Tim Price on martial law in the UK

Let’s get stuck in to our next interview in this week long series. Today is award winning fund manager Tim Price.

Q: Tim Price, where did you grow up?

A: In Solihull. It’s now quite a posh suburb of Birmingham. The name originally derives from Soily Hill, so it’s a lot posher than it ought to be.

I had a happy childhood. I’m the youngest of three – I have an older brother and an older sister. My dad worked in insurance, my mom was a bookkeeper. They were both in finance.

I went to a perfectly decent private school, but it’s not a brand-name private school in the same way as an Eton or a Harrow. As for sports, the one I was best at was probably hockey.

Q: You read English language and literature at Christ Church College, Oxford. How did you go from there to becoming a fund manager in the City?

A: When I came out of university in 1991 and was applying for jobs in journalism, media, and  advertising, there was a pretty bad recession in the UK. I had an older brother who’d read economics at Cambridge. He always knew he wanted to work in the City. He just suggested that it might be worth having a fall-back position in City-type jobs. The argument he made were that the City jobs were interesting and well paid, both of which turned out to be correct.

Q: It sounds like your brother talked you into moving into finance.

A: No, not really. To give him his due, he was simply looking after my interest in trying to get a job after university. It’s slightly strange that it happened to be a job in finance rather than a job in media, but that’s how it transpired.

Q: Were you interested in money as a little boy?

A: Not particularly. If you’d asked me at school or university, I would’ve said I’d like to pursue a career in some form of writing, which has turned out to be the case. In a sense, I’m having my cake and eating it. I enjoy writing, the creative act of writing.

Working in finance is interesting too. The interaction of people in markets is as interesting as it gets. Whatever your take on morality or politics, if you work in the business of investing, you’re working either with or against some of the brightest people in the world. Some of their motives may be questioned, but their intellectual pedigree, in many cases, can’t.

I didn’t necessarily find life particularly easy in a dealing room environment. It was a very, very stressful environment, full of office politics, full of idiots and greedy people. Then again, it’s a very rewarding environment, primarily because you’re up against a lot of intelligent people.

Q: Tell us about your first job.

A: Through a historical fluke which is unlikely to be repeated, the only job I could procure was as a bond salesman for a Japanese bank. It was formed from the merger of two companies – Mitsui and Taiyo-Kobe Bank – that became a bank called Sakura Finance International.

I knew nothing about the bond market when I started. Whatever I learned, I learned through experience – through trial and error. There’s a lot to be said for trial and error and just getting stuck in.

I tend to squirrel away lots of cheesy quotes. There’s one that goes: Life is a tough teacher. She gives you the test first, and the lesson afterwards.

Q: What happened at Sakura?

A: I was there for two years or so, marketing a variety of bonds to UK institutional clients. With all due respect to that business, it wasn’t a marquee name. Cold calling UK institutional clients was tough going. I distinctly remember one particular case. When I said “I’m from Mitsui Taiyo-Kobe”, the person replied, “What do you do, sell motorcycles?” and then just put the phone down. It was a baptism of fire in terms of trying to make a way in this world.

I got a break when I joined Paribas in 1994, doing generalist fixed-income sales. There was a more powerful brand, it was a more professional setup. The quality of the people was a step change higher. I worked with some of the best people I ever came across. It was a much more aggressive culture, too, so it wasn’t all sweetness and light. I started to learn how the market works. Some of those friendships and relationships have lasted through to today.

Q: You said trading rooms could be aggressive and full of idiots. Did you find that at Paribas?

A: In any dealing room, all human life is there. If the rewards are higher, you’d expect a higher level of intensity the further up the food chain you go. But the calibre of people suddenly started getting demonstrably higher. That’s where my learning curve started to accelerate. I was there for a couple of years, and then I got headhunted to Merrill Lynch.

Q: What did you do there? The same thing?

A: Pretty much. I spent the better part of ten years as a generalist, a bond salesman. Then in 1998-99, I got a bit tired by the politics and being constrained by that asset type.

