LSE 00:01
You are listening to Investing Matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice so please do your own research. Hello and welcome to the investing matters podcast.
Peter Higgins 00:17
Hello and welcome to the Investing Matters Podcast.
My name is Peter Higgins, you can find me at Conkers3 on Twitter.
And today I have the huge privilege of speaking with Keith Hiscock, the CEO of Hardman and Co, a London based multidisciplinary, financial consultancy investment research firm, employing highly experienced analysts and professionals with a broad range of capital markets experience. Hardman and Co also happens to be the longest established commissioned research provider in the UK.
Very good afternoon to Keith.
Keith Hiscock 00:54
Good afternoon to you.
Peter Higgins 00:57
Okay, Keith, I like to start this conversation with you, because you've got from 1979 here, I've got in my notes investment role.
And you’ve accumulated a vast amount of investment experience in the investment industry in knowledge, etc.
And I think our listeners are really, really lucky to get your insights today, what I like to start the conversation with what I'm led to believe is a very, very early start a very early interest in the stock market.
So please, can you tell us about that, please, Keith?
Keith Hiscock 01:29
I think what you're referring to is when I was at school, I was a bit cheeky to a teacher in the first year of senior school, I got detention and in detention, I was required to copy out chunks of the Financial Times.
So I'm copying out chunks of the Financial Times I think, actually, this is really interesting.
And so immediately afterwards, I took out a student subscription to The Financial Times, it was at the age of 11.
Peter Higgins 02:00
Amazing, amazing. Love that story.
Thank you ever so much, now, you continued that interest ended up going to the University of Oxford, mate, Oxford University, which you got your Master's degree in Philosophy, Politics and Economics.
And Oxford got a huge reputation via its PPE graduates and producing UK Prime Ministers, Chancellors of Exchequer, Government Cabinet Ministers and Politicians.
Were you ever interested in their political career path, Keith?
Keith Hiscock 02:30
Well, I was, but I thought I'd first of all go off and make some money in the City, in order to finance probably a rather lesser paid role in politics.
But you know, you get sucked into the City, it's intellectually very challenging and interesting.
And the trouble with politics is, it's a very tricky job, you know, you can lose your role through no fault of your own, you know, you if you're an MP, you can lose your seat, you could have done a great job and whatever, but your party is just out of favor.
You know, you could have been for the last whatever it is 13 years, you could have been a phenomenal guy in the Labor Party, but not got the chance to serve in cabinet because you're out of office, and you know, your time might have now gone.
So it's a very tough job, but it's very badly paid, frankly.
I mean, people think politicians are paid a lot of money they're not, I reckon that 80% or more of politicians could earn more money doing something else than they do as a politician.
And you know, that decision, mine was long before the issues about social media and all this trolling, etc, it's a tough job.
And I'm, you know, I don't think I want to do it these days, you know.
Peter Higgins 03:49
I love that response.
Now, do you know anybody from your intake from when you're doing your Master’s that actually went into politics?
Keith Hiscock 03:56
I know quite a few and in fact, I was at dinner with a former Cabinet Minister couple of months ago, and he was complaining about how little money he'd made over the years.
You know, it's a very eminent Cabinet Minister, but you know, he could have made a lot more money for his family and that doing something else in the now.
Peter Higgins 04:21
Indeed, I want to talk about your career path now.
Please, just share with us your greatest lessons and experiences from 1979 to 2001, where you went from being a graduate trainee at James Capel Stockbrokers to Equity Sales and Corporate Roles at Wood MacKenzie, Hoare Govett and Schroder Salomon, which is, I think was Citibank as well at some stage.
Can you give us a little bit of that piece, your history behind all that and some of the experiences during that time, please?
Keith Hiscock 04:54
Yes. So I don't come from a City family. I knew absolutely nobody works in anything in the City.
And I think one of the understandable errors that people make is they think of the City as one thing, but actually, there are lots of different sorts of jobs within it, that have got different kinds of requirements of skill sets and because I didn't really understand all of those.
One of the reasons I chose James Capel was that it gave me a nine-month training program where I spent a month in every department and so I knew a little bit more by the end of that then I did, then I did at the beginning.
So as I say, the first lesson is, it's not all the same thing I'm going to call it investment banking these days, there are lots of different roles within it, I decided that I was most interested in equity markets, because what I like is the way in which economics and politics interreact.
And so you know, one minute, you can be talking about the macro issues affecting markets or the economy, another minute, it might be political issues, another minute, it might be business models.
So that's really why I've mainly focused on equities and institutional equity.
So I've had a career advising the top fund managers in the UK about what they should be doing with their portfolios. And then alongside that, I've done quite a lot of work in the corporate space where I've advised companies or done fundraising for companies or takeover bids, all that sort of stuff. There's a lot of excitement, all of that, because when you come in each day, you've got no idea what's going to happen. I mean, you that some was going to happen, you know, you got to get results coming from BP or that whatsoever. But things just come out of nowhere.
And you've suddenly got to reorientate yourself and think well, what does that mean for the rest of the market. And you're also kind of making the news in a way, particularly when you're doing a takeover bid or raising a large sum of money.
You know, that's, that's all very exciting. I think the business I think what might be interesting to your listeners is that that business changed quite a lot over over time. So I joined before Big Bang. So Big Bang was a government shake up of the regulations, the City was pretty clear, cozy kind of place before that.
And it became much more entrepreneurial, and sort of aggressive really, after that they'd before Big Bang, all these firms were partnerships.
After that they became companies, largely companies like every other company. So that was a change, we used to only be able to have one capacity, you could either be a broker or a market maker, you couldn't be both veterans with Big Bang.
And I think the way in which businesses made their money changed. So today, a broker really makes its money out of fundraisings and takeover bids, it's not really out of trading in the shares and existing shares of quality companies.
Whereas when I first started out you, I think you'll make more money out of trading shares than you did out of fundraising. And that's one of the reasons why there's less research around because there's no money to pay for it really.
So these firms have changed quite a lot. I mean, the core of what they do, which is to raise money to help investors, professional investors, and retail investors, in some cases, make their minds up about what to buy and what and what to sell. That's still there.
