London South East 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.
Peter Higgins 00:17
Hello and welcome to this Investing Matters Podcast.
My name is Peter Higgins and today I have the huge privilege of speaking with the former Goldman Sachs Analyst, globally known and respected Neil Shah, Executive Director of Content Strategy at Edison Group. Edison is an investment research and advisory company with global offices. Good afternoon to you Neil.
Neil Shah 00:40
Hey, good afternoon, Peter. Good to be here.
Peter Higgins 00:43
Thank you for joining us on this Investing Matters podcast Neil.
I would like to start, Neil, this conversation with the point that you graduated from London School of Economics.
So you're already one of the bright sparks, you know, emerging talents of the economics world right?
With a Bachelor of Science degree in economics, then started your career at Price Waterhouse in 1994.
In the banking, capital markets and treasury tax team, what do our audience need to know about the fundamental career drivers of you, Neil Shah, the younger, of 1994, 95/96?
Neil Shah 01:27
So I mean, I studied economics, because I like to, you know, understand how the world works.
And it's a sort of combination of social sciences and maths, which are two things I enjoyed but I am just someone who's curious about the world.
I have, I love learning about the world. I'm an avid sort of listener of podcasts, and I love digesting information.
My dad who has a profound influence on me was an accountant, that was his profession.
And economics is one of those subjects that sort of qualifies you for everything, and nothing at the same time.
And I really didn't know what I wanted to do.
And his suggestion was, well go on and get a qualification first, it'll give you an opening into the working world.
And so I didn't, I didn't actually look that far.
I went to Price Waterhouse did the ACA qualification, it gave me a really good grounding.
It gave me exposure to a range of different companies.
I then found my feet after that in terms of what I wanted to do.
So this fascination with the equities market, you know, what made great quality companies is really what sort of opened the door.
So I was looking to get into equity research and as luck would have it, and I got an opening into Goldman.
Peter Higgins 02:51
Yeah, fantastic. I was going to that next.
So in 1997, you joined the Pan European research team, at Goldman Sachs, specializing in covering construction and building materials. How did that come about? And tell us a little bit about your time there, please?
Neil Shah 03:08
So it came about because one of my friends worked at Goldman, and they, you know, let me know that they were looking to hire someone into that team, I ended up working with Mike Betts, who was a veteran in terms of covering the sector.
And look, I mean, it's one of those things that mentors really important people who've got a deep understanding of the sector.
And if you look at equity analysis, the legend of equity analysis, Mike learned from a guy called Angus, and he was one of the very first analysts who actually took time to analyze when we're going back, you know, many decades, Mike learned his trade through Angus, you know, passed on that heritage to me, it was a really interesting time to join.
So 97, Goldman was still a partnership.
It's a very small equity research team at that point in time.
And, you know, we went through effectively the dotcom boom, which was, you know, a lot of money flowing into the sort of equity side of the business.
And my time there, the research team expanded considerably.
It was interesting, covering an old school sector at a time when internet and tech were in the Vogue, which is good for me.
I mean, I think I was able to learn my trade, whilst not necessarily being in the limelight, Mike actually left Goldman after about a year of me being there.
And I was given the opportunity to run the sector after a year.
So it was kind of a sort of sink or swim type approach you know, come in my head research backed me and said, look, I think you could do this, and I was grateful for the opportunity.
And it was a really enjoyable journey. I mean, I think it was, you know, from a coverage perspective, it was covering the sector through a seven-year cycle.
Seeing the ups and downs, we saw the Asian crisis, you saw the dotcom boom and bust.
We saw, I guess, a mild-ish recession towards the end of that period, as well.
And I learned from some very, very good people, I was surrounded by what you know, some exceptional minds who were covering some of the other sectors and I learned a lot from them in terms of how you go about covering a sector and then more broadly, I think, you know what I saw a Goldman was a firm that had a culture of wanting to succeed and navigating the equities business through firstly, the expansion, then, you know, actually running the business through the Spitzer reforms that came through and separation of investment banking and equity research and trying lots and lots of different things to make it work. And I learned a lot through that period.
And then, you know, after seven years, I guess, you know, that came as an itch, a natural calling point, it's time for a change. And so at the towards the end of 2003, a new opportunity came about and I decided to have a go.
Peter Higgins 06:34
Indeed, I mean, you left 2003 to set up Tusker Capital, a long-short hedge fund.
So tell us about that?
I mean, because that's a big step away from what you do at Goldman, and a huge responsibility.
Neil Shah 06:50
Yeah, I mean, I think like, I mean, that came about because a very good friend of mine, someone I'd known, I grew up in Kenya, and a friend of mine from Kenya, we were both at university together.