Q: What do you mean by the politics?

A: Office politics in a dealing room. If you’re in a sales function, the revenue you make from your clients would naturally be reflected in your career progression. In addition to that, there are some intangible qualities that go towards career progression, and some of those intangible qualities are sucking up to the boss, or stabbing colleagues in the back. It’s all part and parcel of a dealing room environment. So there are certain things in that lifestyle that do not fundamentally appeal.

Q: The stakes are higher, so that brings out the worst in people, right?

A: The best and the worst. I don’t think it’s necessarily negative. I certainly don’t regret doing what I did, but I wouldn’t be recommending it to everybody. It’s a great learning experience. But City careers in the trenches tend to be relatively short. There aren’t that many forty- and fifty-something people in dealing rooms these days. Days of getting up at 5am and spending a lot of time in the evening networking or entertaining take a toll after a period. Although it should be a meritocratic environment, it’s predominantly a young man’s game as well.

Q: Did you move to the buy side then?

A: I moved internally at Merrill from the fixed-income to the private banking side at Chester Street, behind Buckingham Palace. I pretty much started from scratch. That was private banking for high net worth individuals – glorified stockbroking. Things started to get interesting. You could do whatever you wished, whatever you thought was in your client’s best interest.

Q: What did you invest in?

A: A variety of things: bond and equity investments. This was the late 90s, so there was a huge speculative bubble inflating in dotcom stocks, in media and telecoms. That’s when I started getting interested in investing from a multi-asset perspective: getting out of the trough of bonds and getting into a much broader universe, including the equity market.

Q: Did your investment philosophy start to take shape then?

A: It did. I can remember a key book that changed my perspective on things. One of its lessons was: if you’re managing money for wealthy people, just don’t lose it. The way I interpreted it was: concentrate on absolute returns, and not on market-relative returns. From that point on, the whole idea of indexing and benchmarking started to seem increasingly absurd to me.

Q: Why does tracking an index or a benchmark seem absurd to you? 

A: Let’s take the bond market. The way bond indices and benchmarks work is that they allocate their largest weight to the most heavily indebted issuers. That is clearly absurd. If you’re a bond index manager, you’re effectively saying that, irrespective of quality, you have to buy the bonds of the world’s largest bond market by value. By that logic, you have to buy bonds from the US and Japan, which have issued the most debt. But from a logical perspective, it doesn’t necessarily work.

Q: Why not?

A: If you look at the most creditworthy countries at a sovereign level, they’re not the U.S. and Japan. They’re countries like Hong Kong, Singapore, the UAE, Qatar, Switzerland and Norway. These are countries with surpluses of foreign assets. So from a bond perspective, indices are 100% wrong.

The way equity indices work is, they allocate their largest weight to what are currently the largest businesses in market value. All that’s really doing is telling you to buy the shares of yesterday’s winners. It’s telling you nothing about quality and future growth. It’s simply saying: this company is becoming enormous. Therefore, you should buy it because of its size. That doesn’t correlate to any logic, and certainly not to value.

Q: So tell us about the kind of investment you recommend: absolute return investing.

A: Absolute return investing seeks to generate over time a consistent positive return. If you have an objective of trying to make between 5% and 10% per annum in perpetuity, that would be an absolute return objective. There’s clearly no guarantee you’ll deliver on that, but it’s a legitimate target. It’s maybe a difficult target in a world of zero-interest rates, but it’s a target.

If, on the other hand, you have a market-relative return, and take the UK equity market as a benchmark, you’ll try and outperform the FTSE-100 index or the FTSE All-Share index by 2%. That might not sound aggressive, but is actually quite difficult to do. So if the market makes 20%, you’ll aim to make 22%. In a bad year, the market could lose 20%, and if you lose 18% you’ll have delivered according to your objective.

