Ian Cowie looks at a shaken but high-yielding investment trust sector.
24th April 2026
by Ian Cowie from interactive investor
Wars in the Middle East and Ukraine dramatically demonstrate the importance of energy self-sufficiency by squeezing Britain’s traditional supplies of oil and liquefied natural gas (LNG).
But this week the government reacted to rising demand for renewable energy from our own wind and solar sources by imposing yet another tax hike on this sector.
No wonder City cynics say there is no situation so bad that political intervention cannot make it worse.
On a brighter note, several investment trusts focused on renewable energy infrastructure now yield double-digit income while trading at even bigger discounts to their net asset value (NAV).
The average of 17 funds in this sector now pays dividends equal to 10.5% of their share price, which is an eye-stretching 32.4% below their NAV.
So, investors brave enough to bet that government bungling cannot go on forever are being well paid to be patient optimists.
More intervention?
Less happily, the recent history of governments talking renewables up while taxing them down is not encouraging.
This week the energy department proposed increasing a tax called the Electricity Generators Levy from 45% to 55%.
It also wants to introduce Fixed Price Contracts (FPCs), switching away from Renewable Obligation Certificates (ROCs) to Contracts for Difference (CfDs). Do try to keep up.
Never mind all the acronyms and jargon, Iain Scouller, an analyst at the wealth manager Canaccord Genuity, pointed out: “This is the third piece of tinkering with investors’ returns in under six months.
So, what ought to be a straightforward renewable energy strategy to keep Britain’s lights on, without depending on dictators in Russia or the Middle East for oil or LNG, turns out to be heavily dependent on the varying whims of our own politicians. Perhaps we should not be surprised to see subsidies cut and taxes hiked.
However, market forces – in the form of reduced supply and relatively fixed demand forcing up prices – may prove more powerful than political interference. Markuz Jaffe, an analyst at the broker Peel Hunt, said: “Higher power prices typically have a positive impact on the revenues of renewable energy generators.
“Investment trusts in this sector also benefit from higher inflation-linked subsidies, such as ROCs, or remuneration mechanisms, such as CfDs, which adjust for the latest potentially higher inflation data.”
Higher prices as a headwind
As a result, investment trusts in this sector could benefit from what would be bad news for most companies; such as higher energy prices and inflation.
Put another way, this out-of-favour sector might be inversely correlated with most other assets and offer valuable diversification for a balanced portfolio in future, as well as dividends now.
Setting aside the generalities, what about the specifics?
is the Association of Investment Companies (AIC) Renewable Energy Infrastructure sector leader by share price total returns over the last five years and decade, with a dividend yield of 10.5% after raising shareholders’ pay by an annual average of 7.8% over the last five years.
It is important to understand that dividends are not guaranteed and can be cut or cancelled without notice. However, if UKW could sustain its current rate of ascent, shareholders’ annual income would double in less than a decade.
Against all that, the capital performance of this £3.9 billion fund has fallen off sharply; largely for the reasons described above.
UKW generated total returns of 68% over the last decade, before a meagre 9.3% over five years, followed by a loss of 0.3% over the last year. Seen in that light, its share price trading 26% below NAV is not surprising.
Worse still, the Conservatives and Reform are even more critical about wind power than Labour, which at least pays lip service to this sector.
Scouller commented: “Looking forward, there is obviously significant political risk to renewables such as any new CfD schemes after the next UK general election, due within three years.
“While investors want certainty, we are seeing continual tinkering by government. There is a risk that some private wealth managers will take the view that this sector is uninvestable, given continual changes.”
Here and now, while I hold UKW in my ISA for tax-free income, political risk is the reason I prefer to have more of my money invested in Ecofin Global Utilities & Infra Ord EGL
This global fund is now the fifth-most valuable asset among 57 shares in my forever fund.
EGL offers exposure to renewable energy, as well as fossil fuel producers and distributors, to generate total returns of 81.5% and 48% over the last five year and one-year periods.
This £266 million fund is due to celebrate its first decade in its current format next September, after formerly trading as Ecofin Water and Power Opportunities (EWPO), where I first invested in March 2011. The current yield is just over 3% rising by an annual average of 5.2% over the last five years.
Many debates about the advantages and disadvantages of fossil fuels versus renewable energy generate more heat than light. Perhaps the most investors can hope for is less political interference in future.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
has topped our table for the first time in 12 months, with a handful of other specialist investment trusts also breaking into the top 10 list.
