The next interview in our series with regular contributors to Capital and Conflict is with the inimitable Charlie Morris. Charlie’s spearheading our most important publishing project next year. As you’ll see below, there’s nobody in Britain more qualified for it. He’s the ultimate investment professional.
Q: You were at HSBC for 17 years – first at James Capel, which was owned by HSBC, and later at HSBC itself. What made you leave in April 2015 and take over the Fleet Street Letter?
A: My service was actively managed, but the world had changed. Although my fund was less risky than a traditional portfolio, perceptions differed. In 2000-02, ‘relative’ returns became extremely unpopular. Absolute returns became popular. That means a manager making decisions rather than following the market. My portfolio was nothing like the market. It was free of a benchmark. After the crisis, this had largely played out. Many hedge funds caused mayhem, and ‘absolute’ became a dirty word. Relative (hug the index) was back.
Things changed, and I just had to try and figure out what to do next. My last year saw the fund return 13% against collapsing oil and falling credit. I left on an extremely high note. I was determined that was the only position from which to start afresh.
Q: Didn’t you want to go to another bank or firm?
A: Doing the same thing somewhere else would make little difference. The whole reason for a multi-asset portfolio back in 2002 was no longer relevant: Bonds had played out, commodities had played out, emerging markets… Everything we started off calling a great opportunity had finished.
There are still pockets, of course, but you could drive a hole through the opportunities in 2002, whereas today you can’t.
A: Because prices are simply too high. The bond market has very low yields. Credit is highly priced and overly issued. There is too much debt in the world. Property is also in the firing line because it’s a quasi-bond. If you’ve got a tightly controlled multi-asset portfolio, you’re going to struggle. I sought the ability to do my job with total freedom.
A hedge fund would have been appealing, but it’s more exciting to have one’s own hedge fund than work for someone else’s. They are very hard to raise money for these days. Besides, there’s no additional magic that would appear.
Q: Why was it very difficult for someone like you?
A: It’s not easy to make money. Once you understand that, you realise what you’re up against, and it helps you to be more realistic about what’s possible. Hedge funds have a need to perform month by month. Markets don’t work like that.
I think you can do a better job than the market. I think you can take less risk than the market, and make more. But what you can’t do is produce some kind of Madoff-like perfection: It’s just not what it’s about.
I realised that, actually, I love the game more than the industry. I love investments, markets, and the challenge of them.
Q: What is it about the Fleet Street Letter that appealed to you? It’s the oldest newsletter in this country, launched in 1938.
A: I like the fact that it’s got a grand history – that predecessors Lord Rees-Mogg, Patrick Maitland and Nigel Wray were part of it. It’s made some great calls.
Q: Can you list a few?
A: In 1938, it said there would be war in Europe within a year. I read an issue from the mid-1980s talking about the fastest-growing economy in the world being China. At that time, nobody was talking about China. I knew, because I was living in Hong Kong. Shenzhen was booming as a special economic zone.
I’m very interested in the world – geopolitics and economics. The Fleet Street Letter provides an opportunity to express my view. It’s publishing. It’s not the investment business, so I have the freedom to say what I think.
Q: Let’s backtrack a bit and go all the way back to your childhood. Where were you born, and where did you grow up and go to school?
A: Where I was born is really funny. I was born in a town in the northeast of England called Hartlepool, where they hanged a monkey. During the Napoleonic wars, there was a French shipwreck, and there was a monkey that was washed aboard. All the English soldiers knew was that the French were hairy and didn’t speak English. They put it on trial for being a spy. It was found guilty and hanged. That’s why they call the Hartlepudlians the monkey hangers!
My dad built nuclear power stations in the 1960s. He was the chief engineer at Sizewell in Suffolk, then at Hartlepool, then at Heysham. We moved to Heysham, in Lancashire, after I was born. He was up there with the best of the civil engineers on the planet. I’m very proud of him.
Everyone was going on strike. It was the 1970s. My dad got a phone call saying “Would you like to move to Hong Kong and be the chief project engineer of the Mass Transit Railway?” and he said “Yup!” So from 1974 onwards, we lived in Hong Kong. My parents were based there for 25 years. My father was the chief executive of Hong Kong’s largest construction firm. It was quite funny, because it was a British colony showing London how a metro system should work.
Q: How old were you when you moved to Hong Kong?
A: I was three. I loved Hong Kong, and have fond memories of it: the smells, the light, the energy, the food. Some of the smells were quite honking in those days, because there was a contrast. There were slums. Over the next 25 years, they went, and the middle classes grew rapidly.