It seems absurd to be a hostage to fortune and have your portfolio and your wealth tracking a market that’s going down as well as up. I’d be much happier if my wealth reflected an objective that would, ideally, never decline significantly. That’s the reason why absolute return investing makes a lot of sense. Clients for whom I’ve been working for the last 15 years have reasonable amounts of money and clearly don’t want to lose it. They clearly want to make a return on top. They don’t want to make a return with the sort of risk that comes with the potential of losing a significant amount of what they’ve already got.

Q: When did you first get attracted to absolute return investing?

A: In late 2000 or early 2001, I was headhunted to set up a wealth management business at a merchant bank called Henry Ansbacher. I was there for about six or seven years, and loved it. I had complete free rein to develop an investment philosophy pretty much from scratch.

That’s when we started to develop this multiple asset class return model whereby we allocated on behalf of clients to high-quality debt, to value equity, to uncorrelated funds – hedge funds, in other words – and to real assets, particularly things like precious metals, gold and silver.

I worked for about a year in the interim with a Swiss private bank called UBP. And in 2007 I was hired to the company I’m still with – PFP Wealth Management.

Q: If you don’t mind the expression, you’re a big bear. I don’t know if you agree with that.

A: I prefer the term realist, or sceptic.

Q: OK – you’re a big sceptic. I’d like to know whether there was an incident or episode in your life that led you to be as sceptical as you are.

A: That’s a good question. I could certainly identify one or two incidents that made a lasting impression. The first would be the dotcom bubble. The dotcom bubble was a period that really lasted several years from the late 1990s to 2000, then exploded catastrophically. Happily, the damage was relatively limited then, because the entire market cap of Internet stocks wasn’t that large. So it did damage, but to a pretty small corner of the market.

Q: Was that something you personally suffered from?

A: No, not to any great degree. It was helpful that we had balanced portfolios. The clients we were working with didn’t suffer unduly from it. But working during that period at Merrill Lynch – the world’s largest stockbroker – was extraordinary. I saw some of the most incredible returns being made in a very short space.

That’s a very giddy experience. It’s like having front-row seats at the fight of the century. Being involved in that at a relatively early stage of my career was extraordinary. Anyone who says that they can be unemotional about investing is lying. Either that, or they’ve had part of their brain removed.

Q: How did the meltdown manifest itself?

A: It was clear to us at the time that things had gone too far, too fast. We weren’t particularly exposed to the more egregious casualties of the dotcom era. But seeing stocks and entire markets rising by 100% in the space of less than a year, or stocks that could pop after an IPO by several hundred percent in a matter of weeks, the feeling was: “Everyone else is getting rich except me, where do I sign on?”

That feeling of “Oh my God, look at how much money everyone is making!” is extraordinarily powerful, extraordinarily contagious. It’s good that I didn’t experience it at the beginning of my career, because I knew nothing when I started.

Q: Did you witness any high drama around you?

A: Some very moving experiences, sad experiences. There was one client in particular who I wasn’t working directly with, but who lost his home and key relationships because of the amount he lost in internet stock. He was someone I was aware of. It was really heart-rending stuff.

Q:  Did you witness any high drama yourself?

A: People got caught up in the giddy euphoria of things as you might expect. But there wasn’t the high drama of lives being turned on their heads.

Q: What was the second episode that turned you into a cautious investor?

A: That would be the global financial crisis of 2008.

By mid-2007, it was clear that something wasn’t quite right with the system – that something had gone badly wrong in the credit markets. You had a number of high-profile funds, very large credit funds, getting closed down because of their exposure to certain parts of the debt market. There was a gap between what these big fund management firms were saying about their portfolios, and the fact that there was no liquidity in them – which implied that nobody was willing to bid on what they held. They were making excuses, saying, “This is a temporary lack of liquidity”, but nobody wanted to touch the garbage they held.

So the markets started to freeze. The credit crunch started in mid-2007 – it didn’t start in 2008. You started having strange things happening, like the failure of Bear Sterns, which ultimately got bought by JP Morgan. By mid-2008, things started to really accelerate.