He was working at Morgan Stanley as a trader, I was working at Goldman in equity research, he was visiting Kenya and got carjacked and took a bullet through the head when he was very fortunate the bullet went through his cheek and out of his jaw.
But he survived as part of that sort of process of him thinking about what he's going to do next, I suggested, we'd always thought we'd want to do something together.
So we came up with the idea of a long-short hedge fund setting that up together and launching it and he's still running it today, out of the very glamorous location of Manhattan Beach it’s done really well.
He's an exceptional trader, I think what I learned from that entire process is it's quite a lonely experience when he's, you know, moving from a big organization to a small organization, it's quite a lonely experience, setting things up for yourself.
And it was interesting in terms of, you know, marketing the fund to prospective people, I just felt, I learned that actually, I couldn't switch off when it came to managing other people's money.
So I think if I had stayed in, in terms of money management, my health would have deteriorated considerably.
And so I, you know, after a while, I decided to return to my roots of getting back into equity research, and I started looking but having done something entrepreneurial, there was, I mean, I did go for, you know, interviews at various places, I remember going into the offices of Credit Suisse and Deutsche Bank, etc.
And there was a sort of small heart sink moment when you sort of walk through these large atriums, these very big buildings after you've done something entrepreneurial.
And as Charles had it, I met Fraser Thorne, who had set up Edison in an office that was so small that actually, my interviews with them also conversations with them, were actually in the British Museum.
So and I liked that I liked but this was, you know, a small opportunity and something that, you know, I could sort of throw myself into, and that is how I arrived at Edison, Fraser was actually looking for an analyst.
I think I convinced them that actually what he needed was someone who could run the research team and scale up the opportunity.
And there it was, was an interesting concept to Edison.
Yeah, I'm a big believer in equity research, having worked in the industry for a number of years, I can see you know, the impact, it can make the issue that the research industry equity research industry has always faced as the the funding for it has has come consistently under pressure.
And actually, you know, I'm sure we'll go on to talk about the UK Investment Research Review.
But that is at the heart of the UK Investment Research Review, which is researchers valuable, the funding, the traditional means of funding here are in decline, Edison sort of had this idea of taking a leaf and bond rating guy’s books, which was taking a retainer from the corporate and running an issuer sponsored research sort of product in at the heart of it, there's this big question as to if a company's paying you would anybody trust that trust you.
And I remember, having first met Fraser, with my very first port of call was going back to my former heads of research at Goldman, just to talk them to talk through and what they thought of it.
And I think my eureka moment, and all of that was when one of them said that look, ultimately research is a brand game that, you know, if you can get the quality of the product, right and associated with your brand, people, let them worry less effectively about, you know, the source of the funding, etc.
And I think that that's what I sort of embarked on doing at Edison, which was how do I build a great quality research product research offering, and that is what I've been doing for the last 20 years.
Peter Higgins 11:42
So thank you for that for your response. Now, we're in the month of January. So I'll take this moment then to just wish you a happy 19th anniversary with regards to joining Edison Group in January 2005.
Neil Shah 11:54
Thank you very much.
Peter Higgins 11:57
So Neil, can you just expand for me please, give us an overview of the understanding of your role currently as the Executive Director of Content Strategy at Edison Group and what that encompasses followed by an overview of Edison Group, its solutions, Edison Research is differentiated services included investor relations, strategic consulting services, and of course, some companies that you and your colleagues work with?
Neil Shah 12:25
Yeah sure, I think the easiest way of doing that is to explain how we started and how the product evolved.
We started Edison as a sponsored research company, the value proposition that we put the companies was that we would write good high quality research, including once a year, a shelf note, Peter it used to really irritate me when I was working on a hedge fund, anytime I was looking for a meaningful note on a company, you might have to go back five years because you know, most of the content was one page produced on results.
And one of the one of the key things I sort of set out doing is the once a year, there is a note that explains you know, all the drivers of business, its business model, the management team, what it stands for, you know, how it operates in the market, if the industry is at servicing, etc, together with the usual stuff of financials and valuation metrics and risks, we made sure that we cover companies at least once a quarter.
So we cover things on a regular basis, the dissemination of that product is where it's very different from traditional sell side, traditional sales side only send product to their paying clients, we made sure that we made it freely available to all classes of investors.
So this includes your tier one institutions, but also, you know, the smaller institutional investors, the private wealth managers, family offices, retail, and very, very quickly the product, I mean, I think timing is anytime you set up a business timing is you need a bit of luck, right?
And if you go back to, you know, when we got going Edison 2004,5,6,7, it was at the tail end of the credit, boom, you know, the UK market in particular was doing really well, AIM was flourishing, there was a lot of companies, particularly resources companies, etc.