But the way in which you make money has changed really, quite dramatically.
Peter Higgins 08:50
Absolutely has.
Now I want to touch on the first 20 years there from ‘79 to 2001. Who were your role models, Keith coming into the market, and as a young chap, you know who your champions who gave you that sort of feeling that I belong here, you know, I could do well, you know, who was championing your you?
Keith Hiscock 09:10
I think some of the guys I worked for, you know, different firms before Big Bang, as I said, they were partnerships. And they were a bit like golf clubs really, in that they were a bunch of like-minded people who recruited people who were like them.
So you'll be amused about the fact that I think I was approached by Cazenove, which is the most blue blooded firm historically, three times and every time the recruiters have, it's all very different now. You know, they'll take Grammar School boys, which is what I was, well, it never happened but I never got the job, whereas other firms were based upon, you know, meritocratic backgrounds or whatever, you know, and I think, you know, one of the areas that I was particularly interested in was in the corporate space and there were before 88, 87, there were three big brokers in the market.
Cazenove was one of them. I worked for Hoare Govett and there was another firm called Rowe & Pitman.
And basically they sewed up the market, certainly amongst the FTSE companies in all that corporate transactions.
And it was extraordinary to watch the way that people operated, that we have a fantastic guy at Hoare Govett called Peter Meinertzhagen.
And if you read his obituary, and it was absolutely right, which is he acted in the interest of his clients, not the firm.
And I always thought when I was talking to fund managers, for example, I was really being employed by them not by my firm.
My job was to look at everything that we're doing, you know, the ideas we've got today, what the analysts are telling me and work out which bits fitted my clients so I had to get to know my clients very well. And so you get that say 10 stories in the morning meeting.
And I'd go through those stories and say, well, you know, these two will work for this client, but the rest of them won't.
And so you tailor it. So you became really quite close to the clients, because you understand all almost as well as they do, how they run their funds, and therefore what sort of things they're looking for.
So I always felt my you know, my salary was my bonus was paid by my clients, not my firm, really.
Peter Higgins 11:35
That's a really good ethos to have.
So going back to what you say about Cazenove, and the roles there and meritocracy of getting certain jobs and not getting certain jobs, you ended up as the CEO of Metzler, if I pronounced that correctly, please can tell us about how that came about and the different dynamics then because obviously, you're leading you're building the culture of a firm, you know, you've got all that autonomy. So tell us about that one please?
Keith Hiscock 12:00
Oh, that one, it’s an unusual one because in a sense, it didn't get off the ground. So as a German bank, a long-established German bank, wanted to build a business in London.
And so they came and sought me out to go and do that.
It didn't, it didn't take off because the bank itself had to pull back because of its own financial issues before we'd launched.
So I went and got a job somewhere else as a result, but you know, you’re right to say I've, you know, I've run a number of firms or parts of firms in part of my career.
Peter Higgins 12:30
Yeah because it's family owned banks, I thought there might be some dynamics there with that. So okay, so we get to 2002-2009.
Your role, firstly, as head of equities, often graduate to head of equities in 20 years, and have equity sales at Panmure Gordon, and then the same role at Evolution Securities, please, please share us the role, what it encompasses there, what you did during that tenure, but both entities please?
Keith Hiscock 13:05
So the main role of that is what the firm will have is a group of salesmen whose job is to service institutional fund managers. And the job of head of sales has got several roles.
Part of it is to say, well, who's best for which client, because, as I said earlier, different clients have got different sorts of approaches, there are some clients that focus on really deep understanding of a company, you know, they might like balance sheets, knowing everything about the balance sheet, there are others that are sort of maybe surfing over the market more, because they're looking at, you know, bonds, as well as equities or something like that.
There are different sorts of characters, just as there are in life, you know, you make friends with people are generally fairly similar to you. So part of the job of equity, so the job of Head of Sales is to work out who's best for whom, and then to go, you know, and to keep up some kind of contact with all the clients to help understand that the other thing is to motivate the team, and to get the best out of what's coming through.
So for example, let's say we've done an IPO in in something, I would expect us to do all the trading in the IPO after that, because we know who owns every share at the start.
And we've probably talked to everybody in the market and got their view, you know, some people might have said, well, I'm not going to be a buyer at the price you're doing at. But if it fell by 10%, then I would be a buyer. Some people have got it in the you know, the IPO, we'll be saying, well, you know, it's a long-term holding what others might say, well, if it flips up 20%.
So we should know more about all sides of the market than anybody else. And so we should dominate the trading post IPO. Another part of that would be I have to do things like help to price an issue.
So whether it be an IPO or a fundraising in a my understanding of the market, and of investors attitudes to the particular stock or that particular sector, at the moment, should help me to understand what's the right price for doing a deal.
You know, there's no magic answer to it. But it comes from a feel as to the market's attitude towards something. I do that and I'd also be liaising with the corporate department and with the research department. That's what that's what the role involves.
Peter Higgins 15:43
Brilliant. I love that full response case. And it's really interesting, we've said there about helping to gauge the price of the issue or the fundraise, how does that work sometimes when you may have a slightly more positive outlook as to the valuation versus what the company may have, there might be a bit tentative maybe, or vice versa?
Keith Hiscock 16:05
Well, that's where the discussion comes in and, you know, I mean, if you're the company, you should listen to the advice.
I often come across companies who know a lot about their business, but they don't know how investors look at their business.
Because they don't talk to investors day in day out. So you know, one of my bugbears is there are some providers in our world who say, what's the best way of getting your message across Mr. CEO?
Well, it's an interview with you, Mr. CEO, there's nothing wrong with it with an interview with the CEO, or CFO.
And that's all-valuable information. But it's not the whole answer, because the CEO might know how his business is doing.
He might know how it's doing compared to other businesses in his sector. But he's not going to understand how investors think about his sector or his company in the same kind of way.
Because he doesn't talk to investors day in day out, you know, there's, there are waves of fashion. I mean, I remember we did a fundraising for a client of ours last year, it's a fantastic business. And the reason for raising the money was, I had a load of orders in which they needed to put some capacity down to fulfill.
