Holly Cook: We're here at the Morningstar Investment Conference, and joining me is Old Mutual's Stewart Cowley. Stewart, thanks very much for joining me.
Stewart Cowley: Thank you.
Cook: In your presentation just now, you drew some interesting contrasts between your own life and the history of the U.K. economy. What are the similarities that you identified there?
Cowley: Well, I came out of a time when the State paid for everything, from when you were born, into your education, you were sent to university for free when students are looking at paying something like £9,000 a year now to go to university, and I was paid for all along the way. Which created a kind of state dependency culture, which we are all sort of unaware of in some respects, but meant that we've been borrowing money from other people around the world. It's been happening in the United States, it's been happening in Europe as well. We've become very dependent upon this, and we’ve got to break that dependency culture going forward.
Cook: You mentioned the U.S. there. I want to focus on that a little more. You were very negative on Barack Obama's policy there. What is your view on the U.S. deficit in the future?
Cowley: Yes. I mean, I think it’s…I’ve become disappointed. He did some great things in terms of healthcare, but that's an unfunded liability, which he’s created as well in the future. We sort of lost patience in December last year, when he announced another $580 billion worth of tax giveaways, and you think to yourself: this is an economy which with the best will in the world is going to be borrowing over $1 trillion a year systematically going forward, nearly double-digit-GDP numbers in terms of the deficit in the future, and it simply can't go on, and I can't be an apologist for what's going to happen. You can see that over the next couple of years, the funding pressure really builds and you've got to think that, in that sense, the U.S. Treasury market as well as the U.S. dollar is going to be an at risk country.
Cook: So having touched briefly on the U.K. and the U.S., how about the developing world? You talked about a strive to be “healthy and wealthy”. What impact is that going to have on the global economy?
Cowley: I think it's going to have profound effects. We started off a kind of war for global resources, whether it be energy and food and the basic stuff of life. Arguably, for far too long, we've had it cheap. And we're going to be diverting a lot of our disposable income from frivolous consumerism and into the basic stuff of life, it's going to cost more and more. I think that in that sense, the rise in inflation—and I'm not talking about hyperinflation, we’re talking about average inflation—going forward is going to be somewhat higher than we've experienced in the past.
Interestingly, today, during the course of the conference it's been announced that the Bank of England is expecting inflation in this country to rise to 5% in the future. If you're a government bondholder, getting paid 1%, 2%, really it doesn't make any sense. In that sense, that’s why we're pretty negative on government bonds, in particular, and wondering how are we going to protect clients' money in the future?
Cook: Well, I think that’s the key at the end of the day isn’t it? I mean, these are big concepts, big issues that we're talking about, but what does it actually mean for the end investor?
Cowley: Well, in terms of the funds that they want to buy, you’ve got to think about real and absolute returns. I am a bond manager who currently, strangely, doesn't like bonds, which is a difficult message to put out sometimes but it's true. For instance, in our fund, the Global Strategic Bond Fund at Old Mutual, what we're allowed to do is short the market. So that means that as yields rise, we can provide a positive contribution to the unit price if we can get that change right. It's been more difficult so far this year, but if you think about these big global trends, a rise in bond yields to compensate investors to protect them from inflation, then that should happen over time. So a fund like ours could be useful, equities could be pretty useful as well, some high-yielding bonds as well could be pretty useful in terms of their nominal yields compared to inflation. So it is a mixture of things, but that for us as bond managers, can we get that transition from the low yields to high yields to protect client's money.
Cook: One asset that you didn't mention there that I’ll have to ask you about is commodities, where does that fit in do you think?
Cowley: Well, I mean, it's clear to us that there's a kind of global war for commodities, which has started. You can express commodities in various ways, for instance, the Canadian dollar has a very strong relationship with the oil price. So we’ve got about 5% of the portfolio in Canadian dollars. The Australian dollar is used as a commodity related to currency because of the vast natural resources that are in Australia and the demand coming out of China, etc., etc., [you can] buy the Australian dollar. For instance, the South African rand, you can use as a kind of proxy for the gold price as well. So there are various things you can do in currencies, you can do it with companies as well, and you can try and benefit in a, not in a direct way of owning gold and things like that as that’s not our remit, but it's kind of in an indirect way through different asset classes.
Cook: So it sounds like both as investors and as human beings, we have got a quite a few challenges ahead of us. Thanks for joining me.
Cowley: Thank you.