I remember the Vietnamese refugees very clearly. They were all coming over. I didn’t really understand it at the time, but I think back to how these people were trying to get out of Vietnam. Who the hell wouldn’t want to? It’s like Syria today. I’m sympathetic to that cause.
Q: Were you good at school?
A: No, naughty – very, very naughty: always in trouble, all the way through school. I was born at the end of September and was in the year ahead, which I think was the biggest mistake ever. It just meant that rather than being top of the class, I was bottom of the class, bored, and played the fool. If you can, engineer it so your kids will be the oldest in the year rather than the youngest in the year. The difference between being five years old and six years old is huge.
Q: You then transferred from Hong Kong to boarding school – Ampleforth, run by Benedictine monks. Was that a difficult transition?
A: My older brother was already there, so that made it a lot easier. But it was pretty painful. Hong Kong was hot and I was spoiled and it was great. Yorkshire was cold and wet and miserable, and the food was terrible. Boarding school used to be rugby, cold classrooms, cheap food, and no central heating. Now it’s a lot cushier – like Club Med. They’ve all got en suite bathrooms and central heating blasting, and chefs in the kitchen and theatres and music centres. That’s why it’s so expensive.
Q: Do you have bitter memories of Ampleforth?
A: No, school was great.
Q: Were you more studious there?
A: Not really. I wasted my opportunities at school totally. I was naughty all the way through. Maths and physics, I was very interested in. But I was very, very bad at handwriting, because I did so many lines at prep school. I must have done hundreds of thousands of lines, as in: “I must not speak at the back of the class” or “I must not eat sweets”. It destroyed my handwriting.
After leaving boarding school at the age of 17, I had a gap year. I went to study French at the University of Grenoble, and did a tour of Southeast Asia and Australia.
Then I went to Exeter University to read engineering. I should never have done engineering. I should have done economics or economic history. I failed my first year, redid it, and passed it. Then, in my second year, I said: “I’m going to go to Hong Kong, because I’ve already done this”. I spent time in Hong Kong, and just didn’t want to go back. University wasn’t for me. I had good friends from that time, but I didn’t enjoy it.
When I came out of that, my parents said, “You’re on your own”.
I got a job at a pub in Virginia Water in Surrey, and became manager six months later. I managed to treble sales. But I thought to myself, “This is pathetic”.
I had wanted to join the army all my life – from the age of 18. Originally, I wanted to fly helicopters. So at 24 I joined the army. I got a place at Sandhurst.
Q: How was Sandhurst?
A: Fantastic: I loved it. The best year of my life. It’s just the most perfect institution in the world. It runs like clockwork. Not a minute of your time is wasted.
It’s hard work. You learn a lot about yourself and others. You improve your personal skills. It’s not really about being a soldier, it’s about leadership. The vehicle that you use is the green uniform and the rifle, but that’s almost beside the point.
Q: It’s very regimented for someone as rebellious as you. You had to be up at the crack of dawn, I presume.
A: No different than working in the City! I think we got up at six. It was no big deal; I get up at six now. It wasn’t some sort of physical nightmare that people assume it is. Yes, physical was part of it. You had big runs with logs, but that wasn’t what it was about. It was not one big press-up competition. It was teaching people how to give a set of orders, make a plan and organise others.
Q: What about the academic curriculum?
A: It wasn’t that hard. There was some military history. The planning was taken very seriously: the ability to deal under pressure – be tired and cold and wet, yet make decisions and ensure that things then happen. That was excellent, and I thoroughly enjoyed it.
I was supposed to join the Royal Engineers. Royal Engineers are the people that enable the battlefield to be accessible by the army. It’s an important role. Everyone loves the ‘sappers’ as they’re called. Then, halfway through, I was asked if I wanted to join the Grenadier Guards. The Grenadier Guards would be the infantry – one of the most prestigious regiments in the British army. To have that honour was fantastic. I said yes, of course, I would love to join the Grenadier Guards. Who wouldn’t?
I left Sandhurst. We had a couple of weeks off for Christmas, and then I reported for duty at Wellington Barracks right next to Buckingham Palace. Two days later, I was on a plane to Kenya, and was there for three months. You’re straight in there, a second lieutenant at age 24, and 30 men look to you.
