in some ways? Things might peter out a bit. So of course, I would say that as being a bigger Japanese specialist, but I think I think what's important to remember is that even without the Takaichi trade, Japan was doing very well, specifically, particularly in yen terms. The Japanese market has really started to see the benefits of corporate governance reform mainly in the sort of larger cap area, but it is trickling down to the mid caps and the small caps as well. It is still a market which has over 4000 listed company or around 4000 listed companies. And we know that, you know, that's twice the number of the SMP. We know that there's a lot of room to make the market more efficient, more investor friendly, more shareholder friendly.

40:12And I think that momentum is going to continue and it would have continued anyway, whether Takaichi sound came into power or not. I think that's all we have time for today, but thank you so much, Nicola. That was really insightful and helpful and I hope to catch up with you soon. Yes, exactly. Thanks so much for having me on. Thanks again, Nicola. That was a great chat. Now, we've got one last one for you today with Dan speaking to Stephen, Stephen Aness from the Invesco Global Equity Income Trust about all things dividends. He's going to offer some great insights into parts of the market. You might not necessarily associate with being sources of income, as well as whether share bybacks are good or bad news for income seekers. Let's hear that now. I think most people, if they look at the UK stock market, they might expect three, four percent potentially from the sort of say the FTSE 100, but globally dividend yields aren't always that high.

41:12What sort of level that you're achieving and are you having to go to certain parts of the world to be able to get that sort of perhaps a little bit more generous dividends that you might expect? Yeah, look, I think that's a good question, Dan. As you know, the US are principally, you know, buyback is a much sort of greatest part of total sort of shareholder return there. In other parts of the world Europe and in Asia as well in Japan, you know, dividend is often a greater part. When you look at the trust, as it is in terms of portfolio structure, we are sort of underweight compared to the market in North America and overweight in other parts of the world, such as Europe and UK and Asia. What I would say is we spent a lot of time thinking about correlations and making sure the portfolio doesn't just work in one particular environment. And so many of the companies that we own in those other parts of the world are dollar earners, so we're not taking sort of, I think, big risks in that place.

42:12So looking at a portfolio level, the dividend deal is a little bit over 2% at the moment, which is about sort of 20% ahead of where the MSCI world benchmark dividend is. But obviously in our trust, what we do is we actually pay out of 4% dividend when compared to the NAV at the end of the year. And so investors in the trust then have certainty going forward as to what income to expect on a quarterly basis is 1% or quarter of that NAV. And I think that allows then certainty for the end investor, but it also creates us a little bit more flexibility within the fund so that we can perhaps go into areas where dividend yields might be a little bit lower, but where there's a little bit more capital upside. So for instance, there's areas of technology both in Europe, Asia, but clearly the US, you know, those have been, you know, fruitful areas for us to hunt in, but not ordinarily dividend paying areas, but of course that then allows us to, you know, broaden out the number of.

43:18So the opportunity set in some of risk and reward for the trust. So I mean, that's quite interesting sort of discussion because it's I think when people look at perhaps a sort of an income focused product, they might think, OK, well, you know, where's the classic places that, you know, they'll be finding their income is it like life insurance banking and sort of stodgy industries like tobacco as well. You know, I don't think people really expect tech to be paying dividends. So obviously is that commonplace now, the big tech companies, so they all pay dividends or actually you still got to be quite selective about where you're finding some sources of income. Yeah, look, I think you've got to be selective and really the point I was trying to make was we're happy to invest in some of those areas, even if they have very low, or frankly, even in some cases, no dividend. You know, what we're trying to do is find those companies when they are substantially undervalued and out of you versus intrinsic value. And I think look, you know, using an example from the past 12 months or so.

44:20Yeah, SML, I think is a great example, you know, a wonderful company, frankly, at times in its history, I, you know, we felt it's been overvalued. We followed it for a long time. And last summer, we felt at around sort of 600 euros, SML was substantially undervalued relative to its long run. Yeah, it's not one sort of intrinsic value. Now, yeah, SML at that point, I think had around 1.2%, 1.4% dividend yield, not substantial clearly, but had growing it nicely over time. But it's not the kind of company that we were expecting to get much yield from. We were expecting actually to generate decent capital returns from that. And I think, as I highlighted, that just allows us in this, in this trust to harvest capital upside and certain companies like that where the dividend yield might be a bit lower than you might expect in a typical income product, as you mentioned. But it allows us to go into areas where we think we can deliver good risk adjusted returns for our trust holders.