So it's not it wasn't speculative or anything like that, it's a great reason to raise money, but because of the attitude of the market at the time, and what was going on even very, very good opportunities, and very, very good companies struggled. It's understanding that sort of thing. There are times when, you know, there are times when any rubbish can get away.
There are times when nothing can get away.
And it's kind of understanding all of those sorts of things that are part of the role.
Peter Higgins 18:00
Really fantastic response that Keith, thank you very much.
Now, Keith, we're going to move now to 2009, you became a founding partner for the independent research firm, Agency Partners, please, can you tell us a little bit about that venture because a precursor to Hardman and Co?
Keith Hiscock 18:16
Okay, so Agency Partners, which is still going as a business is a specialist.
It writes research and distributes it, doesn't do any corporate finance work.
It doesn't have any market making. It's part of a cadre of independent institutional research firms.
There are quite there, there are several of them. I mean, you know, they don't generally the materials not available to the retail investor.
So I and a couple of friends founded this business to do just that, to start with one fantastic analyst in defense and aerospace, he's still there, and then added some others.
And we went out and established a firm from nothing. Tough work, but quite exciting.
It followed on from increasingly what was happening was that the traditional business model of stockbroker, or investment banker was getting harder and harder, because increasingly, it was relying upon corporate fees, and that sort of changes people's behavior.
So that's, that's why that's why we established Agency Partners.
It's still going, it's great business, got some good analysts. I spent three years there.
Peter Higgins 19:48
It's there now, Keith, you were then part of a group of investors that acquired Hardman and Co. in late 2012.
Please, can you tell us firstly, what initially attracted you to Hardman and Co, given what you were doing at agency partners?
And, what your initial aspirations were as a collective back in 2012?
Keith Hiscock 20:10
Yeah, so as I've already suggested, you know, that the traditional business model was getting harder and harder.
Put that into a little bit of context. If you went back in time, what would happen is stockbrokers used to have really grotty offices and pay small salaries.
Well, I guess they weren't small by the general compared to the average, but they were quite small, but they had very volatile top lines.
Alright, if you do a few deals in a year, you can, it makes a huge difference.
And so to reflect that, what firms did was to have very generous bonus schemes.
So they kept, they kept their basic costs very low so that even in the bad years, they could still cover those costs.
And then in the good years, they could pay out sizable sums of money that got more and more difficult for lots of reasons, one of which was the ridiculous reaction to the global financial crisis of saying investment bankers’ bonuses are too big.
They're incentivised to do deals that may not be in the public interest.
I'm sure the regulators and politicians thought that would de-risk the business. It did exactly the opposite.
Because what happened was that firms went and increased salaries. I mean, I have friends in the City, who had their salaries doubled overnight, because there was a limit on the bonus that you could pay.
Well, did that make it safer? No, it made it much worse, because your basic costs suddenly shot up.
So all of that was going on, and the job was becoming more and more about fundraising less and less about talking about research to institutional clients, and I just thought the tradition model was really difficult getting more and more difficult.
I thought about retiring actually, at that point now, though, I'll go and have a look at different business models. And I was vaguely aware of the sponsored research model.
So I spent some months looking at that and talking to people in the industry. And it struck me, Method 2, and it's going have a big impact.
I'd be lying if I said that I hadn't heard about it.
I just thought there was going to, you know, there was going to be that that was the solution sponsor research was the solution to the crisis in research, or part of the crisis, at least in research.
And the other thing I thought is that it would provide a way to monetise the skill set of investment analysts and capital markets professionals in ways that banks and brokers don't really want to do.
So having come to that, it came to my attention through a contract that Hardman and Co, which had been set up by a guy called Roger Hardman a long time ago in the 90s, might be for sale.
So I put together a little consortium, and we went and bought it from Roger, and, you know, I've run it ever since then.
Peter Higgins 23:21
Brilliant, no, very well done, and congratulations on it, still striving after, you know, 11 years or so.
Now, tell us about your role at Hardman and Co, please, what encompasses followed by an overview of how Hardman and Co, its solutions, scope, and examples of companies that it works with please, Keith?
Keith Hiscock 23:40
Okay, so I'm CEO, which means I'm sort of technically responsible for everything, but obviously, I can't, I can't manage absolutely every aspect of the business.
So my main focus is on the quoted company side of the business, working with the clients working with the analysts.
So that's my main role, in terms of Hardman, so I've already said it's, you know, back 30 years old, the bit, it's best known for is sponsored research on quoted companies.
So that's writing investment research about quoted companies, paid for by those companies, we're very open about that.
And we've got some protections for editorial freedom, etc.
And I think if you ask people in the market about that, they would say we're differentiated by the quality and the depth of our work, and by the spread of our distribution.
So our research is available to everybody, and is read by everybody from, you know, the world's biggest institutional investors through to retail.
So that's, that's the bit that you can, most obviously, see, we do. We are also known for publishing quite a lot of thought leadership pieces on things like liquidity analysis, or the tax revenues raised by companies, or how investor engagement has changed over time, all that sort of thing.
So, for example, the Treasury has recently published a review into investment research chaired by Rachel Kent, and you'll find out work is quoted in their report, we've got a relatively similar business in the tax enhanced space.
So that's writing about EIS funds, IHT investing that sort of thing. And then the bit, that's less obvious.
But in some ways, the most interesting is our consultancy work.
So this is where I said before that, you know, we've found ways of monetising our analysts in areas where the banks and brokers don't want to so that stuff like valuation of private companies, liquidity analysis, and we're doing that for a variety of firms.
So we're doing that for court cases doing that for authorised Corporate Directors.
So these are the people who stand behind OEICs, administering them. And where, you know, the fund is, so one of the problems with Woodford was he told the ACD, you know, this stock is worth, you know, this private company is worth this amount.
Well, how do they know that's right?
That's the sort of thing where we'd come in.
We do it for stock exchanges as a whole variety of things that’s really interesting, but you'll never be able to read about it, because it's obviously all confidential stuff.
So that's broadly, that's broadly what we do as a firm.
Peter Higgins 26:34
Brilliant, I love that you’ve covered all those different aspects and touched on the Woodford valuations that were given as well.
