Baillie Gifford’s Mid Wynd investment trust has been a stellar performer over the past five years. Merryn Somerset Webb asks its manager, Michael MacPhee, for the secret of his success.
When I arrive at Baillie Gifford’s Edinburgh headquarters to meet Michael MacPhee, the first thing he tells me is that he is “just a humble stockpicker”. This seems unlikely, given that his performance has been particularly good over the last few years (see chart below), and that he has been recommended to me as an interviewee by Russell Napier. Napier is a consultant to Asia-based stockbroker CLSA, and a man much quoted in this magazine, thanks to the fact that he has a big opinion on everything.
I also very much hope it isn’t true: humility makes for a lousy interview. But just in case, I start with something everyone has an opinion on. Double dip or no double dip? “What’s very interesting at the moment is that the probabilities are widely dispersed and there are lots of tail probabilities,” he says. Later I try one that always works. House prices? “I don’t expect a 40% fall in house prices (but)… I wouldn’t exclude it happening.” A bubble in China? “There might be a slight set back at some points.” Oh dear.
We push on. Which of the macroeconomic probabilities out there might one ascribe the highest probability to? Inflation? Perhaps. In any normal environment you wouldn’t bother worrying about hyperinflation at all, says MacPhee. But now you might give it more like a “5% or even 10% probability”.
It often happens when the velocity of money picks up rapidly from a very low level as “people lose faith in money, or in the statistics about inflation they are being fed”. Overdo it on the quantitative easing (QE) and it could happen. And until it does? In the West “there isn’t a lot in the tank”; the “debt problem countries aren’t doing very well at the moment and I think that will continue”. Agreed. But how does this period of recession/depression/low growth resolve itself? We wander around the subject for a while, but the truth is MacPhee really isn’t much interested in how things resolve themselves in the West. Why? Because “the thing that has been most helpful to me running money globally has been not to be anchored in our [Western] kind of world”. It is the rest of the world – the growing part – that interests him. If we were sitting in Hong Kong having this conversation, the “view of the world would be completely different”. Instead of being obsessed with the ‘flations’, deleveraging, house prices and recession, I’d be seeing growth all over the place.
So is MacPhee a decoupler, someone who thinks that despite its recent history of export dependence, Asia doesn’t need the West to grow? He is. He expects Asian economies to keep adjusting away from mercantilism and towards the generation of domestic demand as the globe rebalances. He also thinks that much of Asia might be in luck. They’ve grown over the last decade in large part thanks to the disinflation they sent to the West. Low wages in the likes of China pushed down the prices of manufactured goods across the world and allowed Western central bankers to pretend inflation was low, and hence to keep interest rates low and consumption high. The resulting credit bubble and its collapse hasn’t been great for anyone but it does have the happy side effect of creating disinflation in the West, disinflation that may now help hold down inflationary pressures in the East.
I’m not entirely convinced – we don’t send much in the way of goods East these days so I don’t see how they’re going to get our deflation (assuming we ever get it ourselves). And there seems to be plenty of evidence that we are now importing inflation from them (as wages rise alongside the price of commodities). But MacPhee sees the developing countries benefiting from our weak growth in a slightly different way. “The best hope is that their currencies steadily revalue upwards and that they then import capital goods from us at the same time as our companies invest in their booming consumer markets.” Their productivity then “grows significantly and they move up the value chain”. Right now we are all “dimly aware” that something has changed globally. But “in ten years’ time we will be acutely aware of it. There will be a lot of Chinese tourists in Edinburgh.”
That sounds interesting (I have high hopes of renting out my spare room to cover the children’s education bills), but we don’t dwell on it, largely because, unlike most of the fund managers I meet, MacPhee really is more interested in actual investments than in second-guessing the state of the global economy. So on to stock picking, at which he is clearly better than most – see the chart of the Mid Wynd investment trust he has run for the last 12 years.
How does he do it? One core point is that he likes to look for investments in places where the real cost of money is high. If money is expensive, businesses that launch and survive are by definition hardier than most of those that launch when money is cheap. When you can borrow at 3% you don’t need to make much of a return to get by, when money costs 10% you have to jump higher hurdles. He also likes his investments to be a little “asymmetric”: the portfolios that succeed aren’t the ones full of semi-sure bets, but those in which the manager has bought some investments “that have a high degree of uncertainty” and are thus cheap (most investors hate uncertainty), as well as a core of “great companies that are improving or likely to improve”. The latter is something Baillie Gifford, for whom MacPhee manages the trust, is known to be good at finding.