45:24I think a lot of people who hold an investment for generating income, you know, they kind of hope that it's going to be as sort of smooth a ride as possible in terms of, you know, particularly people in retirement, if they're no longer getting a salary, they're leaning on their investments to essentially pay the bills. So obviously, you need to think about dividend sustainability, a stock like SML sort of linked to the semiconductor industry has good times, but also goes through bad times. What do you do when you look at these companies and say, like, yeah, they're interesting now, but are you sort of have to be prepared to perhaps not hold them forever? You need to think about this times when they're going to be good for the portfolio, but when they go off, they're sectors out of favor, you need to look elsewhere. When I look at the long term history of investing in equity income, often the companies that have the highest yields at the outset, you know, often some of the worst returning businesses, because the stock market has worked out that there is something about that business that is unsustainable.

46:30There's a lack of growth, there's competitive threats, it's just the mature low growth industry, perhaps it's over 11. And often, if you look at it, the sort of expected yield versus the realized yield is very different, realize you're being much lower because a proportion of those higher yielding companies tend to have dividend cuts over time. And we've seen that recently in certain areas, you know, automotive is perhaps a good example. Well, we're trying to do a fine companies where on a per share basis, the dividend is growing over time through the organic growth of the business through M&A and capital deployment by the management teams, perhaps by share by back as well, that can also help on a per share basis. So if I look at the kind of companies that we love, I would say, you know, in the last sort of five years or so, a company such as three I in the UK, which is growing the dividend that's a 16% or so. CCP, you assisted but code code of European Pacific partners, the bottle, I think they've grown their dividend around 10% plus or so for the last sort of three years.

47:33So we're not shooting for the highest yield in terms of starting yield of any of our positions, but we do want those companies to grow those dividends over time and the companies which can grow their dividends, we think are much better basis to be over the long run. Now, to take your question on ASMR, you know, absolutely semi conductors can be pretty cyclical industry and, you know, look, there are times to own them and times to not and absolutely we, but look, I think I don't think philosophically we feel that we should own anything forever, I know that that's become a bit of a sort of mantra over the last sort of five or 10 years. But I think partly that was driven by the zero industry world that we lived in and if you look at just the last few months in markets and particularly the last month and a number of companies that were seemed to be, you know, insurmountable in terms of the moats around the businesses, you know, the data they had, the, you know, they're sort of links into into their customers, you know, very strong and those things are still very true with that narrative is getting questioned by, you know, the rapid rise of AI now.

48:38We weren't going to all of those companies and many of them are very different and I think many of them will be immune to that, but the point I'm really trying to make is that many of those companies became very highly valued. For good reason, but yeah, they're share prices and their valuations reflected an almost perfect outlook for the next 10 years and that's being challenged at the moment in some of those capital like businesses and so, you know, I think one of the things that we've always tried to do in this trust is be active and so. yeah we're trying to take advantage of whatever whatever opportunity set may be in front of us and that might be capital heavy and might be capital like it might be technology, it might be consumer staples. But the market structure has changed a lot in the last sort of 10 or 15 years and it's moving faster and I think that that allows us the opportunity to move the portfolio perhaps a little bit more rapidly than we used to just on subject of you mentioned about share bybacks i know particularly in in America there's a real sort of love among big companies to.

49:38To perhaps prioritize share by back so I wanted that if that meant that you know they're using using surplus cash to return to shareholders they're choosing to do it by share by backs does that mean that. The dividends are sort of suffered and I think perhaps as people got used to the love of share by backs that actually ever parts of the world are doing the same thing you know it's actually we're seeing. Not as generous dividends as we might have seen say 10 years ago because share by backs are sort of taken a bit of the pot. Yeah look I think I think a lot of that's fair I think there's a lot there's a lot to sort of unpacking that so I think in the US particularly look some of the most sort of egregious by back programs I think are often you know employee get rich quick schemes effectively yeah they have because on the other side of that they're issuing huge amounts of stock to to employees in terms of share based compensation. And actually the net effect of the share by back is not really to reduce the share count over time it's actually often quite flat so there's a sort of transfer of wealth effectively from shareholders to employees which which will obviously not big fans of look I think.