Can I just touch go back slightly, please and ask you a little bit more about the Hardman and Co EIS solutions, and review?
So I want to touch on something a bit later on. Regarding it, that space.
Keith Hiscock 26:54
Okay, so that's a space that's had research in the past, but it's pretty light touch. And in fact, we were asked to get into the space by one of the industry associations, because essentially, most of the research historically focused on the tax benefits, not what's the underlying business or the underlying fund, you know, how is it performed? What are the risks in it?
And so we've bought a rather different approach to it.
And again, that's all I mean, it's mainly used by IFAs, that sort of thing, but there's no reason why the man in the street can't read it.
I would say, as should be true of all sponsored research firms, we don't carry a recommendation or a target price.
What our work is whether it's in the EIS space, or whether it's in a quoted company space, is it's raising the understanding of a company, or a fund.
It's looking at what the risks are, and what the opportunities are.
There are some forecasts in there, but you can see what the factors involved in the forecast might be.
But we did not have a recommendation or target price.
And the reason for that is if we did have a recommendation or a target price, we'd have to go through and know your client exercise before sending out so I'd have to say, Peter, look, before I can tell you where these were buying this stock, I'd love to know how much money you've got under management.
You know, what are the what are your outgoings? What are the risks? What are your hopes and aspirations? And only then can I say, well, okay, this might be appropriate for you. I'm not having a recommendation or a target price. And by basically raising the understanding of the audience, you don't need to go through the exercise.
Peter Higgins 28:41
I love that reply for that way because my other question, and I still ask you this, because I think you've almost covered it in its entirety is the fact that how do you and your team ensure objectivity when assessing the qualities of a commissioned research client, and you've almost covered it all there, Keith, well done.
Keith Hiscock 28:59
There's a bit more than that to it. So let me take you through what we do. And many firms do exactly the same as what we do.
Some do it slightly differently. But I'll just describe us.
So first of all, before we take a client on, we'll have a what we call a commitment committee.
And that committee consists of independent members and they're, they're looking for two things.
They're looking for credit quality, you know, if we write this and do this, I'm actually going to get the money hidden for it. Because what's the what's the impact on our reputation? Who are we to do this? And that reputation is pretty important to us, because what I've said before about working for law firms and stock exchanges, and Corporate Directors.
So that's the first thing now, obviously, you can take something on and things subsequently go wrong.
That's life, isn't it. So that's the first thing.
The second thing is we employ a bunch of professionals, you know, typically, our analyst has got 25 years’ experience, they don't want to put all their reputation at risk by writing about something they don't believe in.
The next thing is, and I should say, going back to the commitment committee, we don't take everything on that was show.
I mean, we were showing an internet business that IPO’d a couple of years ago, or crypto business I should say, IPO’d a couple of years ago, and we struggled to work out how it made money.
And so we said, we just don't want to don't want to write about it, because we don't understand it. What then we'll do is, so what the research note is designed to do is, look at the business, look at what it does look at what the opportunities are, what the risks to that are, we're not going to ignore the risks of it.
And look at the valuation, look at the forecast, all that sort of thing. But I think there's some critical things in our contract, that should give an investor comfort.
So all of our contracts will say, before we publish a piece of research, we will show it to you, the client, the company or the fund.
And you've got the right to say there's a factual error here, we'd like you to correct that.
You've got the right to say you've put a commercially sensitive practice in that we don't want to be in the public domain.
So we can take that out, beyond that, the only rights you've got is to tell us not to publish, you cannot tell us what we're going to say.
Now, obviously, there's a discussion takes place. And if there were something tricky, we give them we give the company the opportunity to respond.
But the ultimate sanction is to say, no, that's what we think we want to write. And if you don't like that, then you can tell us not to publish the contracts very clearly written, you still pay us so you cannot hold us to ransom.
Obviously, if that happens, we're quite likely to lose the contract in time but so be it.
What you should ask is, how often is it actually happened? And the answer is, I can think about two examples in the last 10 years. And I'll give you one.
We had an insurance company we wrote about first couple of notes were fine, we then get to an we then get to a set of results.
And we say our analyst says look, you're going to need to do a fundraising of some sort, you're either going to need to have a rights issue, or you're going to have to do what's insurance markets called a quota share agreement, which is I share the risks and the benefits of your book with another company.
And they vehemently disagreed with us and wouldn't let us publish.
And of course, what happens a few months down the road is I have to do exactly what we suggested they were going to do. So you know, we're vehemently independent about that.
You know, we have, you know, we're careful who we take on, we obviously have a discussion about it. But the ultimate, the ultimate sanction, is we've got these rights within the contract.
Peter Higgins 33:09
And I think that's superb Keith. It's brilliant to hear you say that, because I think there's lots of questions out in the market, especially from private investors that don't understand.
And the makeup, all these assumptions, and they've got it completely wrong. If it's independent, independent research, it's got to be independent.
So I love the fact that you're sticking to your knitting and going, you know, we're either going to let us publish this or you're not, you know, but we're not going to just be railroaded into being a paid client that just does not, does not and does what he's told.
So absolutely phenomenal. Thank you for doing that.
Keith, I'm speaking now with either private investors, okay, and you being the CEO, they've got all this background in equity sales and leading businesses, etc.
On a spreadsheet, on a research note, what's the two or three things that jumps off the page for you Keith, to say, this is a quality business, the quality investment company, this is a really good company, for my clients and other people to be involved in potentially.
Keith Hiscock 34:10
So the first thing I would do whenever looking at something is to work out what type of business model is, because companies fall into different types of business model.
You know, there are businesses that are running an industry in decline, that can be very profitable.
There are businesses that are growth businesses, by organic growth, there are businesses that are growth businesses by acquisition, you know, there are businesses that grow based on their technology.
So the first thing I think you want to do is to say, what sorts of business is this, once you understand that, then go and compare it to other similar businesses, to understand what sorts of things investors are going to look at.
So if I take two extremes, if I looked at a business that, you know, firm that had a high dividend yield, you might say, well, that's great, it's going to appeal to it to income investors.