The flagship Baillie Gifford trust has enjoyed some strong performance as markets have rallied in recent weeks, while its chunky allocation to SpaceX could also be attracting investors.
The fund might have drawn some attention thanks to concerns that the board of Baillie Gifford stablemate Edinburgh Worldwide Ord EWI
another trust with a big SpaceX position, risks getting overthrown by US activist Saba Capital in a vote due at the end of this month.
The latter last week mooted the idea of capitalising on its strong returns by issuing a C share class. Such fundraising would enable the trust to invest more money in its subsector, while also potentially improving liquidity in its shares.
Meanwhile, the Royal London Short Term Money Market Y Acc remains popular but drops to second place for the first time since February. Value fund Artemis Global Income I Acc drifts up to third. Investors also continue to back tracker funds, with four such names in this week’s table.
Funds and trusts section written by Dave Baxter, senior fund content specialist at ii.
Looking at the table below the good news if you are starting on your investing journey with only modest sums to invest, compound interest takes a while to be noticeable.
If you are investing modest amounts, it’s human nature to want to start out on your journey but initially accrue in a savings account to save charges eating into your invested capital. Charges have been reduced over the years, so it’s not such a problem as before.
Buy one less Starbucks a week, other expensive coffees are available.
The first part of the SNOWBALL’s plan was to earn 1k of income a month from a seed capital of 100k without adding any more funds to the portfolio.
The SNOWBALL should meet its target of 1k a month and consolidate next year and then the SNOWBALL will start to really increase.
Understanding the Snowball Effect
The snowball effect describes how Warren Buffett built his wealth through the power of compounding over time.
Understanding the Snowball Effect The snowball effect is a metaphor for compounding, where small, consistent actions accumulate into significant results over time. Just as a snowball rolling down a hill gathers more snow and grows larger, investments can grow exponentially when earnings are reinvested and allowed to compound. In Buffett’s case, this principle applied to his investments in high-quality companies, where profits were reinvested to generate even greater returns over decades.
The big problem to re-investing dividends is you may find you are wishing your life away as you wait for your dividends to arrive but always remember the goal is to have a happy and secure retirement. To leave your capital to your nearest and dearest and if you could leave a small legacy to your nearest cat and dog home you would leave the world a better place than when you arrived.
The fcast for income for the SNOWBALL at the 6 month stage after the recent portfolio changes is £8,122.00. Do not scale to reach a year end figure as it contains special dividends.
The fcast for income for the SNOWBALL is £13,922.00.
The fcast remains £10,500 and the target £11,240.00
The income fcast for 2027, whilst still to early for it to be a firm fcast is £12,027.00
A yield of 12% versus an annuity of 7% and you keep all your capital.
April is a barren month for earned dividends but dividends should start to stream in next month starting on the 8th of May.
by the interactive investor team from interactive investor
Putting together a portfolio to weather different conditions is no easy task, even in calmer times. For beginner investors it can be particularly puzzling, given there are thousands of funds to choose from.
Dave joins Kyle to explain his choices and how he arrived at the mix of assets. The duo also discuss ‘hands-off’ funds for investors on the lookout for low maintenance options.
Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to On The Money, a weekly show that aims to help you make the most out of your savings and investments.
The focus for this episode is on how to approach building a portfolio from scratch, and joining me to discuss this topic is Dave Baxter, senior fund content specialist at interactive investor. Dave, welcome back to the podcast.
Dave Baxter, senior fund content specialist at interactive investor: Thanks for having me on.
Kyle Caldwell: So, Dave, you’re going to run through three hypothetical portfolios that you put together for three different risk levels. So low risk, medium risk, and high risk.
Before we delve into those, what would you say are the main considerations when starting to build a portfolio from scratch?
Dave Baxter: I’m going to make two related points. One thing to consider is your time frame and your circumstances, which of course is related. So, say you have 10 or 20 or more years to ride the ups and downs, then really you should be taking maximum levels of risk because you can tolerate that volatility and you’re going to maximise the growth that you can get.
Whereas if you’re, in retirement, for example, or if you for some reason would need your money soon, you need to be a bit more cautious.
The other thing I would highlight, which again is linked, is your appetite for risk and that’s quite interesting because sometimes that can contrast a bit with your actual circumstances. So, you might have time to ride out the ups and downs of markets, but if you’re particularly squeamish and freaked out about a big fall in your portfolio, then maybe just for your own peace of mind, you might take off a bit of that risk.
