The Case for Buying Small Caps Now

Bloomberg Audio Studios. Podcasts. Radio. News. So small cap value is the anti-AI trade, you think, Stuart?

Quite possibly.

I mean, the only certainty is we don't know until it happens. If you look around the world, Meryn, small caps generally, particularly value small caps, are very cheap. UK is an outlier within that. If you believe in reversion to mean they're still upside on rating. If it's purely a rotation rather than economic event or a war or something worse... There's no reason I think that movement of money out of the massive concentration in AI stocks into all the stuff that's been neglected for three years can't happen as well.

Welcome to Merrin Talks Money, the podcast in which people who know the markets explain the markets. I am Merrin Somerset Webb, and this week I am speaking with Simon Evan Cook, who is a fund manager at Downing, running a fund of funds. Also, Stuart Widdeson, who is the co-founder and managing partner of Odyssean Capital, who are the managers of the Odyssean Investment Trust. Simon, Stuart, welcome to Merrin Talks Money.

Lovely to be here. Nice to be here. Simon, welcome to Merrin Talks Money.

You have a history of investing in and talking about investing in not just small companies, but small investment funds. And there's a particular reason why it is interesting you to look at not just small funds, but new funds. And there's a history, isn't there, of new funds outperforming in the first couple of years of their existence. Can we tell us a little bit about that before we move on.

To small caps?

Yeah, for sure.

I mean, There's all sorts of belief out there amongst investors, and I sense it as well, that if you're going to buy a fund, you should buy a nice, big, safe fund because it's got an amazing track record and loads of other people are in it, and therefore that is the thing you want to buy. And occasionally this is true, but really, those big funds only really got big because in their early years, they smashed it out of the park. And there are all sorts of reasons why holding and managing a smaller fund is is considerably easier than managing a large fund. So we're about to talk about small caps later on. That's one of the reasons, for one, that if you're running a smaller fund, you can invest in smaller companies. Over the last few years,

that wouldn't have helped you a great deal because of the market dynamics. But generally speaking, we all know that kind of fact that smaller companies will rise more than larger companies over time. And the best managers are able to.

Less efficient.

So you can make more alpha because you're more likely to find a company that everybody else has ignored. It's only got one analyst covering it rather than the 100 that are covering NVIDIA. And so you're able to find a company that is materially undervalued and that can potentially, even if it's not undervalued, still grow by 10, 20, even 50 times. Whereas obviously a company like NVIDIA, amazing as it is, shouldn't be able to grow by 50 times from here. I mean, the maths of that must be, yeah, I can't even imagine, but it must be impossible.

Okay.

So that's part of it, being able to buy smaller companies. A giant fund can't buy into a smaller company, obvious reasons.

But that's not all, right? There's got to be more to it than that.

No, there's more to it than that. I mean, for starters, if it's an emerging fund, so let's call it a new fund that's just been launched, there are different reasons why it may be that Put them into two camps. One might be that it's a new manager. So that's someone who is younger, maybe getting their first chance at running their own fund, having been an analyst somewhere. And the second one might be that it's a more experienced older fund manager who is leaving a bigger company somewhere because they've got annoyed with the red tape or the amount of extra work they've got to do and is establishing their own boutique and is starting their own fund.

So if we take those one by one, starting with the experienced older fund manager and The reason why you'd want to back that particular fund is because now they're finally being let off the lead. You know, whatever was kind of annoying them, holding them back before, it might be that the funder got too big. Might be that they had an overbearing risk department or a CEO who wanted them to hug the benchmark. Now they don't have to do that anymore. And if they are a good fund manager, that should mean that they can create better returns for you for doing that. And at the point when their fund is still small enough for them to be able to maneuver it and buy smaller companies, all of that good stuff, they can still do that. So

that's one reason why a smaller fund might be your friend. The other one is that it might be a younger fund manager who's getting their first outing. Now, no one ever gives a fund manager an outing when they're 22, 23, literally out of university. This guy seems bright. Let's give them a brand new fund and 10 million quid to go in it. That doesn't happen. They're normally someone who's proved themselves as part of a bigger team, as an analyst and and they're being given their first chance with a new fund. And you might think, well, I don't want to invest with a 28, 29-year-old, 30-year-old. That's too young.