But lots of companies coming on to the junior market, brokers were very, very busy in terms of listing these companies, and then a lot of these companies felt neglected in the aftermath, because, you know, their brokers had gone on to do other things.
So it come to us for the ongoing coverage. And very quickly, you know, the business built itself into something which was substantial in terms of scale.
So, you know, covering at least 100 companies, things that sort of surprised me from that point on.
So, you know, we needed to validate our value proposition to the companies and I think promising companies that you're going to drive the share price out was a false promise, there's so many other factors that, you know, reflect badly how a company does.
So the way we choose to validate our value proposition is that it's going to a very wide audience, and it's been consumed by the right kind of investors.
And so, you know, we have analytics in terms of who is consuming our content. And as we sort of showed that to companies, I mean, you know, they were impressed, you know, their first time they were getting statistics in terms of actually who is consuming the research product.
But it also led to, you know, a very immediate sort of call for a while, can you help us meet these investors?
And so back is where our investor engagement why our offering started, which is organizing roadshows for companies and the readers of that research on so we started taking companies out onto the road, meeting investors that they weren't necessarily meeting through their cell phone banks.
And that grew into a very successful sort of second part of our business, over time the business started internationalizing.
So this issue that companies have in terms of lack of understanding, lack of meeting the right kind of investors, lack of liquidity is not just a UK phenomenon. It's something that you'll find a lot across all markets.
And I think it surprised us that how quickly we internationalized the business.
So, you know, very quickly, we started picking up you know, not just London listed companies, which is where we're based, but European listed companies, North American listed companies ASX listed companies and we started to find, you know, an international dimension effectively to our business and that helped, as you start covering international companies, your readership starts to internationalize as well.
And so you know, we started growing our international audience in terms of who's consuming research content but also then who we could roadshow companies do.
So that's the bit that led to the globalization effectively off offering so today, you know, we operate out of London but also have a presence in North America in both the US and Canada.
We have people on the ground in Germany, Greece, Israel, and I think, you know, what is interesting is that, you know, when we look at the readership of our content, it's read in over 200 countries, it's consumed last year, I think we had over 4 million views of our content by over a million people.
So it's wide, it's broad in terms of who is consuming that content, my title change from Director of Research to Director of Content and Strategy, really on the back end of the pandemic.
And I think there's two things that there have been significant changes that I would sort of reflect on the first is MiFID 2, you know, fundamentally change the equity research market, and effectively put up a wall around a lot of content when it previously might not have been more it led to lack of accessibility to research content, the pandemic, I think accelerated everyone's digital lives, right, you and I are here talking remotely to each other.
And that's, that's commonplace, what we saw in terms of the content was the traditional means of getting that content being read, email.
And putting it up on the on the platforms was slowly being substituted by direct search, and more and more people are effectively Googling for content, and arriving directly onto our website.
And our website is a really big call drawing draw effectively in terms of how people consume our content.
And I think that if you think about the way people find content, and I try and draw some real live analogies for this in terms of how I think about my business, so if you wanted to go for Chinese food in Shoreditch, unless you have to know the name of the Chinese food, your search term is generally going to be slightly more generic, you know, good Chinese food and in Shoreditch.
And I think that the way I sort of structured our content is understanding that search mechanism, which is people tend to search by thematics.
For topics first, and we go two offerings in that we have an Edison themes, which is, you know, I try and shy away from the big tomes of 80 Page notes, I try and get off thematic in terms of, here's why this sector is really interesting, or this particular theme is really interesting, but in sort of eight to 12 pages, and then we also have a series called Edison explains, which is like if you don't understand it is sort of a Q&A type guide in terms of giving you the basics.
And that leads effectively people into finding in other companies operating in that in that area, the space etc.
And my the other end of it is that the demographic in terms of who's consuming our content also changed quite a lot through the pandemic.
So it used to be, you know, middle aged, or late age to people reviewing the Edison Research content, looking after their savings or their pension fund money increasing as a much more younger audience consuming that content.
And younger or younger audiences like to view video like to listen to podcasts. And so we've introduced the audio visual element into the content as well.
So that the director of content and strategy is really reflecting the fact that you know, how people are learning about equities has moved from just the traditional research product into a much broader suite of content and which is why I call myself a Director of Content and strategy, strategy is really trying to help companies use our content and distribution channels to help them achieve what we set out as are offering which is to meet the right kind of investors.
So we will tell companies that you know working with us, you will meet a broader group of investors and the right kind of investors who are right for your company companies we work for we work for some very large companies.
So at the sort of upper end, we work for Wheaton Precious Metals, which is, you know, several billion dollars market cap we work for Melrose, which is a FTSE 100 company, we work for Gregg's which is a household name, we work for some really interesting sort of mid-cap names, things like DiscoverIE, we also work with some smaller companies and micro-caps.