Kyle Caldwell: I completely agree with everything you’ve just said. I think also when you’re starting out, how much you’ve got to invest is a big factor, and that can help dictate how many funds or investments you choose.
If you’re just starting out with £1,000, you could feasibly just buy one fund, a global index fund or a global exchange-traded fund (ETF), for example, and that’ll give you ready-made diversification, as those types of funds own thousands of shares across the globe, and it gives you lots of exposure to different areas, different countries, different sectors, and different industries.
Whereas as your portfolio hopefully grows over time, or if you do have a larger initial investment amount, you can then consider holding more than one fund, maybe holding several and spreading diversification out even wider.
Dave Baxter: I guess there’s also the question of how interested you are in your investing point. Because perhaps you kick off and, like you said, you’re having a broad tracker and nothing else. Then over time, perhaps you’re watching what it does and then perhaps you go down the rabbit hole of studying a bit more about investing and then you can pick some of your more individual holdings.
Kyle Caldwell: In terms of what to think about when constructing a portfolio, I think the core and satellite approach is a really good rule of thumb for people to consider.
The theory is that if you have around 80% in core holdings, such as a global fund, which you can build a portfolio around, and then the remainder of 20% in more satellite positions, potentially in more adventurous areas such as funds investing in smaller companies or funds investing in the emerging markets or Asia-Pacific region.
A core/satellite approach helps give you a diversified portfolio and plenty of balance.
Dave Baxter: Yeah, definitely.
Kyle Caldwell: So, let’s move on to the three hypothetical portfolios that you have assembled.
We will put links to each article in the podcast episode description, which will contain the tables of the funds that you’ve selected for each of these hypothetical portfolios. But for those who are listening and watching on YouTube, we’re also going to show the tables during parts of this podcast recording.
Let’s first get into the lowest-risk portfolio or the cautious portfolio.
In terms of asset allocation, talk us through how you decided how much exposure to dedicate to shares, bonds, and alternative investments in this one.
Dave Baxter: To be frank, I’ve been very cautious, very conservative, and just put 20% in shares, and that’s a very diversified exposure. Some people who are cautious investors would have more in equities because even if you’re in retirement, you probably still want to keep growing your portfolio.
But one thing I wanted to explore is the dilemma with the defensive or the cautious side of a cautious portfolio. Because in the past you might simply have held a bit of equities and then put loads of money into bonds because, in theory, bonds should gain in value when stock markets fall.
But we’ve seen some challenges there. In 2022, when we saw interest rate rises, you saw bonds falling in tandem with equities and we’ve had a weird throwback to that with the conflict in the Middle East.
So, you’d be hoping that things like government bonds would be gaining in price while equity markets struggle, but they’ve also fallen because bonds hate the prospects of inflation and rate rises. So, rather than going all-in on bonds, we’ve split it up, as you mentioned.
So, we’ve got 40% in bonds, some government bonds, some corporate bonds, and some inflation-linked bonds. Then we’ve got some gold, some commodities, a bit of property, and also a so-called absolute return fund.
Kyle Caldwell:And the final 20%, is it in equities?
Dave Baxter: Yeah, it’s 20% equities. There we’ve gone for one really diversified fund, F&C Investment Trust Ord FCIT
which doesn’t stray too far from the MSCI World Index. I’ve also gone for a MSCI World ex USA tracker, just because F&C is very heavily weighted to the US and, as investors learned or remember from last year, there’s a lot going on beyond the US and there are a lot of returns to be had beyond the US, so I just wanted to give that spread.
Kyle Caldwell: You’ve arrived at 10 different funds, and they’ve all got a 10% weighting. Those listening in and watching the podcast on YouTube will now be able to see a table of your choices.
You’ve already explained F&C Investment Trust. Are there any others that you want to talk through?
Dave Baxter: A lot of these are actually ETFs. I think six of the funds are ETFs or passives of some form because we wanted some very straightforward exposure.
For gold, we simply wanted a physical gold ETC. With bonds, we’ve gone to some broad bond trackers. But perhaps to touch on a couple of more interesting options, you’ve got Schroder Real Estate Invest Ord SREI
,which is focused on physical property. Property can be a diversifier against equities and it might hold up better if we did see that inflationary environment that is going to threaten bond investors.