I want some grey hair. But you would be surprised at the statistics around that. I mean, if you take possibly the most famous fund manager there's ever been, Peter Lynch, I'm not including Warren Buffett in that because it's not technically a fund, but Peter Lynch... I mean, Peter Lynch is considered to be one of the goats of fund management.

Incredible fund manager, stunning track record. And when we see pictures of him today, we see pictures of this grey-haired gent and you think that's what a fund manager should look like. But he retired at 48. So he did all of his fund managering. All of that track record happened between about the ages of 30 and 48. So that's a younger fund manager running what was initially a smaller fund. And I think that comes down to lots of factors, including the hunger of the fund manager. I think the point in life where you're at, where your brain is still at its physical peak, but also you've got enough life experience to be able to use that.

So picking that sweet spot ties in quite nicely with picking smaller funds. And then to tie a ribbon on the top of all that, for me as a professional fund buyer, because nobody else is doing what I'm doing currently and nobody else is learnt the art of picking younger funds, we get a nice tasty discount generally for being what's called a founder in that fund.

Discount on the fees, you mean?

We get lower fees.

I mean, it always seems to me that there's something in the fact that when you, you know, say you're reasonably young and you start a new fund, or even if you're older and you're starting a new fund, that's when you're going to be incredibly high conviction, really going with the style that you believe in, etc. So if you're going to outperform, those first three, four years are absolutely going to be it. And you've chosen a style that's going to work in that period anyway. But then, you know, let's say you do that. Let's say you outperform in your 10, 20, 30 percent a year, whatever it is. And you hit year four. People have started to put money into your fund. And that's when the nerves kick in, right? That's when it's like, well, what

I've got to do now is I've got to maintain this. So I've got to hang on to the money. So what I want to do now is not take quite so much risk.

Maybe not be quite so high conviction. Pull back from the brink a little.

And that's why those first three years can be so profitable. And after that, things will kind of slide off. It's just emotion.

It's human nature.

It is human nature.

And it's definitely that one side of it that the fund managers themselves might think, OK, I can throttle back a little bit here. But if you've met some of the individuals I've met, I mean, that is not in their vocabulary to do that.

Just as often, if you.

Think about the dynamics within a larger fund company, when that younger fund manager starts their fund and it's 10 million in size and they're working as part of a hundred billion fund manager, the CEO of that company does not give a damn about that fund. But when that fund becomes a kind of category killing franchise running five billion pounds, then they start to care and then they start to worry about what happens next. If this fund manager underperforms because there's a style change, wouldn't it be more sensible if we pulled it back in a little bit so it looks a bit more like the benchmark?

So quite often it's corporate tampering as much as a fund manager losing their willingness to take risk.

Okay, so when you talk about an emerging fund, what are you talking about? Up to what sort of size?

That's a bit of a how long is a piece of string type of question. But I would say an emerging fund nowadays... It's probably anything south of 250 million. And that in itself was a bit of a sad thing because 250 million used to be enough just to run a fund for it to be a going concern and away you go and that's what you've got. But nowadays, if you're running a fund that's 10, 20, even 50 million, sometimes even up to 100 million, particularly a bigger company, that's seen to be not enough and not viable and you can't attract the bigger fund buyers. So It's not there yet. So you'd put that in the emerging camp.

And that's a shame.

And the reason it's become that is because a lot of the fixed costs involved in running funds have become more onerous. And it means you just need more money and it's more of a risk to launch a fund now, which in.

Itself is a shame.

I have a big gripe about that because like any market, you want lots of things being tried and the fittest things to emerge from that Darwinian soup. Whereas currently what we're doing is limiting the number of people who can start funds, who can run them down to really the people who've got the money or the backing to do that.

And that is not many in the current environment.

And the other problem, of course, is that there aren't as many active fund buyers around as there used to be because of the rise of passive.

Okay, Stuart.