So you know, musicMagpie, we work across the spectrum in terms of market cap.
And it's, you know, the idea of you know, who uses us, it used to be that it's companies that you know, was struggling for coverage, actually now, it's the entire spectrum because I think there has been a little bit of dislocation in terms of companies and being able to access the right kind of investors and our offering allows them to find solutions to that.
We've got a great track record.
On our website, we published some statistics in terms of if you look at our clients, you know, those which we've initiated on, we typically see an uplift in volumes trading and those stocks uplift in valuations on those stocks.
And that is it's simple academic theory actually that, you know, if you if you put out content on equities, etc, they get notice and one or more people that look at them, the more activity there is.
So it's a pretty simple business in terms of what we do. I think there's quite a lot of appeal ins for companies in terms of, you know, helping us helping them achieve their goals. And that's why they can work with us.
Peter Higgins 24:15
Indeed, I mean, you've just spoke about some of the companies you've worked for there.
But what you didn't touch on, and I will, I will add this in here for you, because that over the last decade or so, Neil, you've worked for Edison have worked with the top four performing stocks in the FTSE 250, they were Edison clients, because I'm referring to 4imprint (FOUR), Games Workshop (GAW), PPHE Hotels (PPH) and Entertainment One, which of course got taken over by Hasbro for 3.8 billion in 2020.
Please, can you give us more as covered it already knew about this, can you share where permissible? What has led to Edison's outperformance for said clients?
Neil Shah 24:56
Firstly, I think there's a certain amount of self-selection bias when companies come to work with us, I think the companies that typically engage or pay us to work with them, firstly tend to be on the front foot, they feel that they're directionally going in somewhere, they feel that they have misunderstood the market, that the valuations in the wrong place.
So it's very rare that a company that's bad have a profits warning would engage with Edison, right?
I mean, sometimes they do, because they want to explain the profits warning.
And I think, actually, that is a sensible thing to do in terms of engaging with investors, but by and large, most of them feel that their management teams feel that our valuations in the wrong place.
And that, you know, we people, not necessarily appreciating where the business is going.
So I think there's a certain amount of self-selection, there is a self-selection bias in terms of the clients that come and work with us.
The second is that they care about the companies who engage with us, they all care about investor relations, right?
Again, it's one of those things that engaging with shareholders matters to them. And I think that's another reason that you actually they're putting time and effort effectively into this, that helps in terms of performance.
Finally, it is that simple thing.
There's lots of academic research out there that says, you know, if there's additional content effectively on these companies, you tend to see, you know, impact on volume, on valuations and volumes, most of that is qualified, and hence, it needs to be credible content, right? So is the fact that, you know, we put out what we think is good quality research.
You know, we stand by our brand, which we're not there to puff up a company, we're there to provide a balanced view of the company.
And I think, you know, we've won hearts and minds on that.
And, you know, you can evidence that by, you know, the readership, lots and lots people consume our content, the longevity, and ultimately, you know, the kind of clients that work with us.
Peter Higgins 27:07
Indeed. Thank you for that full response.
You touched on quality there, fund manager, Terry Smith, the founder and CEO of Fundsmith has been referred to as the English Warren Buffett, after achieving superior investment returns and with strategies similar to the legendary investor, Warren Buffett, Terry Smith is quoted as saying, “when it comes to generating good returns, the most important thing is quality.”
What in your view are the best research strategies available to private investors, to enable them to find the best quality companies Neil?
Neil Shah 27:40
We run what I call a quality model portfolio at Edison called the Illuminator.
And actually, it will be made available on the website on Monday.
So when people come to Edison Group on Monday, that's Monday the 8th, I don't know when this podcast is going to go out.
But you know, you will be able to see it, it's worth talking about the origins of the Illuminator.
So when I, when I was at Goldman, I met someone who managed private client money.
And it was notable because he turned our partnership at Goldman.
And the reason was that he was making more actually running private client money.
And his thesis was pretty simple, which is that to generate alpha, you need an edge.
And he told me that, look, I can't tell you whether this biotech company is better than another biotech company, or this tech company is better than, you know, another tech company.
But he said that I can tell you what the attributes of a high-quality company are.
And he ran through a series of metrics, which I took to heart.
And I thought, actually, that's really smart.
And because at Goldman, I was in a position where Mike left, and I was running nearly the coverage of my sector by myself, I created effectively proxies for all these metrics.
So I pulled in financial metrics that would reflect the things that people thought made up you know, a high quality company, these are things like they need to to be growing in excess of GDP.
So that's a simple metric, you know, you can look at forecast growth numbers, they've got the kind of product or their services effectively generating a return, which means that they're not going back to shareholders to fund their growth.