One other to highlight, and this might be a controversial take, is the Janus Henderson Absolute Return I Acc fund. A lot of people now probably pretty much hate absolute return funds because they haven’t done that well in recent years. But this one has quite a good record of protecting your capital. It’s a so-called long/short fund, so it does have some exposure to just buying equities, but it also does shorting, so betting on the price of a share falling.
Kyle Caldwell: Personally, I’m not a big fan of absolute return funds. I think many of them are too risky. If you see that an absolute return fund has, over a one-year time period, delivered a return of 20%-plus, then it’s not really doing its job. These funds are supposed to provide steady returns in a range of different market conditions. If a fund can go up 20% in one year, it can also go down 20% in one year as well.
Now for each hypothetical portfolio, you’ve also come up with some more hands-off options for people who might want to outsource the decision-making on a cautious portfolio. You’ve mentioned that wealth preservation investment trusts are a potential good option. Could you explain why?
and Capital Gearing Ord CGT They do have some equity exposure, I can’t remember the levels off the top of my head, but it’s relatively moderate. They also use things like bonds, kind of some derivative instruments, exposure to gold, that kind of thing, to try and protect you when stock markets fall out a bit.
So, if you’re a pretty cautious investor and you want a bit of growth but you also want to protect what you’ve spent decades building up, then these trusts should hopefully do that job, and give you a bit of a steady option. But it’s really worth examining the different kind of levers that they use.
Some, like Ruffer, are actually a bit more complicated. They use more esoteric things. And the different funds have very different exposures to different sorts of bonds, to gold, and so on.
Kyle Caldwell: Each of those three wealth preservation investment trusts are potentially really good options for a defensively minded investor. However, the thing to bear in mind is that if you dedicate too much of a portfolio to that type of strategy, you’re potentially going to do that at the expense of long-term capital growth.
Dave Baxter: Yes. That’s the big risk that we overlook with cautious investors, that you are being too cautious and you’re, like you say, giving up growth. Also, you just need to remember that inflation is a thing and you need to keep protecting your portfolio against those rising costs.
Kyle Caldwell:Let’s move on to the medium risk/balanced hypothetical portfolio that you came up with. To start, could you talk us through the asset allocation?
Dave Baxter: So often, again, this is very subjective, but the idea of a balanced portfolio has in the past tended to land on this idea of 60/40, which traditionally was 60% in equities, and 40% in bonds. I’ve done a slightly different version of the 60/40 because of those concerns we discussed earlier about bonds and their outlook.
So, we’ve got 60% in equities but 20% in bonds and then we’ve got 20% split between a gold exchange-traded commodity (ETC) and a commodity ETF. So, hopefully, if bonds do have a rougher period, then those other assets will pick up some slack in terms of protecting investors from equity market volatility.
Dave Baxter: I still, like everyone, slightly fear and respect the world’s biggest market. I don’t want to completely bet against the US, but I’m still going sort of underweight the US with some exposure because, as I mentioned before, lots of markets have done really well beyond the US.
There are still these questions about the outlook for the US now, and, obviously, the current president is causing a lot of headaches for markets. So, I’ve got that US exposure, and I’ve got one other US fund to give a different form of exposure, and then beyond that what I’ve done is taken exposures to the main equity markets.
So, we’ve got the UK, Japan, Asia emerging markets, which are kind of bunched together, and Europe. Rather than just picking, say, a fund for the UK and a fund for Europe, I’m trying to be aware that investment styles can wax and wane. So, of course, as we know, value funds have done pretty well in recent years, but before that, so-called quality and growth funds were doing really well. So, I’ve tried to mix or pair a growth fund with a value fund.
Kyle Caldwell:You’ve got a number of holdings that are a 3% weighting. Do you think that’s sufficiently high enough to do justice in terms of performance?
Dave Baxter: That’s an interesting critique. I mean, you could argue that you might want to be, say, 5% or higher in order to move the dial a bit better. What’s interesting about these pieces is it just really highlights how difficult it can be to build your own portfolio because you’re trying to juggle the different percentages.
I didn’t want to go too wildly underweight the US, but in my quest to do that and have diversification, it means you need to end up with some relatively small fund sizes.
Kyle Caldwell: For me, if you’ve got a holding that’s less than 1%, it’s going to be very, very difficult for that to move the performance dial even if it has spectacular performance. But we are going to come back in a year’s time to review how these portfolios have fared, both on the website and in a podcast episode. So, we will see in a year’s time how much of a difference those 3% weightings have made.
Dave Baxter: Yeah, fingers crossed 3% is the magic number.