So with that in mind, let's move on to the Odyssean Investment Trust. And that, by Simon's definition, only just hits the 250 million below mark, doesn't it?

Well, yeah, I think we're about 330 million today. So hopefully, on Simon's analysis, we're about to break out and attract some more people for to look at it.

Okay.

And everything that he said about why it is that smaller funds can outperform, did that all make sense to you?

No, absolutely. We IPO'd with about 85 million.

When was that, by the way? When was your IPO? How long have you been on the go?

That was in May, 2018. So, and I'd been someone who'd, I think was in the first category that Simon suggested who'd somewhere else before and wanted to go and have a go independently.

Okay, so you're self-identifying as the older guy, not the younger guy.

Yeah, sadly, yes.

And sadly, I'm a bit depressed because I'm a little bit older than Peter Lynch and he'd already retired. But hey, I love what I do.

We all feel like that.

And I've got.

Younger people in the team and that's all good. But no, I think the three things for me is you can be really agile. You know, you start day one with a clean piece of paper, no legacy. How do we do what we did last time, but better, right? And that doesn't just mean actually your fund selection it means how you how you build the people around in your team um number two i think completely agree with what you said um and it is darwinian you know you there is pressure you know very few people launch a fund and a viable day one and we were very lucky with investment trust it was it was a binary outcome either it launches or it doesn't and if we launch it we sort of you know we we wash our face day one but but there is a lot

of pressure on you not just to raise the first capital but but really make it work for the first three years. I think we've got a good team. So we haven't sat back on our laurels and we've kept pushing because it's in our nature. But I agree with a lot of what Simon said. I think that the interesting thing for me was when I talked to the clients about it, because we're quite a long-term investor. Our average hold is three to five years. And when you IPO, when you launch a fund, everyone's expecting you to be fully invested as soon as possible. And if you do the maths on that, you're doing three to four times the number of investment decisions in a year than you would normally do. And as we're all human, you always

make mistakes. I think the key thing for us actually in the portfolio is getting the first investments right. And if you get the first investments right, actually you'll be viable and you'll grow and you'll create a more sizable vehicle over time.

So you are a small cap investor. That's what goes into the investment trust.

Your record since your IPO is pretty good, but your record for the last year is excellent. The last six months and the last year are very good. Is something changing in this market?

I don't think something's changing.

I mean, we've had a particularly good period, but it's come off two years that were quite soft after a fantastic 22.

And I think from.

Our perspective, a lot of the decisions that we made two to three years ago, which didn't seem right in the short term, have actually really come home to roost positively over the last 12 months or so. We've been very bearish about the prospects for domestic UK companies for some time. We're not great fans of what we see around ourselves, not just in the corporate environment, but in our home lives. And we were very focused on finding international companies that happen to have their headquarters here. So we weren't really betting on the UK economy, which has proven to be a good thing. We really have valuation discipline as well, Merrin. So a key part of what we do as well as for decent companies is to

not overpay. And then finally, I think the one thing that we have started to benefit on more recently is a lot of our companies go through self-help transformations. Much easier with a small company than if you're trying to turn around Vodafone. Maybe the one thing that has changed in the broader market is when a sector goes out of favor for many years, there's a lot of liquidity problems in funds and people that have open-ended funds become for sellers to meet redemptions. And when those redemptions are quite high and there's no buybacks or there's no M & A, there's selling pressure on a lot of these companies. So illiquidity in small caps works against you. What we're starting to find actually is buybacks and M & A is

more than compensating for small outflows. And actually, good news is actually creating positive momentum in share prices. And therefore, liquidity has started to move in your favor. So we've had a couple of stocks this year up 100%, really, because the market started to see, actually, this is a really interesting story. I want to go and buy some shares, and there's no sellers. So I think that it appears like, to us, small cap is towards the end of the clearing phase.

So it's an incredibly simple story, really.

We've been through a period where everyone loves mega caps, where US tech has been very exciting. AI has been very exciting at the large cap level. People have poured into those. Now they're looking at that going, eh, a bit pricey. I'd quite like to identify, look at all that cheap stuff over there and shifting into small cap.