And that's an ROI characteristic there or a return on capital characteristic that you're looking for.
But their balance sheet is in a position which allows them to have some tax efficiency, but also weathers cyclical shocks.
So it's modest balance sheet positioning, but they've got a product, which is, you know, scalable, and internationally attractive.
They've got a management team, which is working in the interest of shareholders, and it's series of metrics that we look at, which we call the Illuminator.
And what we do is we rank the UK market based on these metrics, and we we pull out the top 10 and have had them in a model portfolio.
Now that model portfolio has been running since 2008. The rough statistics for you, if the FTSE All Share during that period, you know, went up by somewhere between 130 to 150%.
The model portfolio went up by over 1,000%. The actual statistics we quote on the webpage.
So, how many leads to substantial outperformance and what is actually picking up is early-stage outperformance of companies which are showing the right kind of metrics that catches them quite early.
And then, you know, we see that grow over time.
One of the names currently some of the names that we have in the portfolio, the model portfolio, Rolls Royce is there and they had a stellar 2023.
Again, it sort of turned around to the civil side of the business. I think it will continue growing over the next year.
But also we like the leadership team that is driving Rolls Royce (RR.), Rightmove (RMV) in there. And you know, had some wobbles because of the rate hikes and also some competition potentially coming in.
But it's one of those platforms stocks that you know, once you've got a dominant position in a particular market, and you've invested in the technology, etc, your return on capital is fantastic, is actually very hard to activity to displace that and I think Rightmove is exceptionally well positioned, Serica Energy is in there, which is, you know, a mid-cap, which has done some fantastic things kept a very low profile valuations extremely attractive, I think the tail will acquisition is going to lead to you know, some better returns going forward.
And interestingly, the company that sort of came in towards the latter end of this year, this year was a business called GlobalData, which just in December actually had a spike because they had a private equity investment in one of their divisions, it led to a spike effectively.
And it was it that was reflected in the fact that the valuation was wasn't actually for the business wasn't necessarily what was fair for the business.
And I think there's further to run on that as well. So we identify sort of 10, high quality names in this model portfolio using the strategy and there's much more detail on the website to get into.
And it tends to be relatively low turnover.
So usually we see one company drop off the list every month and one company replace it. And it's led, it's got a great great track record in terms of identifying companies that outperform the market last year was a tricky year in terms of investing.
So when I look at the Illuminator, you know, it's one three and six month performance metrics, we actually beat the market last year, but on a one year basis, it lagged now, it was because I think we're in a slightly weird year, we do see this and you know, sometimes high quality companies aren't necessarily rewarded, but over time, I believe they will be.
So the other thing I try and do is actually identify, you know, companies which have been oversold.
So I will tend to look at companies where I think they look fundamentally cheap on a valuation basis, and that there in an industry where there is you know, potential activity consolidation activity.
And I think that's another strategy effectively that I look to run in terms of trying to identify companies that are going to lead to up performance.
Peter Higgins 34:43
Indeed, I think that's a really good strategy that I think it's wonderful that you've just spoken about the Illuminator portfolio and in fact has had such significant outperformance and it reiterates the value of picking quality companies but holding them over the long-term as well as what we're seeing now.
I think I saw some piece of research which was saying that that the timeframe for investing now has gone all the way down to sub six months Neil, Which I find absolutely staggering, you know, it's almost like everyone's a trader now.
Neil Shah 35:14
Yeah. Well, I mean, I think I think that's the time and time again, we talk about the power of compounding when looking at investing.
And it's Einstein that said is the eighth wonder of the world, I think that that's what you bind, which is that actually holding on to these companies over a period of time is where you're going to start to see effectively those returns, you know, come through.
And that's why I think it's interesting that the turnover of the Illuminator portfolio is very modest a, you know, if you've got 10 names, one does drop out, but you'd be a holding period for the model these companies is long, and they've been some companies Rightmove has been in there for many, many years, for instance.
Peter Higgins 36:05
Brilliant.
Now I'm conscious of the time we've got allocated for this interview.
So we must talk Neil about the investment research review, which is aimed at bolstering the UK is capital markets, which need all the help they can get.
And to be fair, the review was led or is led by Rachel Kent was launched March 2023.
Where are we since the review commenced, and basically share with us the seven key recommendations made by Rachel Kent?
Neil Shah 36:36
Yeah , I won't get into all seven, but I'll focus on the ones that I think matter. Yeah, focus on the ones that matter to us as investors.
Yeah, I mean, let me let me first say that one of the things that motivates me, in terms of my role is the post financial crisis, I became aware of the fact that exchanges around the world were being asked by their Treasury Departments as to, you know, what can you do to help facilitate the flow of capital to our SMEs, there is a really good reason for doing this, which is that if you look at economies that flourish is the vibrant SME sectors that that lead to that happening.