Kyle Caldwell: So, for a hands-off investor, which type of funds fit into the category for a balanced investor? The one that springs to mind for me is something like Vanguard LifeStrategy 60% Equity A Acc fund given that it has 60% in shares and 40% in bonds?
Dave Baxter: Yeah. That’s the big beast, isn’t it? It’s a nice no-stress option. It’s very simple. They don’t move those allocations around.
I guess, though, given that I was talking about the question marks around the reliability of bonds, a big criticism of that whole LifeStrategy range is that their only diversifier is bonds.
There are rivals to LifeStrategy, for example BlackRock MyMap and a few others. They do delve a little bit into so-called alternative assets, so they try and diversify a bit differently beyond bonds.
There’s a whole universe out there, but there are also active multi-asset funds, which should try and give you that mix.
Kyle Caldwell: And, of course, at interactive investor we also have our own Managed ISA range.
Let’s now move on to the adventurous portfolio. So, if you’re investing in an adventurous manner, you could in theory have 100% of your portfolio in shares. Is that what you’ve chosen to do?
Dave Baxter: I’ve done 100% in so-called risk assets, but it’s not all shares. Obviously, that’s a very big bit of industry jargon, but it’s 92%, I believe, in equities. Then I’ve chucked the remaining 8% into different forms of private asset exposure.
There’s this argument that listed or public equity markets are shrinking and we’re no longer seeing some of those great growth stories – the most obvious example at the moment being SpaceX – and that they get a lot of their growth before they actually list on to the stock market.
So, I just wanted to spice things up a bit by giving some of that exposure and interestingly, again, it is a dilemma because perhaps some people would argue that an adventurous portfolio now needs to have more in private assets and less than I’ve put into listed.
Kyle Caldwell: And with this adventurous hypothetical portfolio, you’ve once again opted for 15 holdings, and you’ve also again selected iShares Core S&P 500 ETF as the biggest weighting – it accounts for 35% of this portfolio. Could you talk us through the rest of the line-up and how the adventurous portfolio differs from the medium-risk portfolio?
Dave Baxter: Yeah. So, I’ve tried to have a string of continuity between the three funds. In this case, I’ve stuck with the whole S&P as a core and then paired funds with different styles for given regions. To give an example, we have BlackRock European Dynamic A Acc, which is flexible but can be quite quality growthy, with WS Lightman European R Acc – that’s a value fund. So, that’s how it’s similar to the balanced portfolio.
How it’s different is that I have put in a few punchy satellite funds. So, we’ve got Scottish Mortgage Ord SMT
which is an interesting one because it’s kind of a value fund, but it also holds things like holding companies and it has a lot in Japan. So, it’s offering you access to growth opportunities that you’re not really getting elsewhere. So, that could have some potential.
And then we’ve gone for some private exposure, as I mentioned. So, we have HarbourVest Global Priv Equity Ord HVPE that’s one of those big, sprawling private equity trusts. It has exposure to so many different funds and hundreds, I think, of underlying companies. So, that’s a well-diversified PE option.
It’s catching that really exciting trend, again predominantly in private assets, and also riding the defence spending trend too.
Kyle Caldwell: And for a more hands-off option, which types of funds would you say fall into the adventurous category?
Dave Baxter: So, you’ve got your simple global trackers, and you can have different mixtures in terms of what exposure you have to the US. LifeStrategy has its own 100% Equity fund and that is much more UK-focused than, say, the MSCI World index.
But don’t forget the active fund because there are some global funds – I mentioned F&C before – which are quite diversified and they can try and act as a one-stop shop.
I would caution that perhaps with some of the really popular names like Scottish Mortgage and Fundsmith Equity I Acc, they can actually be quite focused funds. So, I don’t know if you would necessarily put all your money in those. You probably want to go for a wider spread.
they own hundreds of companies. That does give you greater levels of diversification, and they are a bit more ‘Steady Eddy’ than, say, a Scottish Mortgage or a Fundsmith Equity, which while they do have more potential to outperform an F&C or an Alliance Witan, at the same time, they are more likely to give you more of a volatile ride at certain points.
Dave Baxter: Yeah. It depends on your belief in those stock pickers, doesn’t it, as well, and how much risk you want to take and how much of a bet you want to take on, say, Terry Smith or the Baillie Gifford team.
Kyle Caldwell: Dave, thank you for running through each of those three hypothetical portfolios. As mentioned earlier on in the podcast, we’ll put links to each of the articles in the episode description. That’s all we have time for today. So, thanks Dave for coming on.
