In the first part of our interview with new MoneyWeek writer Charlie Morris,we found out about his time growing up in Hong Kong, his army training, and the time the Prince of Wales wanted to get in his bath.
Today, Charlie talks about his career in the City, and how the digital revolution and blockchain technology in particular will transform the financial services industry.
Q: After your time in the army, you joined the City James Capel. How did you find it?
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Charlie: James Capel was an old-school stockbroker. In those days, it was owned by HSBC, but operated with a sense of independence.
Q: How much money did they give you to manage?
Charlie: Nothing at the beginning. You shadow other people, and you help out. There are dogsbody jobs to do, and that's how you learn. I was assistant to an assistant for six months, and then I got a role as a performance analyst.
It was a rather tedious job. We had a large number of clients. I was supposed to check that the portfolios were as they were supposed to be. There was a very clever French intern, and he introduced me to Visual Basic programming. We were able to download all data into Microsoft Excel, run a macro in Visual Basic. It did my job in a heartbeat.
Within a few weeks, we had all these statistics which were quite unpopular in some circles. But they were very powerful. The work that I began would transform the firm over the next ten years.
Q: What did you do then?
Charlie: I moved on from there to being in charge of our web site, as I was quite computer literate. In 1999, we were the first firm in London to get our portfolios online, which was a great achievement. We won an award.
In the past, it had been quarterly valuations in the post, you had to call and ask for a valuation to be sent by fax. So it was a great leap forward.
Then I became an assistant to a fund manager with a £200m book, having passed my regulatory exams and qualified as a fellow of the Securities Institute (CISI).
Q: When did you actively become a fund manager?
Charlie: Being an assistant is being a manager. It's not in your name, but you are trading securities.
Q: Did you have a good track record from the start?
Charlie: No, there was no track record to speak of in the beginning, because there was nothing to measure. We were following the firm's strategy. Then I was invited to become part of that strategy in 2002. So rather than implementing it, I was driving it. That was my big break.
In 2002 I founded the absolute return service, along with some colleagues. I became team head in 2004. It was a diversified wealth portfolio. The idea was that we could have less invested in equities, but ensure the areas selected would make a difference.
Equities were unpopular at the time. The concept was, "Let's get out of equities and see what else there is". There were bonds, corporate bonds, property, commodities, emerging markets It was the right call at the time.
We had positions in Brazil, India, oil and gold. They got everyone excited. Those positions didn't have to be big. They did so well that it just dragged everything up. You could have lots of bonds, and a modest amount of money committed to interesting themes. That's why it grew so successfully: because we were on the right themes -- a long time before other people had picked them up. We had emerging market debt in 2004. These sorts of ideas worked incredibly well back then.
Q: How do you explain that performance?
Charlie: The mandate was low to medium risk, so we were never allowed to have vast amounts of risk on the table at any one time. But I had a strong view that what little risk you were allowed to take must be right. So I was always looking for the interesting story hence the gold, Brazil, India and never stopped doing that.
Once the 2008 financial crisis happened, diversification didn't really help that much, because the only asset class that held up was government bonds, particularly US Treasuries. The pound went down, property went down, corporate bonds went down, the stock market went down, commodities went down.
The result we had in 2008 wasn't dreadful. We were down 15%, which was not a shock-horror result. Some didn't think we had a good crisis, even though the other funds were down 30% or 40%.
In 2009, everything turned around. That was the bad year for the fund. It didn't rally enough in the recovery, because it was overly defensive. The assets that performed in 2009 were the banks and emerging markets, which had collapsed. Things that had gone down by 90% in 2008 worked well in 2009. Things that hadn't been trashed in the credit crisis didn't recover, because there was no recovery to be had. Not having enough risk can be as dangerous as having too much risk.
Q: When did you leave HSBC?
Charlie: I left in April 2015. I spoke to Merryn [Somerset Webb] a few days after leaving HSBC, and she asked me about whether I wanted to join the team. I said "I'm walking across Spain, can I think about it?'