The best account of the drama around the failure of Lehman is still Too Big to Fail by Andrew Ross Sorkin. He had tremendous access. He talks about the conference call that [JP Morgan CEO] Jamie Dimon arranged with his board on the Saturday morning of the weekend that Lehman failed.

Dimon basically told the board to brace themselves for the possibility of Lehman Brothers, Merrill Lynch, Morgan Stanley and even Goldman Sachs all filing for Chapter 11 bankruptcy. That’s how it could have happened. It didn’t happen that way because clearly, after Lehman, they started to bail out just about everybody. But the authorities could have let 95% of Wall Street fail.

Q: That’s crazy!

A: It’s crazy, and it’s easily on a par with the state of play here in the UK It took the Bank of England a year, but they did admit that they came within hours of closing down the UK operations of Lloyds and RBS. If that had happened, then I think we would have entered an environment of martial law in the UK.

Q: Martial law in the UK? Are you serious?

A: Imagine if, at the end of the week, a guy goes to the ATM, tries to get money out, and finds out from the hole in the wall that not only is there no money in his bank account, but that there’s no money in his bank. That might have happened. I don’t think anybody can say exactly what the outcome would have been. In that kind of potential instability, you’re talking troops on the streets. How do you maintain law and order if people have suddenly run out of money, and through no fault of their own?

I don’t think it’s too strong to say the system was staring into the abyss. If things had gone a different way, if the authorities had allowed certain things to happen or not intervened like they did, it would’ve been a 1929-type moment.

For me, it was a huge learning experience. I started learning more about markets and more about money in the aftermath of that than I’d done in the previous 20 years.

Q: What was the turning point for you?

A: I think it was 2007-08. Up until that point, I was going with the flow. I had a clear belief system that was all about value investing. I’d been a value investor for as long as I’d been an investor: not consciously overpaying for stuff, trying to focus on quality. The events immediately before, during and after the credit crisis gave me career-changing perspective on the way the financial system works.

Q: Did you suffer personally?

A: No – exactly the reverse. My investments are basically in two areas. I own a meaningful allocation to gold and silver and gold mining companies. Other than that, everything I own is in value stocks, and that will continue to be the case. I’m taking a long perspective. That’s money I don’t intend to touch in the next 20 years.

Q: So you weren’t personally affected at all?

A: No – gold was a huge beneficiary of those market conditions.

Q: Did you witness suffering and drama around you?

A: It was more a general sense of the market. Our client portfolios weathered the storm of 2008 pretty well. Whereas the broad equity markets fell – peak to trough – by something like 50%, our client portfolios were down 10% over the same period. They weren’t all invested in the stock market, so we wouldn’t have expected them to perform in line with stocks. Nevertheless, that for me vindicated a much more absolute return, multi-asset focus.

Q: You must have observed some pain and grief.

A: I’ve got two screens set up more or less permanently, one of which is a real-time view of the equity markets globally and the other of news headlines. When pretty much every stock market was falling as if it was hitting an air pocket, that was somewhat disconcerting!

Q: How would you sum up your current thinking?

A: One of the founders of the Austrian school is Ludwig von Mises. He’s a person who lived in the real world. He actually experienced the Weimar-era hyperinflation [in Germany between the two world wars] first-hand, then went over to the US during the Second World War. He found it impossible to get paid work because of the nature of his beliefs in terms of how the economy and the economic system operated.

To summarise the Mises perspective, three things are important.

The first is sound money – in other words, a monetary system that’s largely if not totally independent of government. Money is too important to be left to government, and money should arguably be backed by something tangible. Since 1971 – when [US president Richard] Nixon took the dollar off gold – we’ve had a completely fiat world, where paper money has not been backed by anything at all. My suspicion is that what we’re now experiencing in markets, particularly in credit markets, is a reflection of the fact that that 40-year experiment of unbacked money has run into a bit of a brick wall. The one lesson we know from financial history is that every unbacked currency system ultimately fails.

