Simon Edelsten, the former manager of Mid Wynd International (MWY ) investment trust and Artemis Global Select Fund , has re-appeared at Goshawk Asset Management with his previous co-manager Alex Illingworth.

In this 26-minute interview, Edelsten discusses what drew him to the Harwood Capital backed firm, how he’d like to run an investment trust again but is excited with the launch of its active ETF and the team’s approach to finding good value stocks in the broad artificial intelligence supply chain.

Can’t watch now? Read the transcript

Gavin Lumsden: 

Hello, I’m with Simon Edelsten, the former Artemis fund manager who ran the Mid Wynd International Investment Trust and the Artemis Global Select Fund for about nine years, up to 2023. Simon, welcome. After a year’s gardening leave from Artemis, you have this week re-emerged at Goshawk Asset Management, where you’re reunited with your former co-manager, Alex Illingworth. Did you really retire, or did you just leave Artemis, I wonder

Simon Edelsten: 

I think fund managers always have a problem retiring because the job that we have involves looking after your savings.  As you retire, obviously, you carry on looking after your savings. So, did I ever retire? Formally from Artemis, a year has passed, which is the obligation. During that year, of course, I was looking after my own money and so you carry on keeping interest in the market, making mistakes, making some profits. Then you think this is all fine and dandy, why not go back and to if for other people as well? Fortunately, Alex had met up during that year with this remarkable individual, Chris Mills, who owns a business. His business is called Harwood Capital.

GL: He and they are backing Goshawk.

SE: Yes, exactly. So, Christopher’s very well-known in the investment trust world. His business, Harwood, has his very large and very successful investment trust, North Atlantic Smaller Companies (NAS ).

GL: It’s best known as a UK smaller companies’ boutique. Some private equity funds as well, on the side. This is quite a departure for them to be backing you and your global equities team.

SE: In a way it is and in a way it isn’t. Christopher helped was central, setting up JO Hambro, which was a global equity manager many years ago. That was very much his business and Harwood has come out of that later on. He also has been behind the success of Polar Capital as a large shareholder as well. So, he’s had many years of experience of helping setup global equity businesses. That said, from Goshawk’s point of view, the really key thing for us was that Harwood, inside itself, has all the operations experience, all the information technology experience. All the compliance experience that you need to allow them to do all the hard work and us to concentrate entirely on picking stocks and running funds. That for me, was absolutely key.  

If you set up your own business, unfortunately, how ever hard you try, you end up getting swallowed up with administration and regulation. The amazing offer that we’ve been made by Harwood is the financial stability and the organisation stability of this private business, to allow us to get on and just run money, pick stocks.

GL: You’re based in Harwood’s office then, near Green Park in London. So, you’re sitting alongside those smaller company fund managers, Chris Mills obviously.  Stuart Widdowson on Odyssean (OIT ). Richard Staveley on Rockwood Strategic (RKW ).

SE: All sorts of strange people wandering in and out. It’s quite a hive of activity. Quite a special place, so we’re lucky to be there.

GL: Tell me about your team. Goshawk’s recently bought Vermeer Investment Management and that brings along three fund managers. Tim Gregory, ex-Sigma, Gartmore, Prolific. James Rowsell and Charlie Fricker.
  
SE: Yes. Now, this is very much one of those things in the city. So, Alex had reached this agreement to launch a new global equity business. I wasn’t involved at the time.  They had to think about how to get going. In the latter stages, both Alex and myself, ended up getting rung up by people who knew that Vermeer had been very successful, the Vermeer Global Growth Fund had been very successful, but hadn’t managed to raise very much money. There are quite a number of small unit trust managers out there. Always have been. Who do a fantastic job, but never really get the profile, never really get the critical mass. Clients say we love what you’re doing, but you’re a bit too small. So, they needed to think about their next-.

GL: Global fund has got £61m under management.

SE: It’s a bit bigger now, already. One of the nice things-.

GL: Your arrival’s creating a bit of a buzz?

