Merryn Somerset Webb is shocked to find herself wrapped in the warm blanket of a consensus when she meets Robin Angus, executive director of the well-liked, solid and market-beating Personal Assets Trust.
Robin Angus is a man after my own heart. He carries gold coins in his pockets, has a silver ingot beside his bed, and would wear emeralds on every finger if his wife would let him. Better still, he thinks deflation should be allowed to do its job – rebalancing the economy – but expects inflation to let rip instead. He would invest all his money in high-yielding defensives and gold, given half a chance, and he thinks the housing market is bound to fall by quite a lot quite soon.
Sound familiar? If you are a regular reader, it surely will. This is comforting stuff. In a world where almost everything is up in the air and where I practically never get to bask in the warm blanket of a consensus, spending an entire hour chatting with someone with whom I am in almost complete agreement is really quite something. So much so that I could hardly drag myself away at the end of our talk. The very idea of exchanging my comfy leather armchair in the Georgian townhouse offices of the Personal Assets Trust for a drafty restaurant table and an argument about commercial property prices (my next appointment) was almost more than I could bear. That’s why this week’s interview is rather longer than usual. My apologies.
How to scare Edinburgh’s solicitors
We started our chat with Robin’s sideline – terrifying Edinburgh’s professional classes. He’d been at it the night before, giving a talk in which he put the city’s solicitors and estate agents straight about their futures. It was “kind to do so”, he says. People can’t go on “living in false hope”, given what a mess the world is in. So he told them that the developed economies are like “overstretched elastic”. There is no give left and the only way is down. That means that over the next few years we will see “at best dull flat markets for a few years until growth resumes”. Expect a long and trying “convalescence”.
That doesn’t sound too scary, I say. Given the circumstances, surely the lack of another major crisis would in itself be good news. What about at worst?
At worst, says Robin: “disaster”. Now we are off. Would disaster take the form of inflation or deflation, I ask (this is really all I care about anymore – if we can get this right, we’ll know what to do next). “Deflation would be an excellent thing. I would love to see deflation.” Why? “If you look back to the 1930s… people were not losing value on their savings and investments. They were still getting some sort of return and in the meantime the unhealthy bits of the economy were being allowed to dwindle… underneath, growth was coming in new areas.”
Inflation, on the other hand, “perpetuates unworkable things”. It encourages the misallocation of capital and offers politicians a “soft option” short-term fix. And one that is politically palatable for everyone – borrowers love it for obvious reasons, but “in a funny way” savers quite like it too: it makes their nominal returns look great and “this does fool them”.
That means that any government that wants to be re-elected – and I think Robin and I would agree that this is all most governments want – will always go for inflation. The question then is whether governments can have what they want this time around. We’ve written a lot in MoneyWeek about the broken transmission mechanism. It doesn’t matter, says our number-one deflationist, James Ferguson, how much money the Bank of England prints: if the banks aren’t lending and people aren’t borrowing, that money won’t make it into the system and we will end up in a deflationary spiral.
We’re fighting the last war
Robin disagrees, and I’m beginning to think that I might too. We talk about how generals fight the last war and governments fight the last crisis. I point out that most of the people in power in finance and the government at the moment are in their 40s or 50s. So the banking crisis that really scares them is the one they know best – the Japanese one. Perhaps that partly explains the spate of “Turning Japanese” notes we see so much of these days.
Robin notes that the people who “created the 1970s were the ones who remembered the 1930s”. They remembered deflation and seemingly everlasting recession and that’s what they were fighting. “They had seen the worst possible things” and “anything was better”, so they “forced through inflation to prevent a rerun”. The “terror was depression and inflation was the way out of it”. Perhaps history really does echo.
Either way, Robin thinks the government can create inflation by keeping interest rates at 0.5% and by printing money as and when they feel things might not be moving along fast enough by themselves. “It will work eventually.” I’m not sure there is any eventually about it. Look at the Retail Price Index (RPI), the measure that we all based our view of inflation on only a few years ago, and UK consumer inflation is already not far off 5%. And in the US, where on the face of it printing money has so far been as useful as “hosing lots of water over a dead elephant” – as Robin puts it – you only need look at producer price inflation (currently running at 4%) to see that, while neither the Consumer Price Index (CPI) nor real wages are rising, the pressures are there.