You had to work very closely with your platoon sergeant. The platoon sergeant is in charge, even though you carry the blame and the responsibility. The way it works is, you lead from the front and he kicks everyone from the rear. That’s the historic way to charge. After a while, people start to respect you more, and they stop sniggering and calling you the “young crow”. It all starts to work well once you’re a known quantity.
Q: Where else did you go with the Grenadiers?
A: I got to Northern Ireland in the beginning of 1997, and was there for just under a year. It was regular patrolling duties. I’d arrived just after [Lance Bombardier Stephen] Restorick had been shot, so people were quite worried. We were on a residential tour. You’d be deployed to South Armagh, which was bandit country. They weren’t nearly as bad as present-day terrorists. But it was a real threat.
Q: Were you very frightened, or somewhat frightened?
A: No, not at all frightened. I didn’t think the situation was very frightening. I had a job to do, and we did it. I felt they were more scared of us than we were scared of them. I had a platoon of Grenadier Guards. We were dying for them to have a go, but they never did.
Q: You mean the IRA, right?
A: Yes. They never attacked us. They attacked soft targets.
In the summer of 1997 was the Hong Kong handover. It was the middle of the Orange marching season. I begged my commander officer for permission. I said, “I know we are training for the marching season, but can I just have a couple of days off to visit Hong Kong for the handover ceremony?” So he said “Yes”, which was amazing. That’s how good the army is. If something means a lot to you, they say fine.
I had the most fabulous time watching the handover of Hong Kong, which I was very much in favour of. I thought it was time. The Empire was done.
I came back from Hong Kong and landed in Belfast. I was so tired, so I took a bath in the Officer’s Mess. There was a knock on the door. A friend of mine said, “I’m standing here with the colonel, and he wants a bath”. The colonel was the Duke of Edinburgh. I had to get out of the bath and let him have it. I gave it a quick scrub first!
Q: You then joined the City – James Capel. How did you find it?
A: James Capel was an old-school stockbroker. In those days, it was owned by HSBC, but operated with a sense of independence.
Q: How much money did they give you to manage?
A: Nothing at the beginning. You shadow other people, and you help out. There are dogsbody jobs to do, and that’s how you learn. I was assistant to an assistant for six months, and then I got a role as a performance analyst.
It was a rather tedious job. We had a large number of clients. I was supposed to check that the portfolios were as they were supposed to be. There was a very clever French intern, and he introduced me to Visual Basic programming. We were able to download all data into Microsoft Excel, run a macro in Visual Basic. It did my job in a heartbeat.
Within a few weeks, we had all these statistics which were quite unpopular in some circles. But they were very powerful. The work that I began would transform the firm over the next ten years.
Q: What did you do then?
A: I moved on from there to being in charge of our web site, as I was quite computer literate. In 1999, we were the first firm in London to get our portfolios online, which was a great achievement. We won an award.
In the past, it had been quarterly valuations in the post, you had to call and ask for a valuation to be sent by fax. So it was a great leap forward.
Then I became an assistant to a fund manager with a £200m-book, having passed my regulatory exams and qualified as a fellow of the Securities Institute (CISI).
Q: When did you actively become a fund manager?
A: Being an assistant is being a manager. It’s not in your name, but you are trading securities.
Q: Did you have a good record from the start?
A: No, there was no record to speak of in the beginning, because there was nothing to measure. We were following the firm’s strategy. Then I was invited to become part of that strategy in 2002. So rather than implementing it, I was driving it. That was my big break.
In 2002 I founded the absolute return service, along with some colleagues. I became team head in 2004. It was a diversified wealth portfolio. The idea was that we could have less invested in equities, but ensure the areas selected would make a difference.
Equities were unpopular at the time. The concept was, “Let’s get out of equities and see what else there is”. There were bonds, corporate bonds, property, commodities, emerging markets… It was the right call at the time.
We had positions in Brazil, India, oil and gold. They got everyone excited. Those positions didn’t have to be big. They did so well that it just dragged everything up. You could have lots of bonds, and a modest amount of money committed to interesting themes. That’s why it grew so successfully: because we were on the right themes – a long time before other people had picked them up. We had emerging market debt in 2004. These sorts of ideas worked incredibly well back then.
Q: How do you explain that performance?
A: The mandate was low to medium risk, so we were never allowed to have vast amounts of risk on the table at any one time. But I had a strong view that what little risk you were allowed to take must be right. So I was always looking for the interesting story – hence the gold, Brazil, India – and never stopped doing that.
