What Wealthy Investors Are Buying: M&S and Glaxo
This is the first part of a two-part transcript in which Fool.co.uk's David Kuo chats withElissa Bayer, investment director at asset manager Williams de Broe, about the concerns of wealthy investors. They look at the potential of government and corporate bonds and the likely impact of quantitative easing. Elissa also reveals some of her favorite shares and why she likes them.
EDITOR'S NOTE: What follows is a lightly edited transcript of David Kuo's conversation with Elissa Bayer.
David Kuo: This is Money Talk, the weekly investing podcast from The Motley Fool. I'm David Kuo, and if you want to know what the wealthy people are doing with their money, well, you need to ask somebody who handles the money for those wealthy individuals. So who better to ask than Elissa Bayer, investment director at asset manager Williams de Broe? Welcome to Money Talk, Elissa.
Elissa Bayer: Hello, welcome to you!
David: Thank you very much, thank you very much for coming in today. Now, I guess one question I want to ask you right now is how worried are wealthy people about what is going on in the world right now?
Elissa: I think the asset management houses, the former stockbrokers, fund managers, first of all we're not dealing, I would say, with the supremely wealthy. We are working with people who have a reasonable sum of money and are trying to get the best return for them, and that's both capital appreciation and income. Obviously, people are not getting anything or money on deposit, so the job that we have to do is make this money go as far as possible. What we are also seeing is that people have to support their children, and the age of children are going up all the time, so a lot of people are giving far more money away than used to be the case, whether it's for school fees, whether it's for house, mortgages, whatever. So, looking after your children is a very big feature of what we're doing. I think clients today are much more rational, if you like, there's not very high expectations anymore. People can see what is going on; they're getting it all ways from the news, from the newspapers, television. They're being bombarded with information that it's all bad so I think clients are much more sensible, but because of the rate on deposit, they're giving us more money than used to be the case.
David: Right, so when you say their expectations are more modest these days, what exactly does that mean in numbers terms? Are they looking for 2%, 5%, 10%?
Elissa: The majority of my money is discretionary, so therefore, the decisions are mine, but whereas I think 2011 was a much better year than we expected and you got a lot more takeover, say a lot more things where you could really make money, this year is proving extremely difficult. So I think if clients make somewhere between 2% and 5%, many of them are much happier than they might have been, say, two years ago when that would be a figure they wouldn't be looking at, they would be looking at double figures. I think there's no expectation; if you're going to make double figures this year, you're investing in something which is top-of-the-range risk.
David: But is 5% adequate for somebody when you think that inflation is running at somewhere around about sort of 4% or 5% anyway, so surely I mean they must be beating inflation to have any kind of satisfaction?
Elissa: Well if you think that if you like there's a negative fact that bank deposits are giving such a low rate, people are so depressed by that, that if they make 4% or 5% either on income and a little bit more on companies that are growing, and despite what's being said, there are some companies that are really doing very well out there and seem to be going against the trend. If you can find those sorts of companies and a yield as well, then people are prepared to invest.
David: So what are you recommending to or what are you acting on a discretionary basis for your clients on at the moment?
Elissa: Well, I'm seeing quite a lot of cash coming in, as I say, and if people have got any money deposit they're taking it off. So I think what we're trying to do, I'm all about really stock picking. I don't think you can say any more areas of the world, I don't think you can say particular sectors, if you look at, say, supermarkets, Tesco's, Sainsbury's, Asda, Morrison's are all performing at a different rate. So I really think you have to look at your stocks at the moment and see where you can get the best value.
David: So are you shunning bonds at the moment, Elissa?
Elissa: Not very much. I'm not doing very much into bonds. I think there are interesting bond issues coming through. There was an index link last week, Severn Trent (ISE: SVT.L) , which we put money into. I think that looks good, but I think what you have to look at on the bonds are there's some very interesting things in the bond market, but the yields are going to be high if the quality is low. You certainly have clients, though, who have a higher appetite for risk, and you've got to accommodate that as well.
David: Now there's a very popular saying at the moment, Elissa, and that is that return of capital is more important than return on capital. What are your views on that?
Elissa: I think certain companies, because they...they're not going to invest, which some of them are not doing; they're going to return capital to shareholders. So I think that is a good thing, but ultimately you are in companies because you do want them to grow, and the problem is with the climate at the moment, they're not investing, so giving back to shareholders is one way to do it, but I think whichever way you get the money as a shareholder, I think in the current environment you're prepared to take it.
David: OK. Now then, this is my question that I ask most people who come in here and this is their view of quantitative easing, because we know the Bank of England has authorized another 50 billion pounds to be pumped into the U.K. economy, taking the total amount of QE here in the U.K. to 375 billion pounds. Over in America, you have about a trillion dollars and over in Europe you have a trillion euros. Now, every analyst I talk to seems to have a different view about QE, is it good, bad, or is it just inevitable?