The second is small government. Government should be as small as possible, rather than the Leviathan state that we have today – partly in the UK, but certainly in Europe, where the eurozone has metastasised, getting bigger and bigger. Whether it’s getting better is a moot point.

The third is libertarianism. People should be free to pursue what they want to pursue as long as they’re not hurting anybody else in the process or breaking the law. The society in which we operate seems to be getting increasingly authoritarian. I just want to be left alone to do what I do, free from the constraints of the state. I think other people should be free to do exactly the same.

Q: Can you tell me why you think the situation in Europe and the eurozone today is so dangerous for you, me, and the world economy?

A: A few years ago we had the example of Cyprus. It’s a member of the eurozone. Through a series of bad decisions, mostly to do with debt, it ended up being bankrupt. Because it’s a member of the euro zone, what happens in Cyprus can ultimately happen in other markets.

The bail-in model of Cyprus was that depositors got shafted by the government, or more specifically by the Troika [the European Commission, the European Central Bank and the International Monetary Fund]. So if you were a depositor in a Cypriot bank, you went to the bank on Friday night with the equivalent of €100 in the bank, and on Monday morning you had €90 in the bank. It didn’t really matter, because you couldn’t touch them anyway: your account was frozen.

The reason it’s a big deal is that now we have a template for what happens when a country in the eurozone gets into difficulty. It’s called the Cypriot bank bail-in template. There’s a risk that blameless depositors in a country in Europe will have exactly the same experience. They’ll go to bed on Friday with money in the bank. They’ll wake up on Monday and either have less money in the bank – in other words, money’s basically been stolen from them – or the money’s stolen and they can’t access what’s left of it.

Q: What do you do when you’re not investing?

A: I have no life outside work. I’m a very sad specimen. I read quite a bit, but most of the reading, because I’m sad, tends to be business-related or investment-related. There’s a much wider business universe out there than just purely investment. That interests me.

I’ve got a book on my desk that I’ve just bought called The Outsiders [by William N Thorndike]. The subtitle is: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. This is not necessarily going to be on your Christmas reading list request, but it’s about how other people became successful in business and how they became good asset allocators.

Otherwise, I like film.

Q: Which films do you like?

A: Have you got a spare couple of days? When I was a kid I used to love horror films, and some of that has stayed with me. It probably means I’ve never grown up. I’m also particularly interested in science fiction.

There are a few individual films that I could basically watch for all time, such as the early films of John Carpenter, which I saw when I was a kid. There’s a heavy John Ford influence with John Carpenter. I’m talking about things like Dark Star, Assault on Precinct 13 and Halloween. Halloween was the original slasher film.

Q: Any classics that you like? 

A: The Godfather, parts I and II.

Q: What do you like about The Godfather?

A: I’ve barely spent any time in the States. But there’s certainly one way of looking at it: that it’s a metaphor for the American economy and for American business. I’m not saying this is necessarily my view, but I’ve heard people say that it’s a metaphor for the way business is done – that quasi-monopoly businesses end up behaving in rather nasty ways to get the job done.

Q: Is there any particular part of the world that you like to travel to?

A: My fiancée and I love Italy. Fabulous history, fabulous countryside, fabulous food, fabulous wine. We’ve seen probably most of the larger cities, but we’ve got so much exploring of the larger cities and the countryside to do. We started out with Rome ten years ago: Rome was one of the most pleasant holidays we’ve had. We haven’t been to Venice, but we did Sicily, Sorrento, Florence, Milan.

Q: Are you inclined to invest in property right now?

A: No, I’m not a property buff. If we were to do something personally, it would be to get a place in the country here, something we’d go to maybe over the weekend as a holiday home.

Q: What message would you ultimately like to leave readers and potential investors with?

A: People tend to take stuff for granted. You go to school, you go to university, you get a job, primarily working for somebody else. That’s the way people view things: “If I get into trouble, then the state will help me out”. I’m not saying that’s wrong or evil, but people, of whatever mindset, should be a bit more self-sufficient, more self-dependent.

 

Category: Economics

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