This, along with his bias towards developing markets, means that the fund has almost nothing invested in Britain. It invests in firms listed here but rarely in companies with their main business here. Run your eye down the trust’s UK holdings and you’ll see everything from Middle East oil services firms to Brazilian marine businesses. What you won’t see are any UK-based banks or retailers.
Michael MacPhee’s top tips
I ask for a few of his top tips. First is MIPS (Nasdaq: MIPS), which is a “smaller early-stage version of ARM”. It should, he says, be able to take great advantage from the take off of tablets and smartphones and do particularly well if the Android platform (a software package for mobile phone apps) does well – which it should, given that it provides a way for the phone firms rather than the likes of Apple to get paid for apps. That’s something they all really want. The shares currently trade on “under half of ARM’s multiple”.
Next up is a stock set to take advantage of Brazil’s growing middle-class wealth. Odontoprev (BZ: ODPV3) is the dominant provider of Brazilian dental plans. It is growing fast, has a huge market to keep growing into; has good pricing power; and might also make a killing out of royalty payments from licensing its software. It is also “very cash generative and pays a handsome dividend”. Then there is Dart Energy (ASX: DTE), which owns licences across Asia on coal-bed methane prospects. The idea is to use their “low-cost drilling expertise” to find resources in under-supplied areas where “energy demand is growing rapidly”.
But MacPhee doesn’t just buy stocks: he’s interested in unusual long-term investments too. He is looking to buy into the life settlements market (buying groups of life insurance policies sold on by their original owners) now that the banks may have to sell their holdings cheap for liquidity reasons. And he has invested in a start-up money management business in Edinburgh called Level E. His explanation of how this works takes up two pages in my interview transcription. I don’t understand a word of it and closer investigation makes it clear I never will. But for those who are interested it is something to do with algorithms and dynamic weighting of money; it has worked quite well so far; it appears to offer returns uncorrelated to the wider market; and you can find out more about it at www.levelelimited.com.
MacPhee invested very early on and so got 25% of the firm for £10m. If the “system” (always a word that should make investors nervous) works, Level E could end up making the trust a fortune. It isn’t a conventional investment, but it is the kind of thing that, due to their closed-end structure, only investment trusts can get away with making: long-term and a little complicated.
That brings me on to investment trusts. Mid Wynd is a great performer and it also comes pretty cheap – the management fee is a mere 0.5%. But I’m worried about the investment trust market: fees are going up and both old and new funds are adding in performance fees. What does MacPhee think of that? If that’s what people want, he says, what’s wrong with it? I say it most certainly isn’t what people – other than fund-management people – want. They want low, transparent management fees and nothing else. They might want some sense that their manager’s interests are aligned with their own, but they’d like to get that from him holding shares in the trust, not from him creaming off an extra percentage of their returns.
MacPhee points out that most trusts are good value for money. I say that this isn’t a good excuse for introducing new fees. We might be on the edge of a very opinionated disagreement. But then it turns out that not only is MacPhee the largest shareholder in the Mid Wynd trust, but he thinks performance fees are only really OK if they are “symmetrical”.
So while you might get a performance fee if you do well, you have to forfeit your management fee if you do badly. It’s a nice idea. Sadly, it isn’t exactly a concept I see taking off in the fund-management community in a hurry.
Still, you don’t have to worry about performance fees with Mid Wynd: it’s cheap, it’s full of interesting investments, its relatively liquid, and it is run by a very good – if slightly too humble – stockpicker. One for your Sipp perhaps.
Who is Michael MacPhee?
Michael MacPhee is the manager of the Mid Wynd investment trust and has been for the last 12 years. He joined Baillie Gifford in 1989 and become a partner in 1998. He managed Baillie Gifford’s Latin American fund until 1999, and until recently was the head of the firm’s European Investment team. The Mid Wynd trust is small and relatively specialist in some of the investments it takes on, but its core aim is to provide both capital growth and income: over the last five years its net asset value has risen by nearly 50%. Over the same time period the Global Growth sector as a whole has risen 33% and the FTSE World Index a mere 9%.