SE: I think there’s two things here. Firstly, the existing unit holders in the Vermeer fund were delighted to hear about the deal and the stability.  They now know where Vermeer’s future is. So, they have been prepared to commit more money. It’s not common in the City of London for funds to see inflows this year. It’s a very small fund, but it has had significant inflows. I put a decent amount of money in, as I always do whenever I run any fund. So, I always want to invest alongside other people.  Christopher has also backed it. All the team has their money in. The existing unit holders have put money in. It’s actually close to £70m or it will be in the next couple of weeks. Close to £70m from 50m this summer.  

There’s an important point here. When you’re down at 50m in a unit trust, the other charges, not the management fees, they can add quite a bit.  So, they have been 40 basis points [0.4%], which adds quite a lot on to the management fee. As the fund gets up towards 100m, those charges get spread across many more units. If we can bulk it up a little bit, then the total charges will become much more competitive and it’s because of that that we’ve waived the minimum charge on a discounted fee. There’s an early bird offer if you can find the G-class units on platforms that you use. Not all the platforms like this stuff.  

So, some of them are a bit unhelpful about hosting these, but we have launched a unit at 45 basis points, rather than the normal 75 basis points management charge, just to try to get over that launch hurdle and make sure that we’re offering the public very, very good value for money.

GL: You’ve got skin in the game, which is great. You’re sounding quite hands on, but your formal role is chair of the investment committee. So, are you a hands-on fund manager?

SE: Absolutely. Before Artemis, I worked at a firm called Taube Hodson Stonex. Taube Hodson Stonex had a five-person set of investors chaired by Nils Taube, who was by far the-, who I can only hope to impersonate partly. He would sit there and say I like that and I don’t like that and used his experience to try to help other people. I think it’s important. James is slightly older than me, complete contemporary of mine. He was in stockbroking when I was in stockbroking. We worked for rival firms. Tim, I’d met in the late 1980s. This is a remarkably experienced collection of individuals and I have no intention of trying to do anything other than get the best out of all of their ideas and try to make sure that we complement each other. The news so far, perhaps because we all come from very similar backgrounds of post-big bang city.

GL: A similar approach.  Do they share your global thematic approach?

SE: It’s a remarkably similar approach. That’s the thing that everyone was so worried about of course, when you first meet each other. Then you just start talking about stocks and shares. I did notice that of their existing portfolio before we’d even met, two-thirds, possibly three-quarters of the stocks were stocks we had in the Artemis funds and in the Mid Wynd fund. Then many of the others were just, you might by this or you might buy that, but they’re very close equivalent. The role of themes was there. The willingness to be very contrarian, to be very different from the index was there. So far, we’ve had a very, very easy and happy coming together.

GL: I know you best as the manager with Alex on the Mid Wynd Trust. Do you miss running an investment trust? You’re now at Harwood Capital that’s got a little stable of its own. Will you look to launch one or seek to be appointed to run one?

SE: We’d be very happy-, Mid Wynd was the second big trust that I’d been asked to help find a way forwards in my career. I looked after a trust which came out of Hendersons, called Electric and General, 20 years now. Again, it was a trust which had a problem, had a discount. Board was looking for a solution. Alex and I managed to do that with Mid Wynd of course, coming out of Baillie Gifford, that people were surprised about at the time. When Electric and General left Hendersons, people were very surprised about it. So, we’re here if anyone’s got a problem and they want a consistent, proven package which pulls together discount management. Explaining what you’re trying to do, trying to make sure it’s a product for the public that the public wants to buy.  That’s how you get your discount down.

GL: If anyone’s running an investment trust, particularly a global equity one that’s unloved on a wide discount, you’re willing to help out.

SE: On the other hand, as you will have noticed, the second fund that Goshawk has launched, is what’s called an active ETF.  

GL: Exchange Traded Fund. I’ve got to admit, I don’t know the sector that well and I always think of ETFs as index tracking, passive funds. This is an active ETF.