Portfolio Manager, Author, Podcaster Ben Carlson on why markets are fascinating and increasingly driven by rapid cycles, emotional psychology, and evolving investor behavior, requiring adaptive long-term strategies.
Private credit’s risks differ from 2008; asset-liability mismatches and illiquidity highlight the need for defined time horizons and disciplined capital allocation.
Retail investors have improved resilience, but rising complacency pose risks if true crisis emerges; monitoring consumer spending and job losses remains critical.
AI-driven capex in tech is reshaping margin profiles and valuations, with investors shifting focus from picking winners to identifying potential losers amid sector disruption.
takasuu/iStock via Getty Images
Portfolio Manager, Author, Podcaster Ben Carlson on why markets are fascinating (0:30) Private credit, banking sectors (4:40) Market cycles speeding up (8:00) Economy vs stock market (12:20) Gold and safe havens (22:50) Dividend stocks, yield, income investing and ETFs (24:30) Earnings season: Listen to how CEOs talk about consumers (28:00) AI evolution (31:20)
Transcript
Rena Sherbill: Very happy to welcome to Investing Experts, Mr. Ben Carlson. I’m sure many of you have heard him or heard of him at the very least. You are with Ritholtz Wealth Management. You manage institutions there. You have a very fabulous podcast, the Animal Spirits Podcast. You are an author too.
To wit, we are here today for the most part to talk about your newest book, Risk and Reward: How to handle market volatility and build long-term wealth. Really, really happy to have you on the show. Been listening to you, reading you for a long time. So thanks for coming on the show.
Ben Carlson: Thanks for having me.
Rena Sherbill: Talk to us. I’d be interested to hear first off, if you could share with listeners how you spend your day, how you spend your day looking at the markets, understanding them, how you digest them and then what led you to write this specific book at this specific moment.
Ben Carlson: I start my day reading the horoscope just to make sure I know what’s going on there. Listen to the stars.
Rena Sherbill: Perfect
Ben Carlson: I do a lot of writing and the best way for me to do that is by doing a lot of reading. So I’m doing a lot of reading about what’s going on. I pay attention to a lot of numbers and data.
And I personally think the markets are just fascinating. I know that there’s some people outside of finance who think like this stuff is just it’s boring numbers mumbo jumbo. I think that like the interplay between numbers and feelings and emotions in human psychology.
I think that the markets are just this like giant laboratory for studying human beings. I think it’s like one of the best places to look at the different emotions that human beings have. Fear, greed, panic, euphoria, all these different things that the markets could bring about.
And so I really enjoy just following the market. So that’s why like talking about them. I like writing about them.
Rena Sherbill: Why you called your podcast Animal Spirits, perhaps.
Ben Carlson: Yeah. On a daily basis, that’s a lot of what I’m doing. I’m talking to our financial advisors at my wealth management firm. I’m talking to clients to get a better understanding of what they’re doing.
I’m creating content. And actually, a lot of that stuff, dealing with clients and hearing their concerns and worries and what the problems they’re trying to solve, that’s really good for me in terms of producing content because that’s the stuff that I’m trying to think about.
What are people actually worried about these days? are like regular people outside of finance? What are they worried about?
So I’ve been writing my blog for a little over 10 years now. And the whole point of me writing a blog in the first place, I kind of got into a little trepidation. was right when financial blogs were kind of taking off in like the early 2010s.
So I was reading Josh Brown and Barry Ritholtz, who I’m now working with. They were some of the early blog people. And I just thought that there was a lot of negativity in the world coming out of the great financial crisis. And there was a lot of pessimism and I guess rightly so in a lot of ways because we had two huge stock market crashes and two recessions in the span of 10 years. There was a lost decade for the stock market.
People were really nervous, like, oh my gosh, the financial system almost ended. All these 100-plus-year-old firms went out of business, and the government is backstopping and saving places. I think there was a lot of people who just lacked faith and trust in the financial system. I was getting all these questions from my friends and family about, you’re the finance guy. Explain this to us. What’s going on here? That’s why I started writing my blog.
I’m always kind of glass half full kind of guy. I look for the more optimistic and I look for the good side in most things. And I just thought that there’s a lot of pessimism. That was the idea for the blog.
The book is, I’ve received a lot of pushback over the years. There’s a lot of people who’ve taken on like this whole idea of like long-term investing and thinking and acting for the long term. But I get all these people who look for exceptions. Well, what about this? Well, what do you think about this? Wasn’t this a terrible experience?
