David Coombs, who is head of multi-asset at Rathbones, sits down with ii's Sam Benstead to discuss to some of the biggest themes in equity investing today: weight-loss drugs and artificial intelligence (AI).
Coombs explains why he is very positive on AI developments and which of the Magnificent Seven shares he owns, but reveals that he believes that weight-loss drugs will have a limited effect on fast-food companies - and so sees the recent sell-off as a buying opportunity.
He also speaks about the investment lessons from 40 years in the industry.
Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is David Coombs, head of multi-asset investing at Rathbone Funds. David, thank you very much for coming into the studio.
David Coombs, head of multi-asset investing at Rathbone Funds: Thank you for having me.
Sam Benstead: You've been in the industry for more than 40 years now.
David Coombs: Thank you, yes.
Sam Benstead: You're still here?
David Coombs: Yeah.
Sam Benstead: You must be doing something right.
David Coombs: Hopefully.
Sam Benstead: What lessons have you picked up along the way about investing?
David Coombs: Oh, crikey. How long we got for this video? I'll cover a couple of points. The first is that you need to rely on yourself and back yourself. I think a lot of the time I've been distracted by people who I think are smarter, and they probably are smarter. But there's a lot of smart people. There's always a lot of noise that are competing views and how do you make sense of all of that?
And so what I've done, and this is going to sound slightly odd, but I read a lot less. I stopped reading the Financial Times. I stopped reading a lot of analysis because I just got confused and started just looking at what's going on around me more directly, actually. The white pages rather than the pink pages and what's going on in the real world and how the world's changing with social media risk and how trading and the rise of algorithmic trade traders.
And the thing you learn is: you never learn it. The market's always better than you are, and you've got to learn that humility and drop the arrogance. Yes, you've got to be confident, and you've got to back yourself. But ultimately, you know, forget the hubris and then back yourself and be patient.
So, let me give you a great example [of something] I learned to my cost. This is going way back now to 1999 or even before that, 1997, 1998, 1999, when the first tech boom was happening and valuations were literally going to Mars and back and we weren't even looking at price earnings multiples. We're looking at non-profitable businesses on price to sales sky high. And everybody was ringing up saying: ‘Why aren't you buying this, buying that?’. And I was a value investor back in those days, I’m more growthy these days, but then I was more value-driven.
[It was] early in my career and I was looking at these valuations and I couldn't understand where we were going. It felt ridiculous. Some of these companies didn't even seem real. And then in 1999, having stayed away from a lot of them and underperforming, I capitulated and started to buy some. I was still underweight, so it wasn't a complete disaster, but I got sucked in. And that was a really valuable lesson, in that if you're going to get things wrong, do it because you've done it, because you believe in it. Don't just follow the herd because most often the herd is wrong.
And even this year, if you look at what the herding is, we've talked about the Magnificent Seven in the past. This AI thing we had at the beginning of the year and in the second half of the year, we've had the weight-reduction drugs narrative. Those two narratives have really driven huge, short-term share price movements. And what I've learned and what I've done this year is just stay calm and stay out of that and look through it and take advantage of the volatility that these narratives create. And, ultimately, as I say, don't get trapped in thinking everybody else is smarter than you, even if they are.
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Sam Benstead: So, the weight-loss drugs and artificial intelligence are big themes at the moment, and you're trying to ignore the noise and follow what you believe. So, what do you believe with regard to these topics? What are you investing in?
David Coombs: So, AI I think is going to be a seismic change, right? To me, I would equate it to the internet being invented, right. Now AI's been around a while. I mean, a lot of companies we talked [about] have been using AI to improve productivity for the last five years or so. Even companies like Rentokil Initial (LSE:RTO), for example, use AI. So, this is not new. It's like it just suddenly got invented because Google Plus, or whatever it's called, came out - I've forgotten the name of it now. So, AI's been around a while, so it's not new, number one.
Number two is it's going to have a huge impact on productivity, particularly in white-collar [jobs]. So, if you think back to the 1970s,1980s, 1990s, well, you probably can't, but I can. When a lot of blue-collar industrial jobs were lost to robotics and, in manufacturing, a lot of jobs were lost to technology. I think we're going into the white-collar world, the professional services world, where jobs will be lost to technology. So, it's almost like robotics for accountants and fund managers, dare I say it, but obviously hopefully not.