And it's, you know, because these are the companies that tend to be the growth companies, the ones that tend to expand and employ more people that end up paying more taxes to fund public services.
And so looking after that segment is really, really important.
And we started working with exchanges around the world, actually, in terms of addressing this.
And so I feel like I'm in a very privileged position because I've had direct exposure to conversations.
With not just the UK, but you know what the ASX, the New Zealand Stock Exchange, Singapore Stock Exchange, Tel Aviv Stock Exchange, Deutsche Börse, so you know, we've done it we've looked at looked at a range of different exchanges, a lot of them implemented, what we call intermediated solutions to help their companies with some of the challenges and two instances we actually helped deliver the service.
So for the Tel Aviv Stock Exchange, and the Deutsche Börse, so when Rachel Kent was doing her stakeholder feedback, she ended up talking to me.
I kind of explained, you know, the work we've done, and the fact that actually, the Deutsche Börse scale scheme, when it launched its volumes were I think, 100% higher than that, you know, what the companies that are migrated onto it had previously, the Tel Aviv stock exchange scheme that we helped on again, saw similar kind of impact in terms of volumes, valuations, but also fall on capital.
So, you know, I'm a big supporter in terms of the word Rachel's done, I think she's done a fantastic job in terms of articulating the problem.
And the problem is there is a funding issue in terms of research.
Research, you know, she talks about this golden thread effectively research being the golden thread that holds the gap of markets together, and she has outlined a number of solutions to help that the first being great research platform, and we'll get into a bit more detail about what that entails.
The second is to give fund managers the more optionality in terms of paying for research from the asset and run P&L.
So it's not quite read bundling, technically, but it's effectively passing on the cost of research back up to the asset owners.
She's called for some regulatory reform in terms of if you look at the FCA handbook in terms of research, it's a hodgepodge of rules, etc.
So some clarity in terms of you know what the rulebook is, and this is important, because actually quite a lot of people shy away from making research publicly available on the guise of there's a big compliance risks behind it.
She's called on actually drawing academic, you know, us leveraging academic or academic institutions in terms of the research work, some reforms to the IPO timetable have proposed that a couple of other things but probably the most important, all of that is the creation of a research platform.
What is the research platform?
In essence, it's basically, you know, part of the reason we've seen companies the great the equitisation of the UK market, part of part of that is just the costs of being a listed company are very high. The cost of liquidity is high.
You know, if you think of yourself as a listed company, if the solution is to actually get noticed, you've got to pay for more resources, just another cost.
So, Rachel has suggested that there is if effectively a stamp duty rebate that pays for the provision the dissemination and provision of research for UK listed companies.
And you know, so in our, in essence, a company which feels that I'm misunderstood, or I want more coverage can approach the platform, the platform would use, effectively, public funds to source provide research from people like us or brokers, etc.
But importantly, make sure that that research is freely available to as you know, retail investors, all classes of investors via the research platform, where have we got to and that I think we've got to the point where I think Jeremy Hunt, agreed with all the proposals in the Mansion House speech, some disappointment, that actually we have to see much activity in the Autumn Statement.
And if I was guessing, I'm guessing that, you know, we'll probably see some further progress towards this in the March budget, though, this is pure speculation on my part, but we're in an election year.
The talk of the Great British ISA didn't materialize, maybe it does in March, but accompanying that will probably be some decisions around the research platform.
And actually, I think quite a lot of work has gone on behind the scenes, the Treasury Department has done quite a lot. And in terms of what kind of platform do we want?
And hence, what are the costs of running that platform and then what is left effectively to fund the provision of research.
So I'm hoping that we'll see some activity around that, if we do, I think it might be a great time to look at some UK stocks, one the UK is by all measures, and you'll have that other fund managers on the podcast, etc, talking about the fact that UK is cheap.
Add to that, you know, there is in some sense, an interventionist measure effectively to make more information available on UK listed companies and to level the playing field and to access a wider, wider sort of community of investors through that.
And our experience of that typically leads to an uplift in volumes and valuation.
In other schemes, I think it might start to reverse the fortunes of the UK. And it's one of those if the UK is going through a death spiral, this the chance of reversing that naturally, you could once you start to see that momentum, I suspect, you'll see more and more UK activity taking place.
So I'm very hopeful that, you know, the reset platform does move forward. It's the boldest thing we've seen from all this sort of work in the other market.
So you know, I hope the UK now takes the chance and implements it. But at the end of the day, it's politics and you never know, right? It's like end up just you know, being a lot of noise. And we never see execution on it.