And I think for a lot of people, the whole idea of long-term investing is just it doesn’t make sense in this world. And I’m trying to prove that no, even if we open the kimono and show all the bad stuff, right? Like, let’s play devil’s advocate to my own investing philosophy.
I’m to go through point by point and show everything bad that’s happened in last 100 years and why this form of investing still makes sense. And so that was the idea just to, I look at like the risk and reward as like the yin and yang. I say that they’re attached to the hip. That’s what I wanted to show that like, despite all the nasty risks out there, like the reward is still worth it for long-term investors.
Rena Sherbill: We’ve been talking a lot recently on this podcast about the private credit sector and how it’s coming up against the banking sector. And you just talked about the great financial crisis. You talk about it in the book also, a lot of comparisons being made to what’s happening in the private credit sector to the great financial crisis.
We had Samuel Smith on talking last week about how that very much is not the case. He’s a big bullish guy on Blue Owl (OWL) specifically, and he was laying the case for why the banking establishment or banking institutions or those that run banking institutions are so down on the private credit space.
Any thoughts to share about that discussion and also I guess, bear markets and great big bear markets and where bearishness has you most worried?
Ben Carlson: It is interesting that the whole private credit space seems to be an outcropping of the financial crisis, right? A lot of the banks pulled back from that type of lending, so the private managers stepped in, and now they’re doing it.
I think the biggest difference between what happened in 2008 and now is just these loans are long, these loans are not, it’s not like an event, it’s more of a process. Let’s say that the people who are worried about the credit quality of these loans, and I can’t really speak to the credit quality, because that’s just not my expertise.
And these loans are a little harder to understand, right? But let’s say that the credit quality does go bad. It’s not like these things on one day are all going to go under, right? And all these companies are going go bankrupt.
It would be more like a death by a thousand cuts. So that’s where I think the analogy goes. Even if you thought the worst of these investments. I tend to think that these private managers have so much money and they have so much incentive to make sure that this stuff works out.
It’s hard to see this being this sort of car crash scenario. That’s kind of where I fall on it.
Obviously, I think the biggest thing if I’m like tying it back into my book, is that the biggest mismatch we’ve seen and why you’re having all of these people pull money out and look to redeem is like an asset liability mismatch. the whole,
I think my whole point of my book, one of them I hope people get from it is just the fact that when you make an investment, one of the most important things you can do is define your time horizon.
And obviously there were a lot of advisors who put clients into these funds who did not do that because all this money came rushing in and at the first sign of trouble and some bad headlines, all the redemption requests started, right?
And frankly, I think a lot of the advisors should be like kind of ashamed that they did that because these should be five, seven, 10 year holding periods for these types of funds, right? These should not be something you jump into and out of every time you worry, like they’re illiquid for a reason.
And so that asset liability in this match, I think is like the biggest problem with these funds that these are loans are meant to be held, right? They have to kind of mark them to market and provide an NAV and tell clients how they’re doing.
But because of the nature of these funds, they’re private, these are loans that are meant to be held to maturity, right? And I think that’s the thing that people got in trouble to here.
And why there were so many people freaking out is just that they didn’t have that mindset going in.
Rena Sherbill: Because you manage the institutional side at Ritholtz, but I imagine you’re also very much in touch with the retail investing side.
What would you say are the two things I guess you hear or the things that you hear from each of those groups? During this time when there’s a lot of volatility and it’s kind of hard to understand, and also maybe when it’s like very bullish and exuberant.
Ben Carlson: One of the things that I will say in doing this for a couple decades now is that I think just being part of this industry, retail investors used to get a bad rap. mom and pop used to be like this derogatory term, like, the mom and pop investors, they don’t know what they’re doing.
And I think it’s absolutely true that the retail DIY investing crowd has gotten better at what they do. I think that people beating them over the head for the past 20 or 30 years about the don’t run out of the burning building when the stock market goes down.
I think people have gotten better. And you’ve seen that in all the bear markets this decade. When things go haywire, people are buying. The flows show that the money is going in, not out, which is kind of funny because a lot of it means that the professional investors are probably selling. So I do think that retail investors have gotten better.
We have people coming to us who are DIY investors who have been very successful investing their money. They come to us not because they necessarily need help investing money. They need financial planning help. They need help with estate planning, insurance, and taxes, and all these other things.