So, I think it's really important but the way to invest in it is to look at the companies that will be enabled. You think about the internet, who made all the money? It wasn't those that developed the internet or run the cables, the Ciscos of this world. It was Google [Alphabet Inc Class A (NASDAQ:GOOGL)] and Amazon.com Inc (NASDAQ:AMZN), for example. They didn't design the internet, but they were enabled by the internet. They were the shops on the high street. And I think when you think about AI, you want to look at the companies enabled by it. And Adobe Inc (NASDAQ:ADBE) is one good example we hold that isn’t part of that Magnificent Seven. But subsequently the markets got quite excited about [that] because it has its own AI function called Firefly.
I was on the right side of the AI trade, so I loved it, because we had five of the seven, we had NVIDIA Corp (NASDAQ:NVDA), for example, so it was brilliant. So, great, ride it, take the profits.
When it comes to weight loss, we don't own Novo Nordisk A/S ADR (NYSE:NVO) and we don't own Eli Lilly and Co (NYSE:LLY), which are the two biggest beneficiaries of their versions of those drugs. But again, the hyperbole around that was that everyone was going be on it and McDonald's would never sell a burger ever again. So, you saw share prices in Coca-Cola Co (NYSE:KO), McDonald's Corp (NYSE:MCD), and a lot of the food manufacturers, producers, and restaurant groups, all losing money because all of a sudden no one was ever going to eat brown food again, right?
And then all the medical technology companies’ share prices got hit really hard. The diabetes companies that we own like DexCom Inc (NASDAQ:DXCM) and Abbott Laboratories (NYSE:ABT), got hit really hard as well and it was really painful. I mean, you saw two major sectors of your portfolio share prices legging down because of this hype that everyone was going to be on these drugs and we were never going to eat ever again or go to the pub, right?
Now, you sit back and you say, hang on a second, really? So, we did a lot of analysis of all the test results and who was on the test and whether they changed their lifestyles. Did they come off it after so many months? What were the side effects? We did a lot of work around that to analyse it. And then Walmart said ‘Oh, we've lost a lot of sales because people are on these weight-loss drugs.’
Now, we call that out because it felt like CEO ‘excuse land’ and, turns out it was, because McDonald's and Coke have seen earnings in the last few weeks come out and they're better than they were before. So, there is a lot of hype, there's a lot of people extrapolating this data to the Earth and back again. And the point is, take a step back: is it a thing? Yes, it certainly is. Should Novo Nordisk be valued bigger than the whole GDP of Denmark? I suspect probably not, that's slightly overdone.
Are we going get rid of diabetes in the next 12 months? I don't think so. So, we've been adding to Dexcom and Abbott Labs on that weakness and that's the patient bit. We always talk about ‘we'll wait to add to our positions on a pullback’, and when the pullback happens there's a huge amount of negative noise ‘ooh should we do it because no one's ever going to get diabetes ever again'’. And I think being a professional with experience, you go ‘yeah, you're absolutely going to add to these positions because this is clearly overdone. There is some impact, but let's look at the materiality of it.’
So that’s a long answer to your question, sorry, but experience allows you to be more patient and to be a bit calmer and say, yes, I've seen a lot of these stories over the years and they're almost always massively overdone and often the winners aren't the ones that the market chases first.
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Sam Benstead: Investing during a period of high inflation, rising interest rates, and a potentially very weak economy next year in the UK - how do you go about that?
David Coombs: Well, it's really interesting because I sit around with colleagues and some say, ‘well, when we get back to normal’, and I'm like ‘well, this is normal to me.’ We've been here before, through the 1980s and 1990s. I've worked through higher inflationary environments. To me, this is not that unusual actually. I think people just get anchored to zero interest rates and zero inflation. Well, welcome back to the real world, guys.
I think what's interesting, and it's probably counter-intuitive, is my cash levels in my funds are the lowest [they have] been for 10 years, even though I'm getting 5% on cash. Whereas two or three years ago, I had 15% to 20% in cash and [I was] getting zero on it. And the reason for that is I'm finding lots of things to buy that I wouldn't look at two or three years ago because you weren't getting paid enough for the risk.