SE: Absolutely. There seems to be a new vehicle in Europe. It has some of the features of a unit trust. It has the government structure of a unit trust and like a unit trust, it never trades at a discount. It has some of the features of an investment trust, in that it’s quoted on the London Stock Exchange. It has a ticker. So, it’s very, very easy for investors to buy it. When you want to buy a unit trust these days, unfortunately, there is-, if you want to buy it direct as a private individual, rather than buying it through a platform, I think the form is about 27 pages long. Mainly about money laundering. It’s not that difficult to fill in, but it’s a pain. Whereas, this active ETF trades on the exchange.  

You can just go click, click, click and many investors like to go click, click, click. Just making it easy for people to buy a fund. We’re running this active ETF. We were asked to take it over by an organisation called Han who runs a range of ETFs or they administer a range of ETFs. They make sure all the listings are done properly and all the governance is done properly. Then us being us, we took this thing and we just we’re never going to run a fund where we wouldn’t want to have our own money in it. In the past, Alex and I have always had if you like, the growth-oriented fund, which tries to beat the market and these days, that means that you have to have quite a decent amount of money in the Magnificent Seven.

You can’t just ignore them if you’re trying to keep up with the market. You can be heroic and say I’m not going to have any of them, they’re all ridiculous, but you wouldn’t have done very well.  Then we have a different design of the fund, where we take the same portfolio, we just have much smaller positions.

SE: Exactly. We spread the money. The money that we don’t have in the very concentrated tech area of the market that worries a lot of people.  We then spread across more value stocks and even bonds.

GL: And you have the expertise in the bonds and the value stocks?

SE: At THS we ran everything together. In fact, you have to go back 12 years, to the last time when you could buy a bond in the UK and it yielded more than inflation.  Just in the last few months, low and behold, just in time for Goshawk to be launched, our bonds and American bonds are suddenly yielding more than inflation. The argument not to hold any bonds, which I felt is compelling for the last 12 years because of QE, because of what the Bank of England was doing has suddenly gone away. Of course, you can’t charge fat fees on it. The other nice thing about an active ETF, which again, make it very competitive with investment trusts, the total fees, the total expense ratio of this is 69 basis points. Which makes it better value for money than almost any unit trust, which tend to charge more than that just for the management fee.

GL: Yours is a new business. It starts with an existing fund, albeit a small one, you’re hoping to grow that.  In terms of growing the business, you’ve opted for this active ETF structure. Do you think that’s more attractive and has got more growth potential in terms of gathering assets than open-ended funds or closed-end investment companies?

SE: We hope to gather funds in both areas. Obviously, the route to the retail market in active ETFs, it involved a lot of explaining that these things are safe and properly regulated and can provide liquidity without discount issues. So, there’s a bit of explaining to do. But I have been very struck. Goshawk launched yesterday and only last week, one of the largest listed fund managers in the country said we’ve just decided to pay attention to active ETFs. We seem to be ahead of the crowd here in saying these are proper vehicles. Other people will, I think, do the heavy lifting of reassuring the public, reassuring the wealth managers that these are a sensible investment structure. After that, we’ve got to perform. A small firm like us, if we don’t perform nobody’s going to give us any money.

GL: Let’s turn to markets. We talked about the Magnificent Seven stocks. The extraordinary concentration in those companies, which you feel obliged to follow to some extent. Where do we go from here? Are we going to see an implosion of these huge companies or a broadening of the market? A bit of both.

SE: I hope a bit of both. The concentration in the market today, there’s a report out by Goldman Sachs saying the market has never been this concentrated in the entire history of the stock market. The amount of value, if you look at the index, in a very small number of stocks is miles beyond what it was. When Alex and I came together to launch global fund at Artemis 12 years ago now, America was 52%, 53% of the index. It’s now over 70% of the index. Both the tradition I come from and the tradition the Vermeer people come from is to say, you want to spread savings across more than that. Just because the index is that lumpy doesn’t mean to say this is a sensible way of running other people’s money.  

That’s one of the things that’s brought me back to the business. Inside the Magnificent Seven though, we are not of the view that all of them are expensive. We’re not of the view that all of them are going to blow up. In fact, the ones that have performed the best this year, are actually the ones which always look quite cheap.