Elissa: Well, in Europe, when I think it was done, when they changed the governor of the European bank, it did make a definite difference and it was a bit late in the day when they did it, but you could see European markets, European banks, the whole thing did ease, so it did what it was supposed to do. The problem is, definitely the downside everywhere is you're given all this money and at some stage you are going to have to pay it back. So I think that is a real worry, but if you look at the Americans, they don't even seem to talk about paying money back or their debt, which I think is a very worrying scenario.
David: They just keep on raising their debt ceiling, don't they?
Elissa: They just keep doing it and, you know, they look at one side and they just don't even talk about the other side. So that I think is a real problem going forward. In this country I think they have done it, the gilt market therefore remains unattractive for investors because all the gilt prices are far too high. At some stage if they did ever pay it down the gilt market, that would have to be very carefully worked out how they're going to do that. So I think that is a concern, but I think your problem at the moment is can you get the money into the system and can you get it lent out to people, are you investing in businesses and going forward? I think one of the problems is that despite constant quantitative easing and more quantitative easing, are you seeing more investment, and the problem is not as much as you should be.
David: You see one of the problems with quantitative easing is watching these bond prices at the moment because here in the U.K., 10-year gilts are around about 1.6%. In Germany, it's pretty much the same, 1.5%, 1.6%, and I saw recently that in Germany, two-year German bonds were negative, in other words, if Germany wanted to borrow money you would have to pay it interest in order to actually buy these two-year bonds. I mean how bizarre is this situation?
Elissa: Well, I think the situation is getting worse from that point of view, and therefore, at some stage nothing carries on forever and there will have to be a change, but it's certainly not there at the moment, but with all this money going into the system, the result should be better and it's not. So there is a fundamental problem and just issuing more money may not be the answer. This time around, they couldn't see any other way around.
David: So when do you think this is going to happen? When do you think this money will start to emerge in Europe, in the U.S. and also in the U.K.?
Elissa: I think it won't happen when you don't have confidence, and the problem is the type of politician that you have and the amount of elections that you have, and the uncertainty, means that people feel actually, despite the fact they get no interest on it, a lot of people are happy to keep it under their pillow and that's a bad sign.
David: OK, let's move on to equities now, Elissa, because this is my favorite subject, equities. In your view, do you think that shares are cheap right now?
Elissa: I think there are companies, as I say, that are doing things that actually carry on making money and do what they do well. So they ignore the politics, they ignore other things and they constantly make efforts to progress. So that bit I think is good and I think there are still companies you want to buy. I also think though unfortunately, that companies can get hit by things through no fault of their own, so you know, if coffee beans go up enormously and people decide they're not going to pay the amount of money they pay in Starbucks or Costa that is beyond what...
David: But isn't that what management is there for? Isn't management supposed to be able to preempt some of the stuff that's going on?
Elissa: I think it is, but if you get things, for example, and the moment like floods in this country. I think things can happen that you're just not expecting and there seems to be quite a lot of unexpected, could be acts of god, could be other things that affect companies that you're not expecting, but there are some really good companies that despite what is going on seem to be going ahead and making progress, and that's encouraging.
David: Now the thing is, I mean, on the day that we're recording this podcast, Marks and Spencer's (ISE: MKS.L) have just come up with first-quarter figures. Now, in the case of Marks and Spencer, I don't know whether you're a fan of Marks and Spencer or...
David: Well that put me in my place. Now as far as Marks and Spencer is concerned, food sales are doing OK, clothing sales are not doing OK at all. So, when you have a look at an iconic brand, a high street icon like Marks and Spencer and it's not doing well, what is that telling you about the retail sector?
Elissa: I think they are an icon, and I always remember one of the chief execs coming in and saying, I think it was Peter Salisbury, that everybody's got a view of Marks and Spencer, you know what I mean. Everybody thinks they're an expert. They don't do it with Next or, you know, any of the...
David: Monsoon or anything.
Elissa: Monsoon or anything, but Marks and Spencer, everybody's got a view so I think that's difficult. I do think they've lost their way. One of the interesting things on food sales is they don't break down their food sales very clearly, so it's quite hard to know, for example, the standalone food stores, how much they're making. So I think their figures are not very opaque. I think though on the retail on the women's side on clothing, I think they've tried to be all things to all men. It's not definite anymore when you go into Marks what it is you're looking at, and I think that's bad. Against that, Asos's figures came out this morning and they were absolutely brilliant. I think you absolutely need to focus on what you are doing best and Marks, as I say, have gone all over the place. You've had successive reorganisations, store reorganisations. You go into Oxford Circus it looks like a department store, that's absolutely fabulous, but if it's going to be a department store you need more staff and I think it's down to that level, what do you want to be to your customer, and I don't think customers know. I think customers are pretty savvy if they don't think they know, or they think it's too expensive, or it hasn't got the right thing they want, they just leave it alone. John Lewis's sales are up, again, their online offering every week consistently you see the figures, they're going up, so there are...
David: Why's that?