My job is to look at any investment in multi-asset and ask: am I being paid for the risk that I'm taking? And when you could earn 1.5% from corporate bonds i.e. lending to companies, that wasn't enough for me to invest. Now, I can buy corporate bonds because they've given me 6%, 7%, 8%. I've been buying bonds and not highly indebted companies. NatWest Group (LSE:NWG), Coventry Building Society. Not wildly exciting names, but yielding 6.5%, 7%, 7.5%, then that's quite attractive. That wasn't open to me five years ago.
So, I'm buying corporate bonds. I'm buying government bonds yielding over 5%. I'm buying infrastructure, which I've never bought before, ever, because now they're yielding 10%, 11% some of those companies because people have sold them off because they've fallen 30%, 40% this year. They're quite distressed. Big discounts to their net asset value and so I'm buying them because they're distressed assets. So, what you're seeing is as inflation has risen and interest rates have risen, some asset classes that were pretty benign for the last 15 years have suddenly had a leg down.
I guess the obvious ones are commercial property and even residential property markets have been off a little bit. I'm not ready to go into commercial property yet because I think there are other structural problems there, but certainly we're buying a lot of areas where they've fallen a long way because of these interest rate rises and because we think we're near peak interest rates, these very cheap areas look quite attractive to us now. So, we are not short of things to buy, whereas other people are selling because they're worried. I'm buying because I think we're near the worst of that.
Sam Benstead: We're heading into 2024. There's a lot to digest in markets at the moment, but you've got a very low cash level, so you’re obviously feeling quite bullish. What's your outlook for the next year or so?
David Coombs: So, the first thing to say is my cash weighting does not reflect my bullish or bearishness. I'm Welsh, so I'm almost always bearish, the cup's always half-empty. And again, being a multi-asset manager, you're always focused on the downside. I spend most of my time worrying about the downside rather than the upside. So, I wouldn't say the cash position reflects my bullishness. The cash position reflects the fact I think there are a lot of asset classes where you're being paid to take risk.
Now, when we get paid for that, is it in two months’ time, four months’ time or 12 months’ time? I don't know the answer to that. It goes back to my point about being patient, but I'm really confident that I will be well rewarded for some of those investments that I'm making now. And so, I'm bullish about the potential rewards. I can't say is that three months, six months or nine months. I think it's probably six to 12 months. I think the next six months, you know, is always very difficult to predict, the immediate future. Clearly, there's a lot of geopolitical risk around at the moment as well. So, yes, I think it reflects the fact that there's a lots of quality investments right now, not necessarily equity markets, but elsewhere, that is demanding attention to get into the portfolio.
So, I think reasons to be cheerful, I guess, are that we're near peak interest rates in the US. I'm almost certain we are in the UK, as certain as I can be. I think it would be absolutely ridiculous to raise rates in the UK from here, and therefore that kind of headwind that we've faced for the last 18 months, that's out of the way. It's one less thing to worry about.
I think the Chinese economy, which again has been a really big headwind, because it's been much slower to emerge from the Covid era. I think there are signs it's slowly and that maybe they've got the property market under control. We'll see. So, I think some of the headwinds are starting to dissipate. Clearly, you know, we've still got a war in Eastern Europe. We've got the situation in the Middle East at the moment. And we've got elections in the US and UK next year. So, while I think, generally speaking, the macroeconomic picture looks more positive, there are still things for us to consider, not least, you know, Donald Trump in the White House.
Sam Benstead: And what would be your number one fear for 2024?
David Coombs: I think an escalation in the Middle East would be my biggest fear from here. What we've seen already is the oil price and energy prices react, although not as much as you might think. But were other countries to get drawn in, we could see a big spike in energy prices if we were then to see the major powers come in. Then clearly, we've even bigger geopolitical risk. The probability of that is, I think, relatively low at this stage, hence we're not reacting. But, you can't be complacent.
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Sam Benstead: And finally, the question we ask all our guests, do you personally invest in your funds?
David Coombs: I only invest in my funds. I have no investments outside my funds. So, my SIPP is in my funds, my ISA's in my funds, my wife's SIPP is in the funds. She's my biggest critic. So, yes, I don't invest in anything other than my funds.
Sam Benstead: David, it's been great talking to you. Thanks for coming in.
David Coombs: Thanks for having me.
Sam Benstead: And that's all we've got time for. You can check out more Insider Interviews on our YouTube channel where you can like, comment, and subscribe. See you next time.
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