Well, professional income investors would say, okay, that's box one ticked, but what I want to know is, what's the history of the dividend? Has it ever been cut? What's the cover of the dividend? So let's say the free cash flow cover.
So you know, are you paying out everything that you earn?
And so in the event that something goes wrong, you're going have to cut that? Or is it covered several times, and there's room for things to go wrong? So those are some of the questions that an income investor would ask.
Whereas, if I was investing in a early stage life sciences company, my questions will be completely different. It would be okay. So what's this drug going to help? How big is that market? How competitive is that market? Where's this drug got to in the approval process? Has the company got enough money to get it to the next stage of the approval process?
They're all very different kinds of approaches. So the first thing is to work out what sort of company is, and then that's going to tell you a tick list of the art of the questions you need to answer.
I mean, I was talking a few months ago to a business that's based around, it basically buys and builds.
It's got its particular space, and it buys things in that space.
Well, what a professional investor will do is to say, right, okay, so let me understand what's happening in this space in aggregate, then how do you find that positions? How do you make sure you pay the right price? How do you integrate them?
You can be good at some bits or that bloody awful other bits. And you need to think about it. So the first thing you need to think about what business model is, I'll take another example. You might think hotels are quite simple.
They're not. There are sort of three or four types of investors. So there are some firms that may not be quoted, that specialize in finding sites and getting planning to build hotels. That's all they do. Right? That's a particular skill set. There are other firms whose skill set is building hotels.
And then once you've got it built, you've got two investors, typically, you've got somebody who will own the site, and somebody who will own the brand.
So you may have a hotel, you know, it is the Hilton or whatever, it won't be owned by Hilton almost certainly won't be owned by Hilton.
You're just be paying a franchise fee to use the name, get access to the booking system, etc. And in return for that, you've got to keep up certain standards. That's a fairly low capital business.
You you obviously need a reputation but you don't need a lot of capital to do that. On the other side, you've got investors in hotel property.
That's a very capital intense business, but it's a different sort of business.
So, you know, the first thing I do when looking at somebody is to think what sort of business model is this, that's the first thing I think to look at. The second thing I would do is, I would think quite carefully about the presentation.
Because there are some management's are brilliant at presentations, but they've got an awful business or they're awful at running it.
And there are some management's are awful a presentation and got a great business. And you've sort of got to see through that and in a way that comes from experience when you've seen hundreds of these presentations, you sort of get a feel for it.
Peter Higgins 39:00
Fantastic response Keith, thank you ever so much for that.
I think the beauty of that of the reply is the fact that it covers so many different bases and gets people to think you've got to generate your own questions or to get the right answers.
Because the tendency is for a lot of investors to seek out the answers to the questions and you know, doing the opposite way round. So yeah, thank you ever so much for that.
Keith I want to talk now, because you mentioned it, and I wanted to get a bit more in depth and granular on this.
So the question now, right, for the benefit of our global audience, please can you explain firstly, MiFID II, and the rules, and then we'll get into a little bit more nuanced about it, please?
Keith Hiscock 39:39
Okay, so I'll talk about method two, as it refers to research.
So before MiFID II, which stands for markets in financial instruments directive referred to came into force, I think it's the third of January 2018, off the top of my head before that, what would happen is that fund managers would pay for research and dealing in a combined way. And often the underlying client would have no idea about what was being spent.
So let's say you're running the, you know, the Kent County Council pension fund, you give that to a manager to run.
And they'll tell you afterwards how it had done, they would decide how much dealing they should do how often the function turnover, and then also determine how much research they wanted to pay for out of the fund.
And I think that the authorities, and actually this was really put, although this is a Pan European ruling, it was the FCA that was really behind this one.
And I think their feeling was it was some kind of cozy relationship between people in the City to pay themselves lots of money at the expense of investors.
And, you know, they thought, for example, that fund managers should be paying for research as a cost of business, you know, why should it be coming out of the fund, and so what MiFID II to did was to say, we're going to separate the cost of execution from the cost of research. And in future, you can pay for research in two ways.
You can either go to your client, so let's say you go to your running Kent County Council pension fund, you can go to them and say, look, we need to spend X, whatever it is pounds on research, we'd like to agree with you what that figure is, and then you can go out and then the fund manager can get out and spend it, that was one way of doing it.
Or the second way of doing it was to say you the fund manager, pay for it out of your own P&L, pay for research out of your own P&L.
Now, in reality, what happened was that anybody who thought they were going to be able to go and get the client to pay for it, loss funds under management.
Because you can imagine being in a pitch, I've got somebody who says, well, we'll pay for it out of our own P&L, and somebody else's will pay for out of the fund, you know, you're kind of one nil down, aren't you?
So pretty nobody went for what's called the research payment account methodology. And out of that, what it said was, you cannot take research for free from anybody because it's an inducement to deal with them.
Now, before MiFID II broadly, every institution spoke to every broker, obviously, there are differences in the strength of the relationship. But broadly, everybody spoke to everybody after MiFID II, and you could only speak to get the research from people you'd paid for.
So that dramatically changed. The distribution and the influence of broking firm, it also changed the consensus.
Because up until that point, if you're a professional investor, I recognise your retail investor, you didn't have access to this.
But if you're a professional investor, you've got everybody's research.
You could sit down there and sort of work out where the consensus was.
Now, you only get research on the people you're paying for.
So it's possible that what you're seeing is a consensus is completely different to what another fund manager sees that saw a decline in the payment for research.
But actually, that had been going on for a long while to get back to what it said about my career. The FT reckons that in the 10 years leading up to MiFID II the secondary commission call has fallen by two thirds.
This just accelerated that. So tiny, tiny amounts of being paid for research. Really, there were two exemptions, there are two exemptions to that rule.
The first is you're allowed to have a free trial with a broker for three months in any 12-month period.
Decide whether you want to take one that sounds reasonable, doesn't it?
Secondly, sponsored research, it can be consumed for free, people are submitting MiFID II, are fund managers, right?
What the regulations say is if the research has been paid for by the issuer, i.e. by the company, and is generally available on that's kind of the definition of sponsored research, it's considered a minor non-monetary benefit in the hands of the recipient.