Are women to blame for inflation? The truth is, says Robin, that “the obvious” path forward is “stagflation”, something he remembers well, thanks to working through the 1970s. The “human race will always incline to inflation… a natural bias”. I’m with him on the stagflation bit, but is it really the case that inflation is a natural bias of the human race? Perhaps, I say, a natural bias of democracy? In a working democracy there is never an easy way to cut government spending, so every now and then a money-printing binge is necessary to get deficit-ridden administrations out of their various fiscal holes. Yes, says Robin, “you are absolutely right”.
I’m so pleased by this approval that I treat him to my new pet theory – adapted from an idea of CLSA’s Russell Napier. We wonder if it is the case that you can trace inflation in the West back to universal suffrage. Politicians promise what they think voters want and women voters, being society’s main carers, are most likely to be promised the things that most expand the state. Historically, it has mattered more – or been perceived by politicians to matter more – to women that they get help looking after the young, the sick and the disabled, than it has to the men who don’t do so much of this work.
So what do you do to get the female vote? You promise more schools and hospitals. Then you promise universal tertiary education, tax credits for everyone, free bus passes for the over-60s and subsidised nursery care. And the more unaffordable things the state promises, the more likely it is to have to print money to pay for it – and the more likely inflation becomes.
So there is a horrible possibility that, while it doesn’t make it their fault (it remains the fault of over-promising, power-hungry politicians), giving women the vote actually causes inflation (see our blog for more on this).
Robin loves this one – it is, he says “absolutely fascinating”. All we need now is a PhD student looking for a thesis topic to research it properly. Robin has another subject said student can look into at the same time. He’s interested in the “realigning of stipends in the Scottish church in the 19th and 20th century”.
Sound dull? It isn’t. Looking at the stipend is a way to look at the status of the clergy and how stupendously it has declined. Robin once worked out that, were the current Bishop of Durham to have the same post-tax purchasing power as those of the 1930s and 1940s, he would need a stipend of around £25m a year. And even an ordinary local vicar would need something in the region of £100,000 to live the life of a 1930s vicar. Disappointing for modern vicars, I say. “Better for their souls,” says Robin. See why I stayed so long?
Why you should hold onto gold
Anyway, to get back to the point, the regular debasement of paper currencies is, of course, why Robin holds gold. Lots of gold. Physical gold. In his pocket (regularly checked for holes) he carries a gold £5 coin, which he produces with a happy flourish every time anyone mentions inflation or currency collapse and claims to keep with him for “sensual delight”.
At home (address not supplied) he has a stash of smaller coins on the basis that “any time in history, any place in the world, if you have a handful of small denomination gold coins, you would have been all right. You would have been able to eat, you would have been able to buy shelter, buy clothing.” I press him for a gold price target. But Robin hates price targets (“I don’t predict how anything will go”) and will only say that he holds it for insurance: “it’s money you can’t print… it is something that will always hold its value”. That isn’t necessarily always the case in the short term, of course, but “what else is there” to hold for the long term? Robin doesn’t approve of UK government bonds – if you hold them, he reckons, you must be mad, given the current yields and the utter lack of obvious deflation. Instead, Personal Assets Trust has 12% of its assets in gold, in one form or another.
Britain’s great property curse
I wonder what he thinks about houses. Not much as it turns out. “Property is the great curse of Britain… a great non-productive distortion of the economy… a national religion” that has ended up being – wrongly – “the only thing we trust”. It is also, oddly, the only market where people don’t expect drama. They expect share prices to veer all over the place, but ask them about tough times in the housing market and they’ll say it will “mark time” for a while as incomes catch up to prices. That won’t happen, of course. Never does. Instead, despite the fact that prices are already off 20% or so in real terms, the extent to which prices rose means that “more will come, more should come”. On the assumption that Robin won’t have much good to say about the merits of the buy-to-let sector, we move on.
What else would he buy if pushed? If he were wealthy, he says, it would be more precious metals and jewels, although the latter only for fun. “I love these things.” Otherwise if I handed him half a million quid right now, it would all go straight into the Personal Assets Trust (LSE: PNL).
