Stephen Baines, James Davidson and Jacob de Tusch-Lec manage the Artemis Monthly Distribution Fund
When did civilisation reach its zenith? For FTcolumnist Janan Ganesh, it occurred in the second quarter of 2017, when an Uber “would arrive in one minute and cost about as many pounds per mile”. Five years ago, a combination of abundant cheap labour and the willingness of loss-making tech companies to subsidise taxis and food delivery platforms allowed the middle-class inhabitants of major cities to live “frictionless” lives. It couldn’t last. As Janan explains, “it was built on abundant labour and easy funding rounds for unprofitable companies in a zero-interest rate world”.
The world has changed since then. Life is no longer quite so frictionless, no longer so cheap: Ubers are hard to come by; there are queues and cancellations at airports; lacking staff, hundreds of bars and restaurants across the UK have pulled down their shutters. Meanwhile, prices at the petrol pump have surged and there are dark rumours that gas shortages will mean rationing in Europe this winter.
Back to reality: the regime change in economies and markets
|'Just-in-time' supply chains||‘Just-in-case’ inventories|
|More inequality||Higher wages|
|Petrol at 114p per litre||Petrol at 190p per litre (up 66%) (*)|
|Quantitative easing; interest rates down||Quantitative tightening; interest rates up|
Some of that is a consequence of de-globalisation, war and pandemic-related damage to supplies. But it is also consequence of a long period of malinvestment – and of the profound changes now unfolding in financial markets.
A decade of QE resulted in a serious misallocation of capital
The policies central bankers used to reassure markets in the decade that followed the financial crisis – initially to prevent bond markets from seizing up, then to see off deflation and finally to calm markets rattled by the outbreak of the Covid pandemic – resulted in enormous malinvestment.
By reducing the time value of money to virtually zero, QE and near-zero interest rates helped to stretch investors’ time horizons almost to infinity. The beneficiaries included – among other speculative areas – food delivery platforms, cryptocurrencies, online sub-prime consumer finance companies and producers of lab-grown ‘meat’. In many cases, these companies’ shareholders or bondholders were funding eye-watering operating losses, with products and services – such as the cheap Uber rides Janan enjoyed in 2017 – being provided at below-cost. Yet despite their dependence on massive ongoing subsidies, the share prices of many of these loss-making companies kept rising.
For funds like ours that was, at times, painful. The main promise we make to our unit holders is to strive to provide them with a good level of monthly income. Almost by definition, we focus on companies that generate the chunky, reliable free cashflows needed to meet coupon payments on their bonds and to pay dividends to their shareholders. This means we prefer mature companies making profits today. Rather than companies that are burning cash in the hope of making profits tomorrow, the companies we own tend to be selling goods and supplying services in the ‘real world’ of today. Look at our portfolio and you’ll find bonds issued by a healthcare REIT (Medical Properties Trust), the shares of a brewer (Molson Coors), bonds issued by a company that rents mobile modular buildings (Modulaire Group) and the equities of a fertiliser business (Nutrien).