An explanation of the Trust’s investment philosophy and process
DirectorsTalk Interviews caught up with Alan Bartlett, Co-Portfolio Manager of Global Opportunities Trust plc (LON:GOT), for an exclusive interview offering insights into the Trust’s investment philosophy and approach. Alan explains the concept of Agile Investing, a flexible strategy that seeks to compound real returns over time by actively managing market exposure. In this interview, he outlines how the Trust distinguishes itself from conventional global equity strategies, why flexibility is now more essential than ever, and how the Trust interprets long-term structural changes in the global economy.
Q: What is the investment philosophy behind the Global Opportunities Trust plc (LON:GOT)?
A: We are trying to compound real returns over the long term with an approach that we call Agile Investing. The strategy itself is relatively simple conceptually. It’s a global equity strategy that has a very flexible approach to what the market exposure is and in simple terms, we’re trying to take responsibility for both the risk and the return generated by the strategy.
Q: How does Agile Investing differ from conventional global equity strategies?
A: I think conventional global equity strategies tend to be fully invested and if you’re forced to be taking risk on all the time, our view is that there are times to take risk and to be exposed to markets and there are times to try and protect downside.
So, in simple terms, when we have lots of investment ideas that we have high conviction in, we’re more tolerant of risk and will allow the market exposure of the strategy to go up. When we can’t find as many convincing investment opportunities, we’ll focus more on downside risk and preservation of capital so that the net market exposure of the strategy will flex over time.
Q: Why is flexibility crucial in Agile Investing?
A: We think that’s very important on an ongoing basis because in simple terms, we think that much is changing in the world and that it’s going to be increasingly important to be flexible, to be able to adapt to different market environments as they evolve. So, Agile Investing to us is a confluence of that flexibility with the willingness and the ability to focus on specific investment opportunities that we think can generate high returns over the long term.
Q: What were the characteristics of the 30-year period leading up to COVID in terms of equity returns?
A: I think it’s pretty legitimate to ask, why would you try to run money in that kind of way, and if you think about returns over the last 30 years, certainly the 30 years to COVID, it was an incredibly benign environment to invest in. The period started with the resolution of issues in the banking sector, savings, and loan in the US, and ended with COVID.
Through the mid-1990s, we had the Asian financial crisis into the TMT bubble and burst. From there, through the commodity super-cycle to the global financial crisis and then that wonderful run from 2009 all the way through to COVID with just a mere hiccup in 2013 with the taper tantrum – an amazingly benign period for equity markets that generated over 8% per annum nominal and well over 5% per annum in real terms.
I think during that period, it became very logical for people to adapt to the idea that equity markets were benign and that returns were very attractive, and they were. Downswings in markets were pretty short-lived and as long as you invested broadly in markets and held on, frankly, you had a nice long-term return on investments that more than met most people’s requirements.
Transformation of the “four forces” set to drive markets in the decades ahead
Q: What are the ‘four forces’ Global Opportunities Trust believes are key to global economic outcomes?
A: Why would you now want to be more flexible when we’ve proven over multiple decades that actually just being passive, for example, is a really attractive investment strategy. I think the way to think about that is to try and unpick what drove equity market returns over that long-term period, and we think about it in terms of four forces that drive the world.
In simple terms, these four forces over that 30-year time period that ended with COVID, they conspired to support globalisation and to support this sort of very benign environment for equity investing, the four forces being Demographics, Security, the Environment and Technology.
Q: How did demographics, security, the environment, and technology affect past market conditions?
A: During this period, we had a significant increase in the global workforce because of the industrialisation of emerging markets, which was clearly very positive for economic growth.
Post the fall of the Berlin Wall, it wasn’t as necessary to spend as much on defence and perhaps more importantly, it became safer, if you like, to extend supply chains for industries, which made it easier to produce things cheaply, particularly with this large increase in the workforce in emerging markets.
The third force, environment, was important simply because it didn’t really matter. For most of that time period, we were able to essentially treat natural resources as unlimited, didn’t price externalities to their full extent, if you like. We’ve always had environmental issues, but they were more local than global over that time period.
On the technology side, clearly it was the age of the internet, the business models that supported Microsoft, Apple, and Google, etc.
All four of those things combined logically led to a very strong environment for equity investing that you see in the numbers and also explain why we have had such a significant rise in passive investing, ETF, even the rise in the allocation that pension funds, endowments foundations etc. had towards private capital investments, so private equity, private debt markets. In simple terms, all we had to do was invest in markets and hang on for the long-term return.
