Martin Gilbert is the cofounder and CEO of Aberdeen Asset Management, a $US385 billion UK-based money manager.
The fund giant specialises in equities, fixed income, alternatives and property. It has announced a merger with UK peer Standard Life, in a deal that would create a group with a combined £581 billion ($US750 billion) in assets under management. Gilbert is due to be co-CEO of the combined group.
Business Insider sat down with Gilbert on Monday May 8, and talked about what’s going on in the economy, Trump’s economic policies, and the state of the active management industry.
This interview has been edited for clarity and length.
Business Insider: What is your impression of the US economic landscape right now?
Martin Gilbert: I think the economy in the US has surprised. The old adage is that if America sneezes, the rest of the world catches a cold. If the US economy does well, the global economy will do well. Trump probably has all the right policies. Whether he can get them through the House and Senate is a different matter. Confidence looks good here. The market looks a bit high to me. Emerging markets look better value. The first quarter is the first time we’ve really seen sentiment on emerging markets turn, and markets go up and flows returning to EM.
BI: Aberdeen has a lot of assets invested in emerging markets. What is going on there?
Gilbert: Emerging markets peaked in March 2013, so for four years they have been out of fashion. We saw a bit of a rise in the third quarter of last year, but that ground to a halt after the Trump election. This quarter is the first where we’ve seen sentiment improve, markets rise, flows back in to emerging markets, so they definitely look like they are on the turn.
BI: What makes emerging markets so appealing?
Gilbert: I think the appeal for emerging markets is about valuation. They’re significantly cheaper than developed markets. Developed markets have had a good run, emerging markets have been left behind. Markets such as India are doing extremely well. The market is a bit high there, but generally they are better value at the moment than developed market equities. That’s even more pronounced in the credit markets and government debt markets, where, just to give an example, you can get a dollar-denominated Indian government bond on a 6+% yield, compared to the 1% to 2% for developed market government bonds. There’s a lot of value in emerging markets debt at the moment.
BI: Why is India so well positioned?
Gilbert: The most attractive market we see in emerging markets is India. India, quietly, grows at 6%, 7% a year. There’s great companies to invest in, whether that’s HDFC, Unilever Hindustan, ICICI, and then in the bond markets, the dollar-denominated government bonds compare very favourably with developed market bonds. India is the real story in terms of growth globally at the moment.
BI: Alot of people seem to be of the opinion that US markets are too expensive. During the
March meeting of the Federal Open Market Committee, for example, a number of Fed leaders said that this was a cause for concern. Do you agree that US markets are too highly valued? And what’s your advice to investors?
Gilbert: US markets do look high at the moment, and it’s probably just the wall of money going into equities. Mainly that’s because of course cash is paying so little, government bonds are paying less of a yield. We even get the situation where credit for industrial companies can often be priced at less than the dividend yield on the ordinary share, which is really unprecedented. These historically low interest rates have led to higher valuations in stock markets than we’ve seen for many, many years. As to what to do with that, I think you’ve just got to hold through the markets, choose good companies, good stocks that yield a reasonable amount, and hold them.
BI: Markets haven’t really moved a great deal of late. Are investors complacent?
Gilbert: I think they always say the bull markets climb a wall of fear, and the time to be worried is when complacency creeps into that markets. We haven’t seen it yet, but if it does come that is the time to be cautious about stock markets.
BI: And how do you measure that complacency?
Gilbert: I think the sign of complacency in the stock market is when people don’t worry. At the moment, everyone worries about everything. They worry about geopolitical risk, about political risk, they worry that the markets are too high. The time to really worry is when everyone thinks that markets are going up and everything is going really well.
BI: You said that Trump probably has all the right policies. What is he getting right on the policy front?
Gilbert: I think the reason that the Trump economic agenda is beneficial is, he is doing the right things. He wants to see growth, he wants to see to lower taxes, he wants to see this cash pile sitting outside the US return to the US. All of these things I think will be good for the US economy, and as I’ve said, if the US economy grows, the global economy benefits hugely.