Yeah, I definitely think that's an aspect of it. Divert market small caps are some of the cheapest assets around, quite a small caps, the cheapest assets around in the world today. Simon produced some analysis we talked about a few months ago showing the forward returns from these points post-inflation were potentially very attractive for the next 10 years.

And yet the forward returns from the mega caps in the US appear to only potentially just be beating inflation for the next 10 years. So there's going to be some style change. What we see going and talking to our clients, a lot of our clients are wealth managers, small cap is moving from, I know it's cheap, I don't care, to I know it's cheap, I think it's starting to move, which it has. I think I better own some.

What am I going to buy?

And that's a significant mindset change that we've seen in the last six months.

Yeah.

Okay. That's interesting. Simon, tell us about that valuation research that you did.

Well, I can't claim to have done the research itself. I just put the lipstick on it and.

Sent it out into the world. We'll still call that you doing it. I should just claim it.

Yeah.

So it's by Research Affiliates and they do.

A lot of work on.

Looking at the same way weather forecasting works, you look at conditions today and you say, right, historically speaking, what could you expect going forward from similar conditions in the past? And a lot of that work is based on the valuations you're paying for different geographical markets, different segments of those markets. And unsurprisingly, the areas that have done the best over the last 10 to 15 years, most obviously the US mega cap growth. have exhausted their potential returns because you're now paying so much for those assets that if they just mean revert to anything like a normal valuation, then that's not much in the way of return. But then when you look at the other side of it,

so if you look at European small caps, UK small caps, even within the US, a lot of the small cap markets as well, they really haven't had an incredible 10 years. It's not been a disaster. They've still made you money, but they haven't over-delivered. So it's been sustainable returns they've been delivering. And there's no reason to think that over the next 10 years that they can't keep delivering you inflation plus 5%, 6%, 7%. So let's call that nominal maybe 9%, 10%, 11%. And if you put a great fund manager on top of that, then maybe you can add another one or two. And you start to get up to something that's very respectable looking. At a time when asset allocators on my side of the fence, the

multi-asset fund managers, scratching their head and thinking, what do we do? Equity markets look expensive. Bond markets look compromised. There's other stuff out there, but it's unproven. Well, if you can just pick good stocks out of the market, then actually there's not too much of a problem in my view.

I had Jeremy Grantham on the podcast and we were talking about value and the small cap effect, etc. He said he didn't believe in the small cap effect, didn't believe that there were sort of mysterious reasons why small caps outperform long term. It was just a another another part of the value effect that small caps are automatically cheaper than larger companies and so we talk about small caps as over something special but they just outperform over the longer term because they're generally cheaper i.

Would never argue with jeremy grantham.

I thought that would be really interesting tell someone who say well that grantham he's always wrong.

Yeah have you ever met anyone who said that i'm sure there are people who do there are Most of.

The people who say that, Grantham, is always wrong because he goes bubbly too early.

Well, that's the rub, isn't it? If you think a train is going to crash, you just get off of it. You don't wait five stops and then get off of it. And I suppose that's the trouble with that. But I would take the argument that it's a value effect quite happily. And when you look at some of the Dimson and Marsh data, looking back over the UK, back to 1955, the very best asset class you can be in is small cap value. And I've certainly seen that in my time.

Small cap value over long periods smokes everything else. If you find a talented manager there, you just want to hang on to them. Alex Wright, one of the best known managers in the UK today, cut his teeth on the Fidelity UK Smaller Companies Fund. After 10 years of him running that, that was the best fund, full stop, in the UK. It was the best performer because of the inefficiencies of that part of the market and his talent combined with a great style. just stunning returns.

And stewart you're a you're a small cap value guy right.

Yeah we like to tell you we also like quality as well and i think our key differentiator is we particularly like companies that have the potential to improve themselves through some sort of management action irrespective of what's going on in the market. So we're very greedy. We have a very concentrated portfolio, as you might remember. I think we've got 18 stocks at the moment. We quite like a bit of everything. You know, ideally, I don't know, the value of Aberforth with the growth of something that would attract Lion Trust, but with the self-help that, I don't know, the Melrose management team would love to get their teeth stuck into. You know, when you have a concentrated portfolio, you can afford to be really greedy, right?