GL: Microsoft, Nvidia?

SE: Nvidia’s an odd one, but Meta’s been the most interesting one, which is quite a big position in the Vermeer fund which will be called the Goshawk fund quite soon.  Meta’s up 62% this year, but that’s not the one that everyone talks about. As ever. The press and the commentaries concentrate on the very headline-grabbing ones like Tesla, which has been dire. Nvidia is a bit of a special case. Companies involved with AI like Meta, which was on a sensible rating at the beginning of the year.  Nobody was going to say-, it’s actually performed very well. We’ve chosen a few of these to have positions in. We’re making very good money out of it.

Nvidia, I think, is the stock that people are most surprised is still-, it’s about 3.8% of the fund, which is around the same size as the index. Nvidia is an extraordinary business because its chips now, over the last ten years, were chosen by the gaming industry to be what gamers used ten years ago. That’s what they designed them for.  Then they found that they were so good at that, that when crypto currency mining came along, everyone used Nvidia chips for that. Now AI has come along and everyone’s using. They’re just the best chips for power and speed and AI requires power and speed. At the moment, anyone who wants to be a leader in building AI applications is buying Nvidia chips. 

Probably, there are five people trying to dominate each space and all of them are buying chips at the same time and not all of them will be successful. So, there is the makings of a bubble here. When you value a stock like Nvidia, 1) you can see that it could have enormous amount of upside still and the other way you think, there’s so much uncertainty that you don’t want to have too much money in it. You have to decide how big a size position to have. All I can say is that the position we have at the moment 3.8% is after we’ve taken quite a lot of profits on the way up. That will probably be the way of it. That we will notice that other stocks, the broader market has been left behind. Even in AI terms, there are plenty of other stocks which are related to this.

GL: There’s no denying the power of AI, but what is the best way to play it without getting caught in overvalued stocks? I take you point, Nvidia might not be overvalued.

SE: One of the things that small thematic managers, like us, are good at doing is following an argument through, even if it ends up in an unusual place. One of the things we were looking at in terms of if all this AI is going to be done, what is required to get it all done? There’s been this growing evidence that AI datacentres use absolutely massive amounts of electricity and cooling. On the one hand we’ve made quite a lot of money in an American air conditioning [Train Technologies TT.N] company, which is supplying the air conditioners for the data centres. Also, we started making investments in nuclear power companies. We felt that the amount of absolutely stable and reliable power that the tech companies were going to need, without carbon emissions, the only solution was likely to be nuclear power.

Very fortunately, we’ve also got, we’ve got the Nvidia holding in the fund at this end and we’ve got Cameco, which is the world’s biggest nuclear power company and, also, Rolls Royce [RR], which makes small nuclear reactors here. Both in the fund. We’ve ended up making money on both sides of this argument. I think that this is how these themes tend to play out. The theme remains the same, but time goes past and you start to find other stocks which are related in unexpected areas. We’ve also started buying companies which own and control very high-quality data. In the UK, there’s a company called Reed Elsevier, which is called RELX. We haven’t bought that, but we’ve bought the European equivalent called Wolters Kluwer.

Again, if you allow your business to be very dependent on big data analysis, you need the data to be really high quality, so the value of that data suddenly goes up.  Hopefully, that’s the joining the dots that we carry on being good about.

GL: And other themes? Where else are you joining the dots?

SE: The other area which may interest you because it has changed. You’ll remember that we used ot have quite a lot of money in Japan. Oddly enough, Vermeer has quite a lot of money in a Japan.

GL: Your last column for Citywire was about the turning point for Japan. 

SE: There have been some very good things. The banks have certainly performed extremely well, which were our big holdings when we were at Artemis, as they put interest rates up. Started putting interest rates up. We do think that there’s another step to come, but as ever in Japan, things can take a little longer than you wish. The political situation matters. There’s been this rather inconclusive election, but the economy is still, frankly-, to call it unstable would be unfair. It’s certainly not in neutral position. Japanese inflation today, is higher than British inflation. That doesn’t happen very often. 3% rather than our 2%. Japanese bond yields are only 1%.  Where our bond yields are 4.5%.