BI: In February you penned an article titled “A decade to forget for savers.” What has made the past 10-years such a bad time to save?
Gilbert: I think the last decade has been a very difficult time for savers. They have had negative interest rates on their cash, they have found it very hard to find investments that are safe and give a reasonable yield. It has pushed more and more savers into the stock market, which of course has fuelled this rise in the stock markets we’ve seen globally.
BI: People are living longer, and they don’t have the ability to build up the necessary amount of money to sustain themselves when they leave the workforce. Some Wall Streeters are referring to this as a retirement crisis. Is this a concern for you?
Gilbert: I think the retirement crisis globally is a major problem. I think it’s especially prevalant in countries such as Japan, where immigration is an issue. I think the US is more shielded from it than most countries in the world. It has a higher birth rate than Japan, immigration is tolerated here unlike probably it is in Japan. I don’t think it’s as big an issue in the US as it is elsewhere in the world.
BI: Is it going to be harder for millennials to retire comfortably?
Gilbert: I think the issue that millennials have is that the return on asset classes such as bonds, cash, are so low now compared to the historical levels that it’s very difficult for them to save enough to be able to retire comfortably. If interest rates do trend back upwards, it may be less of a problem going forward.
BI: Times have been tough for active managers as money continue to pour into passive. What are your thoughts on this trend?
Gilbert: I think the asset management industry, especially in the US, is going through a pretty tough time. If you talk to the CEO of a US asset manager, morale would be at a low, even though stock markets are at almost record levels. It’s this march of the passive, it’s eating into the flows of the active asset managers. It’s especially prevalent in US large cap, compared to say emerging market equities. It’s really leading them to think about what they do with their business models.
BI: Warren Buffett has said anyone who gives their money to someone to manage is basically throwing money away because they can park it in low-cost indexes. As an asset manager, how do you defend yourself against these sort of criticisms?
Gilbert: I think for some investors, just buying an index fund is the right way to go. Good active fund managers can outperform indices consistently, so if you do find the right active fund manager it’s clearly better than a passive fund. In areas like US large cap, which are becoming more and more commoditized, even the Warren Buffett’s of this world would buy an active fund rather than passive.
BI: Where does it make sense to invest in active management?
Gilbert: It still makes sense to invest with active fund managers in areas like emerging market equities, global equities, Asian equities, emerging market debt. Any of these areas, there is still huge scope to outperform because of the inefficiencies in these markets. An example would be, you could underweight Russia, overweight India, or underweight India, overweight China. There’s a huge asset allocation opportunities, and huge opportunities in stock picking because the markets are relatively inefficient compared to the very efficient large cap markets.
BI: How do active managers fight back?
Gilbert: Asset management CEOs globally are looking at their business models. They’re looking at costs, they’re looking at making their businesses more efficient, because they’re seeing revenues under pressure all over the world.
BI: Is the problem that there are just too many asset managers?
Gilbert: I think there are probably too many asset management companies in the world, and I think the place to be is either big or small. The area where it is probably more difficult to be is in the middle ground, where you’ve got that cost of regulation, you’ve got the cost of buying your own research, you’ve got all the costs of running an asset management company without the benefits of a big income producing asset.
BI: How does technology fit in to that, especially in terms of using technology to help pick stocks?
Gilbert: I think there is a place for using technology and big data in stock picking. I don’t think it should replace what you actually do in stock picking. I think you should still do your fundamental analysis, but you should use big data to make you a better stock picker
BI: Hedge funds have probably be faring the worst of all asset managers. Are there too many hedge funds, too?
Gilbert: I think there are probably too many hedge fund managers in the world, as well as active fund managers. The hedge fund industry is very efficient. We see a lot of hedge funds open and a lot close. It’s very binary. You either succeed or fail in the hedge fund world. If you succeed, the amount the managers make it beyond most people’s wildest dreams of wealth.
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