We want a bit of everything.

Simon, you said just now that I'm talking about great managers on top of all these things.

What makes a great manager?

You've got to have a particular character trait. And that character trait is the willingness to be extremely different as the circumstances require it. That is ever so slightly different from being different all the time, which you might call disagreeability or just being a grumpy bugger.

Contrarianism.

Exactly.

It's believing in what you're doing. And if what you're doing happens to look like the market, fine. But if what you're doing happens to look 100% different to the market, also fine. And the strength of character and ability to ride that out. Because when it's going against you and the world thinks you're the biggest idiot going because you didn't buy Nvidia, you were buying some sort of mid-cap turnaround stories, that's incredible pressure. And to take that on the chin is extremely difficult and not everyone can do that.

So there's definitely a character trait. And then there's all the basics. To my mind, you've got to be a bottom-up stock picker. I'm not a big fan of people who are macro investors who are trying to guess what Putin will do next or what Trump's next move will be. I want people who are trying to find 20, 30, 40 individual stock situations where the quality of the company is good, the valuation of the company is low, And it's diversified enough that if you've got 20 of them, then they're not all pointing the same way.

So tell us about some of the stocks you do hold in the trust. As you say, super concentrated, 18. What's the most interesting one you've added recently?

Well, we don't add very many new ones a year.

I think the one that stood out for us this year was a company called Zote Foams, which has been around for a very long time. It has a unique process of creating foam using Nitrogen being forced into it, which means it's inert. This was our halo asset.

Investment.

So heavy asset, low obsolescence. We really like this company. There's a management improvement story going on. It has a very high market share in the UK for what it does, about 85%, which is great. But the key thing is, it's very well invested. And the use for life of the assets is, we think, until 2060. And they're virtually fully depreciated. And in our view, this is a great place to be in a company that's growing, that can pass on inflation and doesn't need to reinvest very much in the future. So it was very much an asset play.

There's also an interesting growth play. They are putting some more capacity in at the moment. And one of the customers they have is Nike, for example, where they do a lot of the specialist mid-layers for Nike shoes. And they're actually putting some capacity in close to the Nike shoe factories in Vietnam, which will allow them to free up some capacity in the UK. So we think it's a very rare, super, super asset-backed business. We think we've probably got in at around 60% of the real asset value.

It's a growth story. We bought in very cheap.

And valuations, how do you look at the valuations on a stock like that?

Well, the current PE ratio is about 11 times. It's got a tiny bit of debt. So I think the EVU bit's about somewhere between eight and nine, which is not really expensive. On an asset basis, the net asset value, as I mentioned, I think we paid slightly above book value as stated, but the book value is materially understated in our view. I think from, to give you an idea, Meryn, I think the site in Croydon, the insured value and replacement value in the site is a multiple of what it is in the books. So it's quite a nice mix of like an old style deep value investment asset backed with a growth story, but also a management change story as well, relatively new chief exec, relatively new finance director,

who are also very incentivized to perform.

Okay.

You said earlier that you tend to hold things for a couple of years. What would make you sell this?

Three reasons something would leave the portfolio.

One, it's taken over and we've had a lot of our Because the way we select stocks, a lot of our companies have been taken over over time, typically overseas trade buyers. The second thing is before we invest, we write a very detailed investment thesis. We all discuss as a team. And that provides the guidebook for what we think is going to happen. And periodically we review this, typically no more than every 12 months. And if a stock isn't doing what we thought it was going to or the management team aren't doing what we thought it would do, it's a trigger to say, actually, have we just got this one wrong? And the important thing for the team is it depersonalizes the decision that we've got this one wrong. So, you know, second thing is thesis

goes wrong. The third thing, absolutely right, is around returns. So we set a target price for all our stocks three to four.

Years in advance. You compare that to day share price.