Peter Higgins 44:42
I hope we do see some action and know that you're keeping everything crossed, as well Neil.
So we get some positivity through this political year, you almost touched on it.
But I'm going to ask you a bit more there. If we do see some catalysts in 2024, for whatever reasons, who do you and Edison Research Group see, as some of the potential immediate beneficiaries within the UK markets?
Neil Shah 45:08
I think, firstly, it's going to be a lot of those companies where you know, the valuations are completely in the wrong place for kind of businesses that they are, you know, whether that's and they haven't necessarily explained what they're doing particularly well, or things more recent.
So think of something like Team17 (TM17), which took it out a hit at the back end of last year.
But actually, I think, you know, the gaming industry, if we look at the long-term drivers of the gaming industry, it's an attractive industry.
And over time, I think that those kinds of companies would benefit a business like Costain (COST), which, you know, is as has had its ups and downs, but I think is going the right kind of way, but just is not particularly well understood by the market.
And look, I mean, I ran a round table for Rachel and put 18 IROs in front of just to have a discussion about the UK research platform.
And, and two really big themes that have emerged from that.
So just in terms of constituents, I had, I tried to replicate what you know, in a team names something like the UK markets and for FTSE 100 companies, or clutch and mid-caps, and sort of the micro-cap, small-caps around the table, the feedback that I think sort of came through was the a lot of companies find that their marginal share price is set by the retail investor currently, and that investor is not particularly well informed.
And you know, the examples where you know, when a company says we are going to meet guidance or with expectations, a lot of investors haven't, do don't have access to consensus and data platforms, etc. Just don't know what that means.
So having research that is made available is useful. I also think that you know, it's one of those things that we pick up when we're comparing UK companies to US companies. US companies will often put out a point estimate that this is our guidance for the year make it very publicly available as directional.
We know where they're going. UK companies often don't and I think just just that sort of clarity in terms of where they're going is going to be important.
The other which theme that emerged is that a lot of companies felt that they weren't necessarily meeting the right kind of investors.
And I think the platform will help in terms of connecting them to long term capital, rather than short-term money.
Peter Higgins 47:54
Indeed, you touched on the valuations there.
And we spoke earlier about cheapness at some of the companies and the fact that they're neglected or they don't get their communications out there to investors.
In 2023 Neil, the FTSE Small Cap and AIM indices were busier indices with regards to of all things, takeovers as they witnessed 13 and 20 takeovers, respectively.
The average bid premium was 50% Neil, which reflected the depressed valuations of so many UK smaller companies, how do we go about and you've touched on it already there.
How do you go about ensuring that companies a) get out the message and b) retail investors and institutional investors actually engage, purchase and value our companies accordingly?
Neil Shah 48:47
So the takeover stat is notable.
And within the UK, if I was a private equity firm, I would find buy into the UK very attractive, but proposition valuations cheap, they tend to be sort of sensible companies, good rule of law, all of those kinds of things.
And if you look at some of the names that have been bid for, I mean, I remember looking at HomeServe, for instance, where you know, actually a sizable part of its businesses in the US, and yet you're buying that business at a very low multiple compared to what you're buying in the US.
So I do think that there is scope effectively for those valuations to unravel in terms of how do we address those changes?
I mean, there is no silver bullet, but I do think that the research scheme will help with research platform would help considerably.
Why is that?
Well, I think, you know, markets like momentum, you know, it's one of those things that the moment you start to see interest and share price is going in the right way. There's a sort of, you know, it continues rolling.
And that's what we've seen in some of the other markets, which is when the Deutsche Börse ran the scale scheme, you know, it was there was more research made available.
Importantly, the research was all in English language.
And one of the very big things that they saw was a much larger international audience coming in looking at these German companies, because there was, you know, research and English there was explaining all these businesses did, the same thing for the Tel Aviv stock Exchange scheme that we ran.
So I think that, you know, making more research available, it's not going to be the domestic changes effectively, there is that international investor coming in and looking at the UK, I also think like everyone, it's, it's the fact that, you know, you are seeing some pension fund reforms taking place that are is going to be at the margin, some institutional demand for our UK stocks.
So it's a combination of, you know, these two things, it's making more content available, attracting more investors explaining these stories better to investors, whilst at the same time, you know, create a little bit of a demand push.
And if you get that, right, it's a virtuous circle, I think you'll start to see the UK suddenly move on to the front foot, but you need to see these schemes implemented.
And I think that that's this part of the frustration is lots of noise about it, etc, you know, around the Mansion House speech, but we haven't seen any execution yet.
Peter Higgins 51:43
Indeed.
Now, we spoke of cheap and undervalued.
And you then spoke about the virtuous circle, because it seems to be a virtuos circle in 2023 Neil regarding the phenomenal growth of us artificial intelligence related plays.