I walked across Spain. I did the Camino de Santiago, walking from Saint Jean Pied de Port in France, across the Pyrenees, and arriving in Santiago de Compostela.
Q: Are you Catholic?
Charlie: Yes not a particularly good one, but I am. Most people on the walk probably weren't.
I was alone but not alone, because you meet a lot of people along the way. What's beautiful about this particular route is the history, and the fact that it's got bars, restaurants, hotels, hostels all the way along. So it's very easy to do from a logistics point of view. Some people get their bags carried in a van. Other people have rucksacks. I had a rucksack. It's huge fun.
Of my 23 days of walking (it's supposed to be done in 33), I was up for first light on 21 of the days. On the other two, I had severe hangovers and didn't quite make it. First light is beautiful.
Q: You thought about your next career move during those 23 days of walking?
Charlie: I thought about what I was good at and what I wanted to do. I recognised that I had skill and experience in private wealth, because I'd been doing it a long time. I wanted to continue that in some way.
Also, I had a deep knowledge of the gold market. I felt a need to stay involved in it.
Thirdly, I was pretty obsessed by the future for digital assets, ie blockchain. It's something I became very interested in. I thought, I must do something about this. I can't just watch things pass by.
In blockchain you've got a new layer being left behind every ten minutes. It's like a footprint of where this system has been. I want to dig into every single layer and know what happened and why: the geographic spread of bitcoin, how much of the ecosystem is Chinese, American and Brazilian, how much is speculation or genuine or technological and dark net meaning naughty things, drugs and so on. I want to put this together and come up with economic statistics. If there's more transparency, people will understand it.
Q: Meanwhile in the City, it seems exchange-traded funds (ETFs) are becoming more and more popular.
Charlie: In 2003-04, I remember saying, "This exchange-traded fund thing is really going to catch on".
An ETF means you take the open-ended fund and trade it over the stock exchange, rather than trading it off market. That's the innovation. It makes it so much easier to trade. The ETF tracks an index.
Because active managers tend to have done badly in aggregate they basically underperform by fees then the case for passive management just rises. Active management will only work if you run away from the index. Rather than saying "I want to have a bit more Vodafone and a bit more Rolls Royce", you've got to make bold decisions and say, "These 25 stocks are great, and I'm going to go with them". And you're either a lot ahead or a lot behind. Over the long term, the only way you're going to have a radically better result is by that approach. Tweaking the index is pointless for humans.
Q: Do you think the computer revolution has hurt fund managers?
Charlie: Absolutely. Computers are everything.
Tweaking portfolios can work well if it is implemented with damn good models. By using computers to do that for you, which is powerful, you'll make money. Humans are better at identifying great companies and holding them.
Q: So fund management as it's operated in the last 20 years is going out of style?
Charlie: Yes. Why would you give money to a firm that charges high fees when you can just track the index with Vanguard for very low fees?
Q: So City jobs are being lost to computers?
Charlie: Yes. When I started investing in the early 90s, you couldn't easily buy overseas exposure. You'd have to buy a unit trust 5% front end, 1.5% annual fee. You could buy an investment trust, but that was about it. It was very difficult.
Now, through the stockmarket, you can buy gold, you can short corn, and you don't need a broker. The public have never had such cheap access to the finance industry.
If you've got £100,000 to invest through a fund manager, you're paying up to £1,000 a year in fees, and for what? It's a lot cheaper to do it yourself, just taking advice from people that you trust and respect.
Q: What part of financial services will survive, do you think?
Charlie: Anything that requires ideas. A computer can work hard, but it can't think. Investing, corporate finance, deals and private equity and all the good stuff.
In the back office, things like the blockchain will improve efficiencies beyond recognition. Right now, when you do a transaction, all these old-school computers have to agree with one another before the trade is settled, and they sometimes don't. Every day, hundreds of trades don't settle correctly because someone's computer doesn't agree. Blockchain takes everything to a single reference point. I see it as progress. I see it as the future.