That gives you a potential forecast annualized return. Now, if that annualized return goes below 15% or isn't as good as other things in the portfolio or other things we want to buy, we reduce or move it on. So we have quite a disciplined way of thinking about returns in the portfolio. And I think that's a big differentiator compared with some that has 100 stocks. If you have 100 stocks, it's a bit like the magpie. You collect interesting things and leave them in the nest. For us, every single stock has to work.

You mentioned M & A and private equity, etc.

Do you worry that the market is shrinking and there will come a point when the interesting stuff is not available to you? And we always say when we talk about small caps, John and I, when we're doing podcasts and when we're writing, we always say, if you don't buy them, somebody else will, and then it will be too late and there'll be nothing left, nothing left for the domestic retail investor to buy in small caps.

Yeah, look, it's a really live debate. I mean, we're very fortunate because we don't have to own many stocks and we can put up to 20% of.

The portfolio overseas.

So I would be more concerned if I was used to running 100, 150 stock portfolio and my job was to try and beat the index by 1% a year. Because as your index shrinks, you're going to end up with more volatility against the index, which as Simon knows for big asset management company is risk, right? So I think it's a much bigger concern for the bigger players than us. I mean, I'm more optimistic. I used to work in private tech many years ago. I looked at taking lots of companies private. It has been a bit like shooting fish in a barrel in the UK for private equity for many years when the cost of debt was very low. I think where the cost of debt is now, it's much harder to justify taking companies private.

So I don't see so much risk from private equity. It's not said there's none. But I think the bigger issue more is the really interesting companies, particularly those global niche market leaders, if they're not recognized properly.

By the UK stock market, the obvious trade buyers are.

Can come in and if you look at some of the m & a we've had this year that that appears to be what's happening on the other hand i think rationally what should happen is if flows have stabilized what's left should re-rate and actually it will probably re-rate to a point where ipos make sense again and there's so many assets that private needs to sell again the quaternary or septunary buyout or whatever it's going to be this time you know it ain't going to work and maybe ipo becomes a good exit again so i'm i'm I'm short-term concerned, medium to long-term. I think these things do go in cycles.

And rising rates should make it make sense for growth companies to come to an IPO rather than just keep borrowing money at 6%, 7%, 8%, right? So changing interest rates should really change the dynamic between the choice of private or public.

I think that's right.

We meet many management teams who have done public and private and their pros and cons are both. I think The really nice thing is if you treat the public market right and you get the right shoulder base, it is semi-permanent capital. Whereas if you're going through private equity, quite often the second day the private equity house buys you, they're thinking about how they're going to sell you in two and a half to three years' time.

And decisions are.

Maybe made to optimize that point rather than what's right for the next five to 10 years. And if you've got a very, very good long-term growth story in a decent company, why wouldn't you want permanent capital? I do think these things go in cycles. We've had a very weird period during zero interest rates. It wouldn't surprise me if we have a boomy IPO market in three or four years' time.

Wouldn't that be great?

We've been complaining about the lack of IPOs for so long. Simon, do you think that's possible as well?

I hope it is. Yeah, I'm an optimist.

I'm not as close to the market as Stuart is, but I do speak to a lot of small cap investors. They've been a fairly depressed bunch for the last three or four years, so it hasn't been a lot of fun talking to them. But yeah, I am also a great believer in cycles and it does feel like we've come out of a very long, very weird cycle. The weird thing this time is that you're starting to see these M & A activity happen and the market is still downtrodden. And that's because of the peers on my side of the fence who have been busy selling their UK equity, active UK equity funds that hold the small caps.

And at some point, the last one of those will have left. And as Stuart mentioned earlier, at that point, then suddenly it's not going to take very much to get things moving the other way, I believe anyway.

Well, let's go back to the beginning of our conversation to emerging funds. And As you said, you can't buy investment trusts. But in the open-ended area, what's interesting? What funds have you been looking at?

What do you like?

Are you looking at UK specifically?

Well, across the board.

What are you seeing that's interesting in newish funds that fit the criteria that we discussed at the very beginning of this conversation?

So the easiest place for us to pick a fund currently is in the global value space because there's been such a Darwinian cull of value managers over the last 10 years that the only ones left who are actually very good So we've got the likes of Aram Moore there. That's Sean Pesce you've met.