Q: Why is the Trust concerned about the future impact of these four forces?
A: The problem we think we have now is that three of those four forces are no longer a benign impact on economic growth and the one that stands out that still clearly is, is technology.
Q: How does the Trust view technology’s role in future productivity?
A: The way we think about it, technology is moving from the digitisation phase, the assimilation; digitisation being the move to the internet and digital business models, but we weren’t actually able to read the internet. Now, with large language models, we can.
So, the adoption of AI, artificial intelligence, the business plans that come from that are going to be transformational for productivity and are going to be fantastically interesting long-term.
Q: What are the implications of ageing demographics on economic growth?
A: We’ve passed the tipping point on demographics. The global population is ageing and outside of Africa, there really isn’t anywhere where the working-age population is growing on a forward-looking basis. That’s going to cause issues.
On the simple level, less people to do things and that is really important. If you look over the very long term, we think about 40% of economic growth comes simply from more people so that going into reverse is a bad thing but actually, dig within that, there are other even more significant issues potentially in terms of the inequalities created from the last 30 years. In simple terms, all the assets are owned by old people that have benefited from low interest rates and inflated asset prices. We’ve got less young people that are going to be working, who have to go buy houses that are now really expensive.
How some of these things play out over the next decades is going to be very interesting and complex but demographics is not a positive for economic growth anymore.
Q: How has global security shifted, and what does it mean for the economy?
A: Clearly, Russia invading Ukraine has focused everyone’s attention on defence expenditure but also, COVID showed the limitations and the risks of having extended supply chains for businesses. So, we are undoubtedly in a period in which security on every metric, whether it be cybersecurity, guns and ammo, or supply chains for industry, is high on people’s agendas. People are going to have to spend more money on increasing security, largely at the expense of economic productivity.
Q: How does environmental sustainability affect short-term growth?
A: Unfortunately, from an environmental perspective, we have really got no choice but to start trying to price externalities, because the issues are undoubtedly global, not local. As a father, I’m extremely supportive of the desire and the need to move to a more sustainable future for our children and our children’s children, but from a conventional economic growth perspective, spending money on environmental technologies isn’t good for short-term growth.
We only have to look, for example, at the increasing cost of UK electricity, which is largely driven by the move to more green electricity, and the impact that that has on the input costs for industry in the UK and productivity to see that in the narrow, short-term sense, economic productivity is negatively affected by environmental sustainability. Notwithstanding the fact that it is incredibly important and we should all be supportive of it.
Q: Why does the Trust believe future asset prices won’t be well supported by economic growth?
A: So, three of the four forces to us are negative for economic growth on a forward-looking basis, with technology being the great hope, if you like, for the future. It’s far from clear that the aggregate of all those things is positive and if you think about that wonderful 30-year time period that ended in 2020, in which we were able to generate 5.5% or so real returns on equity markets, economic growth was pretty anaemic, actually. Across the world, maybe 2.5% per annum. That’s in an amazingly positive environment.
So, from our perspective, on a forward-looking basis, asset prices aren’t going to be supported by particularly strong economic growth at all. Even if we just continued the 2.5% that we had in a very benign period, which wouldn’t be exciting enough for asset prices, really but we think it’s going to be likely worse than that, despite the positives from technology.
Q: How does Global Opportunities Trust interpret high current asset valuations?
A: A major problem alongside that is just asset prices. If you look at the US, for example, cyclically adjusted price earnings ratios are close to all-time highs, more expensive than they were before the depression in the 1930s, for example. House prices in the US are as expensive as they’ve ever been an equity in housing in the US is at an all-time high.
What that does is it creates significant wealth effects so if markets fell, the impact on individuals’ wealth is significant, and that would cause quick and significant retrenchment of spending. The US is a consumption-led economy, not a savings-led economy. Savings rates are low, but in adverse times, savings rates increase dramatically. If you look at what happened after the financial crisis, it was very quick. If that were to happen again, there’s no question that a relatively shallow potential recession would become a very significant recession.
Q: What does the Trust advocate in light of these macro and valuation concerns?
A: So, we’ve got some big long-term factors that are adversely affecting long-term economic growth, combined with very expensive asset prices in the short term. From a simple perspective, we think it makes perfect sense, given those things, to prize flexibility and prize the ability to be able to focus on specific investment opportunities that are attractive, rather than implicitly bet on everything being okay and owning a little bit of everything, being passive, for example, being the way forward.