Once the 2008 financial crisis happened, diversification didn’t really help that much, because the only asset class that held up was government bonds, particularly US Treasuries. The pound went down, property went down, corporate bonds went down, the stockmarket went down, commodities went down.
The result we had in 2008 wasn’t dreadful. We were down 15%, which was not a shock-horror result. Some didn’t think we had a good crisis, even though the other funds were down 30% or 40%.
In 2009, everything turned around. That was the bad year for the fund. It didn’t rally enough in the recovery, because it was overly defensive. The assets that performed in 2009 were the banks and emerging markets, which had collapsed. Things that had gone down by 90% in 2008 worked well in 2009. Things that hadn’t been trashed in the credit crisis didn’t recover, because there was no recovery to be had. Not having enough risk can be as dangerous as having too much risk.
Q: When did you leave HSBC?
A: I left in April 2015. I spoke to Merryn [Somerset Webb] a few days after leaving HSBC, and she asked me about whether I wanted to take over the Fleet Street Letter. I said “I’m walking across Spain, can I think about it?”
I walked across Spain. I did the Camino de Santiago, walking from Saint Jean Pied de Port in France, across the Pyrenees, and arriving in Santiago de Compostela.
Q: Are you Catholic?
A: Yes – not a particularly good one, but I am. Most people on the walk probably weren’t.
I was alone but not alone, because you met a lot of people along the way. What’s beautiful about this particular route is the history, and the fact that it’s got bars, restaurants, hotels, hostels all the way along. So it’s very easy to do from a logistics point of view. Some people get their bags carried in a van. Other people have rucksacks. I had a rucksack. It’s huge fun.
Of my 23 days of walking (it’s supposed to be done in 33), I was up for first light on 21 of the days. On the other two, I had severe hangovers and didn’t quite make it. First light is beautiful.
Q: You thought about your next career move during those 23 days of walking?
A: I thought about what I was good at and what I wanted to do. I recognised that I had skill and experience in private wealth, because I’d been doing it a long time. I wanted to continue that in some way, shape or form.
Also, I had a deep knowledge of the gold market. I felt a need to stay involved in it.
Thirdly, I was pretty obsessed by the future for digital assets, ie blockchain. It’s something I became very interested in. I thought, I must do something about this. I can’t just watch things pass by.
In blockchain you’ve got a new layer being left behind every ten minutes. It’s like a footprint of where this system has been. I want to dig into every single layer and know what happened and why: the geographic spread of bitcoin, how much of the ecosystem is Chinese, American and Brazilian, how much is speculation or genuine or technological and dark-net – meaning naughty things, drugs and so on. I want to put this together and come up with economic statistics. If there’s more transparency, people will understand it.
Q: Meanwhile in the City, it seems exchange-traded funds (ETFs) are becoming more and more popular.
A: In 2003-4, I remember saying, “This exchange-traded fund thing is really going to catch on”.
An ETF means you take the open-ended fund and trade it over the stock exchange, rather than trading it off market. That’s the innovation. It makes it so much easier to trade. The ETF tracks an index.
Because active managers tend to have done badly in aggregate – they basically underperform by fees – then the case for passive management just rises. Active management will only work if you run away from the index. Rather than saying “I want to have a bit more Vodafone and a bit more Rolls-Royce”, you’ve got to make bold decisions and say, “These 25 stocks are great, and I’m going to go with them”. And you’re either a lot ahead or a lot behind. Over the long term, the only way you’re going to have a radically better result is by that approach. Tweaking the index is pointless for humans.
Q: Do you think the computer revolution has hurt fund managers?
A: Absolutely. Computers are everything.
Tweaking portfolios can work well if it is implemented with damn good models. By using computers to do that for you, which is powerful, you’ll make money. Humans are better at identifying great companies and holding them.
Q: So fund management as it’s operated in the last 20 years is going out of style?
A: Yes. Why would you give money to a firm that charges high fees when you can just track the index with Vanguard for very low fees?
Q: So City jobs are being lost to computers?
A: Yes. When I started investing in the early 90s, you couldn’t easily buy overseas exposure. You’d have to buy a unit trust – 5% front end, 1.5% annual fee. You could buy an investment trust, but that was about it. It was very difficult.
Now, through the stockmarket, you can buy gold, you can short corn, and you don’t need a broker. The public have never had such cheap access to the finance industry.
If you’ve got £100,000 to invest through a fund manager, you’re paying up to £1,000 a year in fees, and for what? It’s a lot cheaper to do it yourself, just taking advice from people that you trust and respect.