So in a sense, you could argue that a sponsored research firm should have a bigger distribution list in the institutional market than a broker would have.
Different kind of relationship, but broadly, that's true. So that's, that's what MiFID II did, right?
In a way it sort of evened up the market because before MiFID II, retail investors were a massive disadvantage to institutions.
So if you think what an institutional broking firm did was it published research, it was only available to institutions that rung them, talked to them, you know, I'd ring up my clients and say I’ve come back from this meeting.
I think we're going to reduce our forecasts or this.
Obviously, the retail market got none of that. In a sense, it leveled the playing field by making it more difficult for institutions didn't make it any easier for retail, but it made it more difficult for institutions.
Since then, there was a rather complicated change to try and help out small and mid-cap companies.
So what the FCA said was, if the company is less than 200 million in market cap, it can be outside the scope of MiFID II, it was a very complicated definition of 200 million because it's on an annual trailing basis.
So as I said to the FCA at the time, I don't think anybody's going to take any notice in this whatsoever.
And that appears to have been the case, because it's too complicated. If you're the fund manager, stuff comes in and you've got to decide, am I allowed to see this for free?
Or can I not see it for free? Is it below 200? million? Was it below 200 million in the period? Or is it above it? It's just too complicated.
So most fund managers said, look, we're either take nothing, or we'll pay for something and we'll take all of your research.
We're just it's just too complicated otherwise.
Now, what the latest proposals are in the Kent Review, published by Her Majesty's Treasury is that you can roll back MiFID II, I think the problem is, the horse was bolted.
If you're going to have an impact, what you're saying is you want institutions to start charging their clients for research again, and that's going to be a very difficult conversation, isn't it?
You've had it for free up till now we'd like to go and charge you for it.
We don't have to, but we'd like to. I just can't see that's going to have an impact, really. But the rules have got a bit easier, but I think it's too late for most research.
Peter Higgins 47:43
Thank you for that full response. Keith. I think that, I found this piece of research myself as well, and it says, according to substantive, substantive research, a firm that analyzes investment research spend amongst asset managers, their survey of 40 asset managers, firms overseeing more than $12 trillion which shows that the average research budget for 2023 decreased by 6.5%.
And research budgets as a proportion of assets or assets under management had dropped by 50, more than 50% since MiFID II was introduced.
So the question I was going to ask you was the proposed unbundling?
I think they started talking about it June, July of this year of MiFID II.
Is the possibility that it could reverse the ongoing investment research decline, you know, money spent on it?
Keith Hiscock 48:35
I don't think so. People might disagree with me, but I don't think so.
Because you think what's got to happen? What's going to happen is the fund managers got to go to its client and say, we now would like to charge you for research.
What if your competitor down the road says, well, we're not going to charge you for research, that in defense of, to some extent, if I managed to want to charge for research, they might say, this is a perfectly reasonable position to hold is that you're focusing on the wrong thing.
The thing that's most important is the net of all of the costs, what's the performance?
And if our performance is better than the other guy down the road, then you shouldn't worry about how much you're paying for research because obviously, it's working.
That's the argument that will be made, I think, in reality is going to be quite difficult to do that.
And that's one of the reasons why the review has talked about recommends establishing a research platform to pay for research, because they don't really think it's going to go back to the old system.
Peter Higgins 49:41
Yeah, I think there's, you're re-iterating what you said earlier about it, the horse has already bolted, they've left it too late, almost spot on Keith. Now, I want to move slightly now to research but more so on the ESG credential side, there seem to be more and more focus on that now as well, regarding listed companies, and asset management, how is Hardman and Co evolved in there?
And have you seen much change since 2012 at Hardman and Co regarding companies to be more proactive in that ESG space?
Keith Hiscock 50:13
I've certainly seen a lot of change.
So you know, there are big parts of report and accounts, around the issues, there are more and more specialists employed in, you know, to advise and to look at it, that's certainly the case in sort of a mini industry as has been created.
I think many investors are still struggling with it's not that they're against the idea that, you know, we should do something about the climate, the question is, what's the best way to do something about it and how you measure it.
So for example, there are a number of systems that are designed to judge what the ESG credentials of a company might be.
Now, the problem with that is that there isn't a kind of an agreement, we're not coalescing around one way of measuring it.
And I've had many people, I mean, we've looked at incorporating some kind of score into our research in the way that you'd put down, here's the P/E, or the dividend yield, here's what the score is, when you get to look at it, there are hundreds of different ways of looking at it.
But more important than that, is I've come across companies, which are considered the worst possible on one scoring system, and the best possible another scoring system.
So how do you undo that? And also, I always think when I look at these, when I look at problems, I always think about Al Murray actually, you know the pub landlord talking about Brexit, he always says, whatever question somebody or wherever opinion, somebody passes, you should always say that was much more complicated than that.
And that's kind of true.
So I noticed in the papers today, Lego are saying that, you know, they were thinking of moving across to recycled plastic, to make their bricks.
But actually, that's going to have a more detrimental impact on the environment than using new plastics.
So you know, there's lots of things like that.
And I think we've sort of, we went through a period where everybody got terribly excited.
And actually ESG investing was working, you know, you were getting out performance as well. And that was because of the money going into ESG.
There's some evidence that interest has waned a bit.
And as I say, the practical things are, are quite difficult.
I mean, I'd love to be able to put a score on our research that said, this company is X, but I don't know what score it what score, it should be, because nobody can agree on what the factors are and what the weightings for the facts are.
It's a bit like there's a thing in economics called the Happiness Index. I know you've come across that, Peter.
Basically said we shouldn't be measuring GDP, we should be measuring happiness. Now. That sounds a great start.
The trouble is, how do you measure happiness? What are the factors that you use? And what's the weightings for the factors?
Peter Higgins 53:19
No, I love that response. Good. Thank you. That's absolutely fantastic.
I love the fact that touching the Happiness Index there.
Now we've touched earlier on about the markets and everything else and EIS.
I want to cover this little bit here now to talk about what I saw in the weekend press as well.