We've had him on the podcast.

Yeah. Yeah.

Red Wheel are very, very good there. We've got a Dutch manager called Kempen. Havelock are a very good smaller firm in London. We've had to leave a few on the bench as well. So there's good funds at Jupiter. There's good funds at Brickwood and a new manager just having left Schroders. A lot of fund managers have left the Schroder value team and he's gone over to start at Brown Advisory.

So there are a lot of.

Good global values. And who is that who's gone to Brown Advisory?

It is Nick Kirridge who's gone across. Yeah, great track record, great heritage. Yeah, and there is disprover that has come out of that Schroeder Value team. We've just bought some of their emerging market, ex-emerging market managers over at Neuberger Berman, Juan Torres and Vera German, who are, exceptional emerging market value fund managers. We were lucky enough to get into their fund in July when they were one of a handful of funds that went up when the market was being dragged down by the AI sell-off that happened in that period. And that's been one of the most encouraging things for us is that the funds we have picked by and large have.

Delivered in the.

Which is when you've seen that wobbling AI, as you've seen over the last six weeks. We've had funds, we've had lots of active funds that have not just outperformed that falling market, but actually risen in that falling market. And to the point where our own Downing Fox funds have actually risen as well because of the underlying stock pickers.

Essentially, because you would have thought that the AI fallout would hit everything. Everything.

Everything is now connected to AI one way or another. Are you going to be more productive because of AI? Are you in any commodity market is now connected to AI? Any infrastructure market is connected to AI? Any consumption market is connected to AI, etc. So when it really happens, when the AI bubble really crashes, everything will go with it, surely. Absolutely.

I'd be brave to argue that it definitely won't be the case. But if you look at the experience in 2000, when we had similar conditions, similar concentration, then it wasn't the case at all. We've mentioned Aberforth, UK smaller companies, that fund went up in that bear market. I had a look at the data the other day, because I'm the sort of boring person who does that. There were 50 UK funds, mostly UK equity income funds, who boringly had to stick to their valuation disciplines and buy boring companies whose price went up as the tech market sold off, as did Warren Buffett, of course, who was doing that same old thing of buying boring companies at a cheap price.

So if it's purely a rotation rather than an economic event or a war or something worse, there's no reason I think that movement of money out of the massive concentration in AI stocks into all the stuff that's been neglected for three years can't.

Happen as well.

So small cap value is the anti-AI trade, you think, Stuart?

Quite possibly.

I mean, the only certainty is we don't know until it happens. I mean, look, if you look around the world, Meryn, small caps generally, particularly value small caps, are very cheap. UK is an outlier within that. If you believe in reversion to mean they're still upside on rating. As Simon said, every circumstance is different. I think, you know, our view is you pick a style and you stick with it and...

You don't get greedy.

How many funds in a funder fund portfolio?

In ours, there's 35. Yeah, very diversified. But then when you think about any given market, and we don't pick a particular style. We're not one of those fund managers who are going to be all in value because we think value does well.

Yeah.

You imagine the Japan market, for example. It's not crazy to imagine buying a large cap growth, a mid cap growth, and a small cap growth and doing the same for value as well.

Mm-hmm.

And you wouldn't have a single stock crossover. And before you know it, that's just six funds in one market. And you can do the same for most markets across the world. And very quickly, you get up to well into double figures and you're not, you know, they're not treading on each other's toes. Yeah.

And thank you both so much for joining us today. We really, really appreciate it. My pleasure.

Pleasure.

Thanks for listening to this week's Merrin Talks Money.

If you like our show, rate, review, and subscribe wherever you listen to your podcasts. And keep sending your questions or comments to merrinmoney at bloomberg.net. You can also follow me and John on Twitter or X. I'm at MerrinSW and John is John underscore Stepak. This episode was hosted by me, Merrin Somerset Webb. It was produced by Sam Asadi and Moses Andam. Sound design by Blake Maples. And special thanks, of course, to Simon Evan Cook and to Stuart Whitteson.

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