Elissa: Because I think they've got a very good offering, they bombard you if they are on their online with things that you might want. If you go on their site and you don't buy something they come back and send you an email, why haven't you done it? It's very, very clever marketing and I think Marks just haven't got it in the same way, but because it's an icon, everybody looks at it, but I don't think what they're offering at the moment, I don't think it's a share, again at this level, even though the share price is fairly weak, I don't think there's a need to rush it. I think even icons can get it wrong so one has to be careful.
David: Do you know, if I ask my son, who's around 20 years of age, "What do you buy from Marks and Spencer?" he would say "food." He wouldn't say "clothes."
David: So it looks as though Marks and Spencer, with Marc Bolland at the head.
Elissa: He might not have said "food," he might have said "sandwiches," you know what I mean, it's not across...
David: It's food.
Elissa: I was going to say it's not across the range and they remain expensive. They also offer things, you know, like three for two and whatever, but actually sometimes, you don't want it. When they do something very well, I mean they shoot out the lights. They get it right on an item, you know, nobody can sell it better, but they also have things, for example, their Christmas ranges, you think at no price do you want it. When it's down to 1 pound, you don't want it, and you think who's doing the buying? So they have that power to do it very well or very badly, and I think that's the problem.
David: So it sounds pretty much as though Marks and Spencer is...
Elissa: Not on my list!
David: OK, is a no-go area at the moment.
Elissa: I mean I think retail is hugely difficult, to be fair, really difficult, but if you're looking...
David: So why is Next doing so well?
Elissa: Well, I think Next has got its customer right and I think also they were the original one with a catalogue, but I think there are a lot of people with money who are shopping outside the hour. So I think the online offering, which 10 or 15 years ago, people thought would be great and wasn't, I think needs to get better and better, and that's where people are going. So online footfall is enormous.
David: OK, so have you got any other no-go areas at the moment for equities?
Elissa: I'm a bit anti-pharmaceuticals. I mean I love Glaxo (ISE: GSK.L) , but I think Glaxo was really a 1980s stock. Interesting, Perpetual in particular are very overweight in pharmaceuticals, I think they've got fantastic yields, but the share price just doesn't do what you think it's going to. I think because of the fact it's so hard to bring on new drugs life has got more difficult in that area. So I think you have to accept when you're doing portfolio management, which is difficult in today's world, that there may be sectors that you actually don't want at all because they don't make money and I think probably banks in my opinion, fall into that category. I mean I think Standard Chartered (ISE: STAN.L) is a great bank, but however cheap some of the U.K. banks seem to be, I think there's a real problem they could be cheaper. So you have to really look at your stocks carefully.
David: I'm stunned into silence, because at the moment, when I look at banks I just think they are ostensibly cheap because one of the general rules of thumb, as far as banks are concerned, is you buy when the P/E ratio is below 10. In the case of Marks and Spencer, its PE ratio is five, which is significantly below 10. It can't really get much cheaper than that, can it?
Elissa: I think you need to decide, even with a P/E of five, is it the right time to go in or can you wait and see what happens, but I think you could find that you would be holding some of your banks and even your Marks have been taking a terrible, you know...really saying, "Gosh, what a risk." In a year's time, will they either be the same price or will they have moved ahead? You would think that the banks are so low that the prices will move, but you're not seeing really clients who want to move into banks. The speculative people do and OK, it goes up 2 pence or 3 pence, and they're in and out, but if you're a long-term holder and you're looking at, there's still more things that could come out which could make it unattractive.
David: Now the thing is, we had David Buik here just last week, and David Buik was saying -- he wasn't giving this as a tip -- but what he was saying was if he bought Barclays (ISE: BARC.L) shares today and in three years' time you looked back you would say, "Hey, you know, this was actually quite a good investment." So he's given himself somewhere between three and five years for Barclays to turn itself around.
Elissa: Yes, but I think when looking for clients, I mean I look after discretionary money and what I hoped to make is sound returns. I think I would like to look at Barclays in a year's time. I don't think I necessarily need to hold them for three years to find out where my money's going to go, but I do think with what's happening at the moment and because of the fact that everybody wants to bear everything and that's becoming increasingly obvious that things have happened in banks that people would rather didn't happen, but as more of this comes out, a bank could look cheaper. I think, I suppose if I've learnt anything over the years, there are no sacred cows among companies or shares, so the fact that, you know, something either looks very expensive or very cheap, or going up in a straight line, you either have to take the profits, or you actually have to decide, "I don't think that company's going to do well."
That was the first part of a two-part transcript in which Fool.co.uk's David Kuo chats withElissa Bayer, investment director at asset manager Williams de Broe, about the concerns of wealthy investors. In the second part of the transcript, Elissa reveals her favorite shares.Just click here to continue reading.
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The article What Wealthy Investors Are Buying: M&S and Glaxo originally appeared on Fool.com.The Motley Fool owns shares of Standard Chartered and Tesco. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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