Holly Black: Hello, and welcome to Morningstar. I'm Holly Black. With me is Jon Miller. He is Head of Manager Research. Hello
Jonathan Miller: Hi, Holly.
Black: Merry Christmas, Happy New Year, all of that.
Miller: Thank you very, and to you.
Black: So, it's that time of year when I think a lot of investors take stock. And we should take a look back at the lessons we've learned in 2019. Because it's been quite a full-on year. And I think probably the first lesson, the biggest thing that's been on everyone's lips is liquidity, which probably 12 months ago, no one was thinking about. What should we take from this year?
Miller: Well, we had a high-profile case with Neil Woodford, investing, notably in smaller companies, especially then into unquoted, and that moved the dial with the outflows and investors got gated. It's well documented. Now, a few lessons from. Unquoted are best held in closed-ended funds, so investment trusts where the structure is better managed for that sort of thing. You're going to have to manage daily flows. A closer look at funds as they change their market cap profile and their size, can the manager still deliver? And for us, the analysis that we undertake, liquidity has always been part of what we look at. The tools that we've had to hand have increased over the last 18 months or so to push the conversation further with managers.
It's also about can the manager grow the fund, and as inflows come and still manage it in the same way they did historically. And also, the ownership of the individual stocks. If they hold a high percentage of the free flow, if you're a seller, and the market knows about it, you get forced – you get fire sale prices. There's quite a few moving parts. Overall, there's a big case here with Neil Woodford, but we don't think there's a systemic risk across U.K. funds that there's loads of unquoted or issues with liquidity. But it's something we still have to watch and do watch.
Black: Okay. And that brings us on to lesson number two, which I think this year has shown us that we can't predict what's going to happen on the macro side of things. Trade wars, is there going to be a Brexit, is there not, is there going to be a general election, who's the Prime Minister? It just shows you you need to invest for the long term and not try and guess the politics.
Miller: It's crazy because if we were sitting here a year ago filming this, we'd have said exactly those three or four things. And the market was in pretty much a big meltdown in the Q4, quarter 4 last year. So, we'd have been sitting here with all the worries, and now we're sitting here with the same things on the agenda for, you know, some things might be kicked down the road even further with Brexit, who knows. But the market is up quite handsomely this year. And we wouldn't have thought it with those headaches in Q4 in December and the markets in freefall. And I think people sometimes sit here and think, we need the markets to go down before I can invest. Well, if you sat there in Q4 last year when we were a bit panicked, you'd have sold after the FTSE All-Share was down nearly 10% last year, and it's probably made up this year. US equities, kind of tech firms and high-growth stocks sold off more than 20% last quarter. They've made it all back by the first quarter. And part of this really is to say that it's long-term investing. There's no point second guessing when there's going to be a trough because quite often, it doesn't bear as you might think. And it's about staying fully invested for the long term.
Black: Okay. So, I think our final lesson is, we have to start taking sustainable investing seriously, and that's whether you want to call it ESG, green, ethical, impact, whatever word you've got for it, it's front and center.
Miller: Yeah. And to be clear, I don't think this is about someone saying, I'm green, I'm ethical, I'm this, I'm that, I'm sitting on a certain side of the fence. It's more about how regulation is driving advisors or investors to understand these things, and companies are being forced to make change as well. So, where we think about change and change for the better, these sorts of companies have probably got an advantage for the ones that don't adapt. And I think that's key around all this. As I said, I think there's a – the way the dynamics are changing is the ones – the companies that are adapting that are going to be there and make a difference in the future, whether it's around governance or sustainability or workers' rights. So, that's really come to the fore, and I think it's really going to be – the next year that we hear a lot more about it, but I think education is key, because there can be confusion around what's going on in this space.
Black: Thank you very much for your time.
Miller: Happy New Year.
Black: And Happy New Year to you, too.