Those interest rates are going to carry on going up. Will it be enough to make the Japanese economy and Japanese businesses easier to run? There’s probably going to be some turmoil in the middle. There has been a big improvement in profitability in Japan over the last ten years. The return on equity. The dividend payments.  Shareholder value has started coming through and it’s started coming through in the cashflow per share.  Some of the story is done. We used to be pretty much, limit up in our Japanese exposure. The market’s performed very well. The value for money is slightly less than it was, it’s still very good, bit slightly less.  This also has left us with room for one other change.

You may remember that I sold out of China completely five years ago. Feeling that around the time of the Ant Financial IPO being cancelled and the big Chinese tech stocks falling very sharply. Partly due to political interference.

GL: There was a crackdown wasn’t there?

SE: Yes. Then of course, since then there’s been a property crash and in the last few months, the People’s Bank of China has had its Draghi moment.  The People’s Bank of China, I think three weeks ago, said we’ve got to restore confidence.

GL: A ‘whatever it takes’ moment.

SE: It’s a real whatever it takes moment. In public, in Chinese and he basically said we’re going to print two lots of Y300 billion and if that isn’t enough, we’ll do it again and again. The money is going firstly to clear our property developers and their stock of unsold housing. Write off all the bad debts and then the next bit of money is going-, the Central Bank of China has said we’re also happy to lend money to any businesses that want to buy back shares and any of the public who want to buy shares. They’re trying to stabilise not just the housing market, but also the stock market.

GL: Stock market has responded. Is that sustainable? China is looking incredibly cheap after three very tough years.

SE: I think it’s time to go from having nothing, to having a bit. 

GL: How much is a bit?

SE: 1% of the fund, but it is a change and it’s a step in that direction. Also, of the best performing shares that we had in our fund over the last 12 years at Artemis, a lot of these shares have performed quite poorly over the last year. Companies like Louis Vuitton, L’Oreal, because of the problems in their Chinese business. As soon as you think that China is stabilising, we’re not talking about bouncing back. We’re certainly not talking about a consumer boom, but as soon we you think it may not be as bad in future as it’s been the past, then you take advantage of the-.

GL: Opens up opportunities in Europe as well.

SE: Yes. You’re able to buy really good quality companies, which you used to have to pay a premium for, during a period where life is a bit dull for them. For us that’s great. Value for money.

GL: Positive on China and the implications that might have for elsewhere. What about the US? We’ve got the election coming up next week. Do you think the betting markets are right, pointing to a Donald Trump win?

SE: Deliberately, I try to avoid taking any view on who might win. You look at what might happen to your portfolio and the risk in your portfolio either way. We’re not quite up to weight in America. 70% of the world index in America doesn’t strike us as balanced. We’d like to see the dollar come down a little bit. It would help a little bit on the performance, but that’s a small matter. The extraordinary thing about-, we’re recording this the day before the British budget. Everyone’s worried that the Labour party might spend too much money and that will make bond yields go up. Extraordinarily, in America, if Trump wins, he will issue more bonds than the more leftwing candidate because his tax breaks are so expensive that he has to issue $7.2 trillion more bonds. Which is quite a lot. Rather than the $3.2 trillion that Kamala Harris has announced she’s going to spend. It’s a very strange world where the right-wing candidate’s success might be the one that the bond market won’t like.  

GL: We’re getting an equivalent to a Truss moment?

SE: Oh, no. If you have a Truss moment in America, then you really need a proper tin hat on. Oddly enough, we have actually kept some liquidity in the fund, in case there’s some wobbles on it because there would always be. In terms of the stocks we own in America, which is much more than half the fund, American businesses are very good at coping with change. They don’t panic about these things. They don’t overreact in the way we do. The next ten days-, the first ten days of Goshawk are going to be a rather exciting time to run money and you just try-, you don’t try to make money out of this. You just try to avoid losing any money.

GL: Best of luck with that. Thanks very much for joining me, Simon, and welcome back.

SE: Thank you very much or asking me.