And it's basically Keith one estimate says that 1/3 of all AIM shares are held for tax reasons, and that's around 30 billion pounds, including funds and investment companies.
There is ongoing topic speculation this weekend that Rishi Sunak’s government could end the inheritance tax relief on AIM shares.
Firstly, do you think IHT relief could be scaled back and start and then stopped? And secondly, what do you think would be the impact of AIM shares and related AIM funds and investment components please?
Keith Hiscock 54:07
Okay, so it's an it's an interesting field IHT because on the one hand, you'd say, well, very few people actually pay it.
And it's, it would be easy for the counter argument to be well, what the government's doing, or the Tories are doing is just helping out the rich and looking after their own, it'd be easy to cast them in that school.
But it would appear from the polls that more people than is the case think they might pay inheritance tax, and that somehow it's unfair.
So it seems to be more important. And if you think back, it derailed Gordon Brown, who wanted to go for an early election.
I can't remember the years now, once you go for an early election, and George Osborne said, well, if they were elected, they'd introduce a million pound relief.
And it derailed him. And the polls suddenly turned in favor of the Tories.
And he postponed having an election until the last possible moment, and then lost.
It feels as though it's something that should really be only of concern to natural Tory voters, you know, the wealthy, but it's the reality is it seems to have a bigger impact than that.
I don't quite understand why. But you know, it's not the job of a politician, I suppose to understand why in that sense.
Would they do something about it at all, obviously, if they abolished it completely, then the value of reliefs on AIM would disappear.
And you wouldn't need to hold those shares.
However, I guess you'd still be worried about what happens if the Labour Party were to get in at the next election.
Would they just roll the whole thing straight back.
And so if you told, you know, they might roll it back to what it was.
And if you just sold all of your AIM shares, you've lost the relief, and you've got to start all over again.
So I think it'd be, you'd want to see what happens there. Would it be rolled back for everybody? Would the relief just be increased? i.e., you know, you can have one and a half million free of inheritance tax or whatever.
I don't know. I mean, to say the whole thing would go in one go.
I mean, is pretty bold and I would suggest unlikely.
So at the moment, I mean, there was a worry before about the IHT relief, not because IHT might be eliminated.
But because the relief might be eliminated. There was a bit of talk around that, what's the benefit of it?
Why do it? So yeah, it's a possible risk, I have to admit, what you'll find is AIM IHT investors tend to be concentrated in certain things.
So I'm sure you know very well, the rules, you can't hold every AIM share.
There are some companies that fail because they're in a trade that isn't covered.
But, you know, you could buy, for example, I think, early oil and gas, but you'd be mad to be doing that, in a you know, for an investment is about wealth preservation.
So they tend to focus on the same kind of things. So what proportion is of those difficult to tell.
I know somebody else in the industry that's inquired of doing a piece at the moment for somebody in a contact of mine has asked the revenue, what's the cost of the relief?
And they won't give an answer. I'm not sure they know the answer. But remember, the way that IHT relief works is it's in arrears.
When somebody dies, the executor submit the accounts for the estate.
And it's then you determine whether, you know, so you've got to prove, for example, you've held it for two years. It's a qualifying investment.
You've got to get through only when that's done.
Do you then know that you've got relief? So it's very difficult to look today and say, oh, there is relief? I mean, I think we did a Freedom of Information inquiry of the rescue around what things did you reject at why and they refused to answer it on the basis. Well, they're all individual cases.
Peter Higgins 58:46
Wow. I mean, the stats that I was looking at the weekend, and I pull some figures down here is basically saying in 2020-23, there was 41,000 estates, mostly in the South East of London, that paid IHT of 7.1 billion.
And that, from the most recent Treasury figures showed that only 3.76% of UK deaths resulted in inheritance tax charge. Yeah, so the numbers are tiny, but obviously, it affects the super wealthy, obviously. So that's maybe why they're going down it.
Keith Hiscock 59:25
I think the super wealthy can avoid it very easily. Like you know, if you're incredibly wealthy, you give away all your money seven years before you more than seven years before a decade.
The poor, the poor don't pay is that kind of the people in the middle that have got most of those have got most of their assets in a house, which you can't tax plan on that are caught.
Peter Higgins 59:49
Agreed. Keith agreed. Absolutely agree. Absolutely.
I was going to ask a slightly nuanced question regarding the abolishing inheritance tax would also then impacts the EIS side of things which your firm’s involved in, and potentially private markets?
Keith Hiscock 1:00:08
Not directly.
I mean, they can be the same sorts of assets. But an EIS is a different thing. So an EIS is not usually to offset wealth tax or inheritance tax.
It's designed to offset income tax, so you get a release your income tax bill in that year, when you make that when you make that investment, and, you know, the idea is that those investments go into risky things, or risky areas that it's in the interest of the economy to develop.
Peter Higgins 1:00:40
Okie dokie. Right, I've got just a couple more questions for you Keith and I need to touch on very briefly some personal questions of yours.
With regards to you being a private investor, now, Keith, in your own right, what access you've got to the market, given your role, and when you are allowed to invest, what type of investor are you long-term investor funds, equities, you know, global investor, what sort of investor are you Keith?
Keith Hiscock 1:01:05
Okay, so So first of all, because of my role, I am restricted in what I can do.
So obviously, I'm on privy to inside information at certain times, which I can't deal on.
And even outside that I'm restricted on what I can deal in, you know, with regards to our existing clients.
So I think I'm relatively unusual in my space that I’m a very long-term investor. I've got several holdings that I've held for more than 20 years.
And I think actually, if you look at the for sort of investor, I've let me talk about some of the things that I think people do wrong.
The first thing is, I think, investors sometimes like moths round a light, and I think stockbrokers.
I have found stockbrokers when they do a PA, they'll sell something because they've lost interest is nothing interesting happening with it.
And something more exciting has come along over here, rather than take a long-term view, so they flip from one to another.
That's sort of what day traders do, isn't it?
The second. I'm a great believer in getting rich very slowly.
Obviously, we'd all like to buy things that go up tenfold in the next month.
The reality is, there aren't many of those.
And if you're looking for those, you're going to take massive risks, which are bad.