That’s probably a wise choice. It’s performed well in the last few years, losing only 17% when the FTSE 100 plummeted by nearly 40% two years ago, and rising 17% to the FTSE’s 14.6% over the last year. It holds all the things we like (gold, high-yielding international stocks, and so on) and has 30% of the portfolio in cash.
Why so much? Is the board expecting an upset in the markets? He says, “Oh yes” to this in such a way that I want to know how certain he is, and when he thinks it will happen. He isn’t having that – going no further with time specifics than “in the next year”. This refusal to be pinned down on numbers and timescales is very sensible, but still a little bit maddening, I say. So he gets a bit more specific for me: “What I think is going to happen is reflected in how my own money is invested and if you want to see what I believe, look where my money is.”
I think he is recommending we all hold a good bit of gold and cash, although he, of course, will say he is recommending nothing, except perhaps the trust.
The future of investment trusts
On to another of my current pet subjects, the future of the investment trust industry. There is a general assumption among the managers I speak to that when commission is banned as a payment form for independent financial advisers (IFAs), as it is supposed to be in 2011, investment trusts, which don’t pay commission, will suddenly shoot up in popularity.
I’m not so sure. It seems to me that commission bias, whereby IFAs suggest unit trusts that pay good commission, will be replaced by knowledge bias, whereby they will keep suggesting what they already know all about – unit trusts. Robin doesn’t think it very likely that there will be a sudden rush into investment trusts either. But he differs from most of the other people I talk to in the industry, in that he doesn’t think there should be.
Why not? “The investment trust sector is not a sector I would like to see full of hot money.” So he doesn’t mind that only a small proportion of people ever buy investment trusts? “No.” In fact, that’s the way he likes it. He doesn’t want the kind of people “looking to put £1,000 into something that will rise rapidly in the next few months” coming anywhere near Personal Assets Trust. The trouble with people looking for a quick profit is “that if they get it they sell, and if they don’t get it they sell. They don’t stay with you for the long term.” Everyone should take a small amount of their portfolio and “have fun with it” if they enjoy that kind of thing. But the likes of Personal Assets Trust is not for fun. It’s there to “provide long-term security” to long-term investors.
So there you have it. Buy gold, buy defensives and have cash. If you can’t be bothered to do it yourself, buy PAT. But that done, don’t sell it. Or if you do, don’t let Robin find out.
Who is Robin Angus?
Robin Angus heads the executive committee of the Personal Assets Trust (PAT), to which Sebastian Lyon of Troy Asset Management has been investment adviser since 2009. Angus has been a director of the trust since 1983 and was instrumental, with Ian Rushbrook, in its creation. He started his career at Edinburgh-based Baillie Gifford, was consistently rated the market’s best investment-trust analyst, and has been in the market for more than 30 years.
Why should you care what he thinks? Because PAT’s objectives are to “protect and increase” the value of its funds “in that order”. And that is something it has been extremely successful in doing, outperforming the FTSE All-Share index by more than 140% since 1990 and creating a long-term base of exceptionally loyal investors. Unlike most investment trusts, PAT does not trade at a premium or a discount beyond the occasional 1% or so (see page 39 for an explanation of this). Finally, his quarterly reports are considered to be some of the best in the market – being contrarian and clever, but also entertainingly written.
The difference between unit trusts and investment trusts
Unit trusts and investment trusts exist for the same reason – to take your money and invest it in a range of securities chosen on your behalf by a fund manager (unit trust), or investment director (investment trust). But there are some important differences.
Firstly, you can only buy units from a unit trust, not on a public exchange, as you can with an investment trust. That means unit-trust units are less liquid than investment-trust shares, as you can only sell them back to the fund that issued them, and only at certain times.
Next there is a pricing difference. Investment trusts are companies, so their share price is determined by the stockmarket. That means they can trade above or below the value of the assets held by the trust, giving rise to a discount or premium to net asset value (NAV).
Unit trusts, on the other hand, price units with direct reference to the assets they hold, so no discount or premium arises. Then there’s advertising – unit trusts can market themselves freely, whereas investment trusts (like all companies) are restricted. A bigger advertising budget can fool investors into thinking unit trusts must be a better bet. In fact, lower average charges often make the equivalent investment trust cheaper.