I think a lot of people have gotten the message that we don’t freak out and panic anymore when this stuff happens. And I think that’s one of the reasons the market didn’t go down more, because I think there’s a lot of people who are beating their head against the wall going, I don’t get this. There’s a war in the Middle East.
Oil prices went crazy. The trade off for moves is closed. Like oil markets are in disarray right now. Supply and demand, it’s all over the place. Why is the market only down? Why did the market only go down like nine percent? I think there’s a lot of people who like rightfully are questioning like this doesn’t make any sense.
I think 20 years ago the stock market maybe would have fallen a lot more. But I think investors have learned and become a condition to not panic as much anymore.
And I guess the second part of your question is, what do I worry about? I guess the one concern there, even though people have gotten better at, people used to say the stock market is the only store that goes on sale and people run out of the door, right? The fact that people don’t do it as much anymore, my biggest concern would be that there is eventually some sort of complacency.
When there is a real risk, a real sort of financial crisis moment, not just a boy who cried wolf thing, are investors too complacent. Do they think that it’s going to snap back right away when in that case where we have like a more prolonged bear market and it’s more painful than people think? That’d be my one concern right now.
Rena Sherbill: So what do you say to that? What do you say to that concern? Is there something that assuages you or is there something that furthers your concern as you look to how investors, because it does very much seem that almost everything is priced into this market. Or even the more volatile, the more priced in it is.
Ben Carlson: I think this is one of the hard parts, too, is that markets are just happening faster and faster than ever. These cycles are speeding up. And I think it’s really hard to wrap your mind around how far like the I think it really started in the pandemic when the stock market kind of looked over this valley of like we shut the economy off.
And I remember when the stock market first started rallying like October or April and May of that year. And everyone said this is a dead cat bounce. There’s no way that that was it.
This thing is not getting better. There was no vaccine yet at this point. was, mean, people were, you know, the economy was still in tatter. People were at home and the stock market kind of looked over this and saw like the trillions of dollars government spending and said, all right, fine, we’re off to the races.
And I think a lot of people were just like in a state of disbelief. And I think that seems to be a lot of the case in a lot of these downturns is like disbelief that it could happen this fast and the market could move so quickly and decide to be more forward looking.
But I think the other side of that could be that we could have, because we have these impulses to move faster, you could see more flash crashes in the market, where you have these huge air pockets where things go down faster.
The COVID one was, I think, the fastest 30 % bear market from all time highs in history. That was a whatever, black swan, one-off event kind of deal. But I think those moves the other way could happen as well.
Rena Sherbill: What are your thoughts about how the economy is moving on its own and then maybe along with the market or how those are influencing each other?
Ben Carlson: I think one of the things I talk about in the book, I did a whole chapter about the stock market versus the economy. And one of the things that I’ve learned is that there are so many people who are smart and well-rounded about what’s going on in the economy.
And basically, none of them can predict what’s going to happen with it. There are more ways to slice and dice economic data than ever before. It’s not just the headline number anymore.
You can get so granular on economic data of this specific, what goes into this number, all the different variables that go up into this number and what groups it’s impacting. And it’s kind of insane how much access to economic data we have now.
And everyone’s still got it wrong in 2022 about like the fact that there’s going to be a recession. And so the way that I look at the economy now, it’s so the US economy is so big and dynamic, it’s I don’t know, 30 plus trillion dollars that it’s kind of like turning a battleship that people think that it’s going to be like a stock market where all of a sudden one day it’s just going to fall.
And I don’t think the economy really works like that. Unless there’s some exogenous event, like a pandemic or some crazy financial crisis, it seems like the economy slows in stages and grows in stages. It doesn’t just happen in one fell swoop. And I think that’s the problem most investors have is they try to equate the economy and the stock market and think all of sudden, OK, here we go.
This one data point shows me that this is happening and there’s just been so many headfakes. If you think about it, the COVID recession was technically one or two months and it wasn’t a real recession because we threw so many trillions of dollars at it. know, people lost their jobs were in some cases paid more to stay home than they were to go to the job.
Small businesses were given loans. Everyone was kind of made whole at that point. So we haven’t had a real recession. And if you can’t be on it, that ended in 2009. That’s like 17 years since we’ve had a real recession, which is kind of amazing coming out of the financial crisis when everyone thought they were going to happen all the time.
So you wonder, are the risks building or is it just that these things are happening so few and far between because government intervention is so much more prevalent than it was in the past.