Yeah and we, we got introduced to the new phrase now, which is the Magnificent Seven, Microsoft, Amazon, meta Apple, Google, the parent of Alphabet, and Nvidia and Tesla.
Obviously, they outperformed immensely during 2023.
What is the synopsis of Edison's research regarding the outlook for the Magnificent Seven?
Do you guys have any favorites? Or are you thinking, well, you know what, there's no chasing these?
Let's just back up a little bit. What's the thoughts from the group?
Neil Shah 52:32
Let's take the AI path first.
So these are phenomenal names firstly, they are, in many ways, naturalistic monopolies.
So they are just going to generate, you know, exceptional returns, it comes down to risk reward, right?
And what you're seeing of late is that the valuations of these companies, particularly when you saw that sort of last quarter spurt in equity prices have continued to expand, yet the growth rates of these businesses have declined, right?
So and that is, that is a real challenge at some point, you know, you will probably get to see people wanting to diversify out of the Magnificent Seven.
I don't think we're there yet, I think there's further to run.
The reason why I think that there's further to run is that the optionality piece, so if there are going to be winners from the AI race, my bet would be that the companies are most likely to capitalize on these are the Magnificent Seven, their best equipped effectively to win their AI race. And so when you're looking at the growth rates, perhaps you're not necessarily factoring in the impact of AI on progress.
With rates going forward, I think that there is good reason to have exposure to them.
When I talk to professional managers, you know, what they're doing is they think AI is going to be a dominant theme for the coming years.
And they are doing a lot of groundwork in terms of the other companies to take a look at the SMEs.
And at some point, they're going to pull the trigger on that, you know, and move away from the Magnificent Seven into one of the smaller companies that are being exposed there, and this is not just you don't need to look at tech companies.
I did an interview with Polar Capital (POLR), who identified RELX (REL) as a company that has benefited, you know, from AI, because you know, their legal services now empowered by AI. And that becomes quite an interesting play.
So you can buy into that AI theme and a slightly more reasonable valuation than perhaps the Magnificent Seven, if you look look at it. And that's where I I think that diversification is going to come that way.
And so I would put a lot of work into, you know, the companies that are exposed to the AI theme, but not necessarily the mainstream, sort of Magnificent Seven.
My personal view is I'm very neutral on the Magnificent Seven in that I think valuations are stretched, but I can see an argument for the growth perhaps being underestimated by the market.
Peter Higgins 55:30
Yeah I think RELX had a fantastic year, in comparison to most of them our FTSE 350 stocks, and I think it managed over 30% for the year.
So really, really good call there with RELX, Neil.
I'm conscious of the time so we'll ask you one last question and this is where I'm going to give you the magic wand to do whatever you want, you're in charge, yeah, so this is my fun question….
I'm going to ask this one, conscious of time I'm going to give you the complete autonomy of the UK equity markets, Neil given said power, what thing would you change immediately to change the UK equity capital markets investment industry to place it on a better footing than it was yesterday, and is no longer face with a valuation discount to its US counterparts?
Neil Shah 56:21
Right, so I think that the answer to that is not one thing, but a series of things.
The first is I think we've got to get better at creating national champions, the standout companies, we don't have an Apple, we don't have an ASML etc.
It used to be that BP was a shining light in the oil industry, for instance.
And I think that what we've got to get better at is supporting our growth companies.
And part of that comes from the education effectively of our institutional investors in terms of supporting those growth companies, which then leads us to the second piece, which is I'm a huge supporter of the research platform, because I think the creative ecosystem, creating effectively more information to help people make the right kind of decisions around that is going to help unlock some of those valuations and create basically the right kind of environment for UK companies.
And then thirdly, I think it's actually you know, empowering effectively the retail audience to participate more in the UK market. I mean, we're underweight compared to a lot of the other markets.
So I think 10, 11, 12% UK retail participation in UK equities, 22% in Scandinavia, 40 or 50% in North America, and you know, re-engaging that audience back into our UK companies is going to be key and part of that is helping them have the tools to make the right kind of choices, and I think a lot of them are still in the dark.
Peter Higgins 58:11
Fantastic reply, Neil.
Thank you so much, ladies and gents, that was Neil Shah, the Executive Director of Content and Strategy of Edison Group, thank you ever so much for sharing insights with me Neil on this Investing Matters Podcast, delight speaking with you today. Wish you all the very best with everything. Wishing you and the team absolutely fantastic 2024, take care, God bless.
Neil Shah 58:38
Peter, thanks for having me on. It's been a huge pleasure.
Peter Higgins 58:41
Thank you. Take care.
Neil Shah 58:43
Bye.
London South East 58:45
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