Q: Where does your heart lie on the issue of the European Union?
Charlie: The EU is Churchill's idea. He's the grandfather of the whole project. Unfortunately, he was voted out of office in 1945, for the right reasons at the time: the country was fed up with war. But we had lightweights at the negotiating table, and not Churchill, which was the problem.
The EU has overstepped its mandate. They've got this single currency that's not working. The price of the euro in Germany and Greece is the same, but it shouldn't be, and it just doesn't work. There's youth unemployment. The EU encourages big state. As a negotiating body, it's not nearly as good as it ought to be, and that's because it spends too much time on things that don't matter and not enough on things that do matter.
Take financial services. Britain has been blocked out in so many areas. You can't launch a fund and sell it in all those countries without quite a lot of administration. You can't just charge into France and sell financial products to the French. It's probably easier for them to come here than for us to go there.
The EU is about the free movement of goods and people, not services, and Britain is a service country. So we don't benefit so well there. A lot of the EU deregulation served others more than it served us.
Q: But why should Britain leave the EU?
Charlie: Because the EU is not fit for purpose. It's a bureaucratic, left-wing, big government monster.
Q: Do you travel around Europe often?
Charlie: Yes, I go to Deauville, in Normandy. My wife's family have an apartment there we use sometimes. I also go to the Alps, to Megeve. I love the north of Spain, and Italy. I was in Munich the other day, and in Vienna recently.
I love going to Europe. Before I was 30, I thought the world started once you left Europe. I was brought up in Hong Kong, and I thought America, China and Southeast Asia were interesting. I found Europe boring. Now it's the other way around. I think the world stops when you leave Europe! I've sailed from the top of Norway down. I pretty much sailed the whole coastline of Europe.
I love everything about Europe.
Q: How do you situate yourself on the political spectrum?
Charlie: Tory, obviously. Centre-right.
Q: Do you like David Cameron and George Osborne?
Charlie: I think they've done a better job than anyone ever thought they would. The second election was incredible against all the odds, to get a majority.
Q: Where do you see investment opportunity nowadays?
Charlie: The world is ready for equities again. They're the only asset class that can protect and grow your wealth in the future. The others aren't going to do it. Their price is completely wrong.
Q: You're not worried about a great recession or depression?
Charlie: I am scared of that. There could be a cyclical bear market in equities in the short term in the next year or two. There's every chance of something going wrong. We've already seen emerging markets in a terrible bear market. So are natural resources.
But there are areas that are really working. For example, Silicon Valley is one big dollar factory. The prices might be a bit punchy, but it's working, and the market doesn't care about prices until it stops working. That's just going to carry on.
You still need to have an answer to the question, "What do I do with my money?"
Right now, as a British person, the best thing you could do is to try and get out of the pound, because we've got a big current account deficit. The country is doing pretty well in most areas, and that's a good thing. But the pound is pricey against the dollar. In short, the pound is on a pedestal right now. And yet the current account deficit is the largest it's been in history. The reason for that is the overseas income on foreign-owned British assets: The income is down, because of the euro crisis, and we've got a trade deficit with Europe.
It's quite important to protect your real wealth by making sure that you earn some dollars.
Q: So you think there will be a correction to the pound?
Charlie: Yes. I think that's one of the most important near-term themes.
Q: Beyond technology, what other areas of equity growth do you see?
Charlie: What we're looking for next is the low in emerging markets and commodities. That's the most important investment decision we're going to make in the next few years. That's the big opportunity.
Q: What do you do when you're not busy thinking about money and investment?
Charlie: I sail. It's probably my favourite thing. I had a boat for the last seven years in Portsmouth harbour. Very, very sadly, I sold her last year, thinking I would never have time to go sailing. Then I left HSBC, and now is the year I wish I had it!
I will be back in the boat market soon.
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