Q: What part of financial services will survive, do you think?
A: Anything that requires ideas. A computer can work hard, but it can’t think. Investing, corporate finance, deals and private equity and all the good stuff.
In the back office, things like the blockchain will improve efficiencies beyond recognition. Right now, when you do a transaction, all these old-school computers have to agree with one another before the trade is settled, and they sometimes don’t. Every day, hundreds of trades don’t settle correctly because someone’s computer doesn’t agree. Blockchain takes everything to a single reference point. I see it as progress. I see it as the future.
Q: Where does your heart lie on the issue of the European Union?
A: The EU is Churchill’s idea. He’s the grandfather of the whole project. Unfortunately, he was voted out of office in 1945, for the right reasons at the time: the country was fed up with war. But we had lightweights at the negotiating table, and not Churchill, which was the problem.
The EU has overstepped its mandate. They’ve got this single currency that’s not working. The price of the euro in Germany and Greece is the same, but it shouldn’t be, and it just doesn’t work. There’s youth unemployment. The EU encourages big state. As a negotiating body, it’s not nearly as good as it ought to be, and that’s because it spends too much time on things that don’t matter and not enough on things that do matter.
Take financial services. Britain has been blocked out in so many areas. You can’t launch a fund and sell it in all those countries without quite a lot of administration. You can’t just charge into France and sell financial products to the French. It’s probably easier for them to come here than for us to go there.
The EU is about the free movement of goods and people, not services, and Britain is a service country. So we don’t benefit so well there. A lot of the EU deregulation served others more than it served us.
Q: But why should Britain leave the EU?
A: Because the EU is not fit for purpose. It’s a bureaucratic, left-wing, big government monster.
Q: Do you travel around Europe often?
A: Yes, I go to Deauville, in Normandy. My wife’s family have an apartment there we use sometimes. I also go to the Alps, to Megeve. I love the north of Spain, and Italy. I was in Munich the other day, and in Vienna recently.
I love going to Europe. Before I was 30, I thought the world started once you left Europe. I was brought up in Hong Kong, and I thought America, China and Southeast Asia were interesting. I found Europe boring. Now it’s the other way around. I think the world stops when you leave Europe! I’ve sailed from the top of Norway down. I pretty much sailed the whole coastline of Europe.
I love everything about Europe.
Q: How do you situate yourself on the political spectrum?
A: Tory, obviously. Centre-right.
Q: Do you like David Cameron and George Osborne?
A: I think they’ve done a better job than anyone ever thought they would. The second election was incredible – against all the odds, to get a majority…
Q: Where do you see investment opportunity nowadays?
A: The world is ready for equities again. They’re the only asset class that can protect and grow your wealth in the future. The others aren’t going to do it. Their price is completely wrong.
Q: You’re not worried about a great recession or depression?
A: I am scared of that. There could be a cyclical bear market in equities in the short term – in the next year or two. There’s every chance of something going wrong. We’ve already seen emerging markets in a terrible bear market. So are natural resources.
But there are areas that are really working. For example, Silicon Valley is one big dollar factory. The prices might be a bit punchy, but it’s working, and the market doesn’t care about prices – until it stops working. That’s just going to carry on.
You still need to have an answer to the question, “What do I do with my money?”
Right now, as a British person, the best thing you could do is to try and get out of the pound, because we’ve got a big current account deficit. The country is doing pretty well in most areas, and that’s a good thing. But the pound is pricey against the dollar. In short, the pound is on a pedestal right now. And yet the current account deficit is the largest it’s been in history. The reason for that is the overseas income on foreign-owned British assets: The income is down, because of the euro crisis, and we’ve got a trade deficit with Europe.
It’s quite important to protect your real wealth by making sure that you earn some dollars.
Q: So you think there will be a correction to the pound?
A: Yes. I think that’s one of the most important near-term themes.
Q: Beyond technology, what other areas of equity growth do you see?
A: What we’re looking for next is the low in emerging markets and commodities. That’s the most important investment decision we’re going to make in the next few years. That’s the big opportunity.
Q: What do you do when you’re not busy thinking about money and investment?
A: I sail. It’s probably my favourite thing. I had a boat for the last seven years in Portsmouth harbour. Very, very sadly, I sold her last year, thinking I would never have time to go sailing. Then I left HSBC, and now is the year I wish I had it!
I will be back in the boat market soon.