50:45The way I think I maybe best explain this we think about everything on a per share basis we ultimately are a shareholder of you know sort of single share so you I think share by backs can be really powerful. Really a brilliant sources of retirement shareholders because what they allow is an increase in our per share value in the company. Both from a sort of capital level but also from an income level so. If I think about a company such as standard charted which obviously went to a pretty tough time at the back end of the last decade and then through COVID but since then on the on the sort of bill went as management. We have increased the dividend I think at 26% Kager for three years no sorry more than I think it's 45% for three years for start of a low base obviously but since 2021 standards have have shrunk the share count by 26% there are 26% less shares an issue now.

51:45And so if you think about what that means from a dividend paying capacity for the business let's just say the business can still pay out the same nominal amount in in pounds millions then on a per share basis obviously that goes up quite dramatically if you don't sell into the into that share by back and so. You know I actually think the combination of of dividend and I talked earlier about the importance of dividend growth you know by backs can be a very powerful contributor to dividend growth on a per share basis but you want to buy those shares when they are below entrance value and look since we're sat here in the UK I can't think of a better long term example the next feel see that is a business that for years everyone said look general retail retail it's hard. Internet blah blah blah I think they've grown revenues of our full four and a half percent for 20 years but actually delivered a brilliant total shareholder a time because they've combined increasing the dividend over time you know with very consistent execution on the share by back and on a per share basis that's been amazing for long term shareholders and so I think by backs can be a really powerful contributing force to dividends and dividend growth.

52:59But I think you know what what you have to be careful of is companies doing it at the wrong time you know we talked about six companies often companies are buying back shares at the peak of the cycle when they have the most excess cash of course often that's when they're shares are over valued and so you know you need to take into account how management think about it when they execute and whether it is actually a value creating force or lots. Yeah I mean what what about we talk about dividend growth what about dividend cuts I mean it feels like you know there's a couple of little bits in the news at the moment Stellantis said it's not going to pay you dividend down that's the sort of the the big car company the house builder barrett said actually we're going to have to cut dividends a bit. Are you seeing signs that you know companies are perhaps being a little bit more cautious or is it is it just an indication that if you either have a business that's in a bit of a you know financial strain. It's probably best if they do pause the dividend or cut it a little bit but generally it's still quite healthy healthy out there.

53:59Yeah look I think if you look at the aggregate I think using data I think from S&P global I think dividend growth for this year is meant to be around 3% also which I think is a bit slower than last year I think 25 was just under 5% dividend growth aggregate. So I think there is a little bit of that going on but I think to your point you've you've delighted on an auto company in a house builder. Yeah I think both are probably pretty tricky markets to be in at the moment I mean clearly Stellantis has had this you know big big sort of reverse in policy around electric vehicles versus some combustion engine and that's that's a real challenge for them but. And that's why I think you know when I think about what we're trying to do and in this trust is maintain a you know portfolio of you know recently concentrate portfolio 40 to 45 stocks making sure that within that there's a lot of idiosyncratic opportunity but companies where the dividends will grow over time and they're not challenged so you know I talked about 3 ICCP.

55:02And you know I'd also include something like Canadian Pacific which as a rail business you know really hard to disrupt you know went through a big merger with Kansas City Southern which created some challenges and so they had to sort of slow dividend growth for a while but that's a great actually it's a great example of a company that is now aggressively buying back shares and increasing the dividends I think the dividend increase has been about 15% this year at CP. And yeah so I think you are job obviously is bottom up you know fundamental stockpickers and poor video constructors is to try and avoid those companies that you talked about such as Barrett or Stellantis where they're the industry or businesses challenged and try and really just you know concentrate our capital in the areas where we feel that the businesses can you grow through different environments and keep paying those growing those growing dividends. Well Stephen thank you so much for joining us absolutely brilliant to have you other podcasts and hearing all your thoughts about income so thank you very much. Well thanks for having me then and yeah we'll see you again soon. Thanks again to Stephen and S for coming on podcasts and that's all from us today hopefully we give you some good food for thoughts on different parts of the investment trust world.

56:09Now we'll be back with our monthly investment trust special on the first Monday in April but until then don't forget to listen to our normal weekly podcast the age of all money and markets podcasts in the same place. Until then see you next time thanks for listening. This podcast is for educational purposes and the views expressed don't necessarily reflect those of AJ Bell. The podcast isn't telling you if a certain investment is suitable or not. The value of investments can change and you can lose money as well as make it. It's also important to remember that how your tax will depend on your individual circumstances and rules can change. The way an investment performed in the past may not be the same as how it behaves in the future. If you want help go see a qualified financial advisor.