I think I make the point about presentations.
So I'm fortunate, I'm very privileged in that I've been to 1000s of presentations over the years.
I'm not saying I get it all right. But I can spot what's a good story, or whether it's a management pulling it up a bit too much, or whatever.
I think I've contradicted in some ways what I've already said, which is I think it is possible to become an expert in something, you know, there's about 2000 quality companies, it's possible for you to know more about one company that virtually anybody else, any other investor, I think one of the big problems that investors have is admitting you're wrong.
Which is, and I've done it. And one of the advantages, actually, having my own investments is I've gone through the same kind of emotions as other investors professionals have.
So you know, particularly if you've if you've winkled, something out, you think it's really interesting, it looks cheap, and then it falls in price, you go and buy some more, don't you because it's even, it's even better value, isn't it?
And that keeps happening until you begin to realize there's something wrong here I haven't spotted or I don't understand.
And I think when you look at something, you should all work. So I made a point about think what business model it is. I think the other thing is, think what the issues are. So most companies or funds or sectors there are about, let's say, half a dozen issues, which are critical, and which people have got different opinions on.
I mean, a share price is essentially a consensus of lots of different opinions. Alright, so I would always start by saying, right, what are the key issues at the moment? And what's the consensus view on that?
Then I'll come to my view, there's no good saying, oh, my view is, you know, things are going to be a lot better this year at BP, you know, profits are going to double.
If when you go and look, you'll find that well actually, that's what the consensus is going to make no difference to the share price whatsoever.
Right. So I think understanding what those issues are, and sometimes they're wrong.
So if I go back a few years, I talk about one of our old clients Burford Capital, which is a litigation funder.
When they came to us, the first thing we did was to go out into the market and talk to investors about their attitudes towards it.
And the comments we got back were the first one was always an ambulance chaser.
I'm not going to invest in anymore, it doesn’t have any retail clients whatsoever.
You've completely misunderstood it. It's, it's all about commercial clients.
The second thing was, look, it's only got a market cap, at the time, 250 million, if it doubles, it's going to make no difference to my portfolio.
I don't know what to compare it with. I mean, that's a perfectly legitimate concern.
And then then we get the question that says it is classified is a non-equity instrument, which is a specialist type of investment company.
What's the right discount to NAV? Well, remember, this is a growth business. What, why? Why are you focusing on NAV? That's the wrong valuation metric?
So what we did was to recast that story by saying, look, this is the way this is an interesting way of looking at things generally, as an example, law is a growing part of the economy.
And in the developed world, we may not like the fact that it is, but it is, let's be honest.
And in fact that UK is one of the if not the preeminent place, for international cases, right.
But it's actually very difficult to invest in.
Because pretty well, all the law firms are partnerships.
Okay, there's a few that are now quoted a tiny number that are quoted, here's a way of investing in it through litigation funding.
Second thing, though, is, this is the biggest and the first investor in the space, it's like being the first professional investor in the stock market, I think you'd like to think you'd outperform.
And then the next thing to say is, it's what we call an uncorrelated assets.
So it's an asset and the success of which is not correlated with the economy, the stock market, the bond markets, success comes from picking the right cases.
And winning them, that's a very interesting asset is a very different sort of asset once you start to understand anything, okay, I can see why that might appeal to investors.
So it's that was about changing the perception from what the three or four key views in the market were and then, you know, another thing was reading statements properly.
Every morning, I read lots and lots of statements.
And there are some tips together to get out of that.
The first is look at the front and see, are they pleased with their results?
Or did they leave the word pleased out or a similar word? Alright.
The next thing is, you'll often you'll often find the bad news is the back end.
So you're looking for the paragraph that begins however, or nevertheless, right?
Those are critical.
And then the other thing about reading statements is about management changes, which can be quite important. I did a podcast about that myself a few months ago, which you can look at on our website.
But broadly, it runs like this.
There's about three people that really matter, which is the Chairman, the CEO, and the CFO, they're the ones you want to look out for. Obviously, people leave businesses and they move on, you know, they get a better job offer or something like that, that can still be bad news for the company, they were doing a great job.
But you got to look at the way you look at the use of the language because there's a very careful use of language in our in our world.
So we're looking for is somebody might be going because they've got a better job to go to.
That's great.
Well may not be good for the business you own but what you're looking at, but you know, it's not bad news in the sense they might be leaving because of ill health.
You know, or partner's ill health or something like that, obviously, that's all sad, when you want to start to get worried is where they're going with immediate effect.
Because that sounds like there's been a fallout over strategy, particularly if it's say the finance director.
And again, with immediate effect, there's no handover period, that's sort of a sign.
If it's coming up to the year end, or it's gone past year end, and they're doing the accounts might suggest that there's a hole in the account somewhere and the finance director is held responsible for it.
Those you know, it's never quite as the language is never quite as blunt as that.
But that's the sort of thing you're looking for in those statements.
So look out for that.
Generally, companies are quite good at building themselves up that generally got a whole team of advisors whose job is to sort of do that. It's the bad news that you can you can find.
Peter Higgins 01:10:21
Absolutely thorough and full response there, Keith, absolutely fantastic.
Thank you ever so much for being on the podcast, going back now to 79, 1979, with regards to the investment industry, for the betterment of large and small investors, there's one thing that you would change for the betterment of everybody. What would that be please Sir?
Keith Hiscock 01:11:07
That's a very, very good question. Actually. I would like to go back to the system where market making is separate from agency broking.
I think that's an unnecessary having the two together as an unnecessary conflict of interest.
Peter Higgins 01:11:23
Brilliant response, thank you ever so much, Keith, thank you ever so much for being on this Investing Matters podcast with me. What can I say? Hardman and Co multidisciplinary financial consultancy and investment research firm employing highly experienced analysts and professionals.
Wish you all very, very well. Going forward Keith and I’ll probably top down and visit you in the office at some stage.
Keith Hiscock 01:11:47
Thank you for your time. Peter, good to talk to you. Thank you for your time.
Peter Higgins 01:11:51
Keith it has been absolutely delight. Thank you, sir. Take care. God bless you.
LSE 1:11:56
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