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Invasion of the Body Snatchers

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Invasion of the Body Snatchers(1)

Poster for “Invasion of the Body Snatchers” (1956)

In Santa Mira, a small town in California, Dr Miles Bennell is amazed that several of his patients confide in him that their partner’s attitude has changed radically, transformed into that of a completely different being from what it was. After a series of investigations, he and his partner Becky discover that an alien species is taking over the bodies of their fellow citizens. While they sleep, a pod hidden in their rooms recreates their bodies and replaces them. This is the plot of Don Siegel’s 1956 film ‘Invasion of the Body Snatchers’.

In Santa Mira, a small town in California, Dr Miles Bennell is amazed that several of his patients confide in him that their partner’s attitude has changed radically, transformed into that of a completely different being from what it was. After a series of investigations, he and his partner Becky discover that an alien species is taking over the bodies of their fellow citizens. While they sleep, a pod hidden in their rooms recreates their bodies and replaces them. This is the plot of Don Siegel’s 1956 film ‘Invasion of the Body Snatchers’.

How do we understand Dr Bennell…! For us old fashioned value investors, the expansion of crypto is very reminiscent of the invasion of the body snatchers.

Scene from “Invasion of the Body Snatchers” (1956)

In the last few weeks a number of people I have met have turned out to be unexpected followers of crypto. From senior professionals working in private equity to fundamental managers. I even did an informal interview with a former analyst from a well-known investment house who followed the automotive sector. After half an hour talking about fundamentals, we had a drink and the young analyst, uninhibited by alcohol, started talking passionately about crypto (and Gamestop…). I went down to Italy and went to a dinner of my partner’s friends, all intelligent and super nice people with very different professions. Here, too, by the dessert, they emerge as Shiba Inu enthusiasts or miners in Siberia through pyramid structures based in Lithuania. What surprises me is that, in general, there is at the base of this army of proselytes a low propensity to go into the foundations on which this phenomenon is based. In the sense that no one can explain where their value comes from. Another surprising thing is how this fever is transversal, taking in men and women, young and old, and people from the most diverse educational and professional backgrounds. Greed is undoubtedly inclusive.

The temptation is strong to denounce it as mass madness, but then you analyse further and unexpected supporters emerge who make you doubt that the madman is you or, as in Dr Bennel’s case, that these people are possessed by aliens. Among the many prestigious supporters are Elon Musk (Tesla), Jack Dorsey (Twitter), Tim Cook (Apple). Geniuses and/or good managers. However, it must be acknowledged that, on the other hand, we have people we hold in high esteem who, like us, consider them worthless, such as Bill Gates (Microsoft), Munger and Buffett (Berkshire Hathaway), Jamie Dimon (JP Morgan) and practically all the governors of central banks and supranational institutions (apart from a few countries in difficulty that see crypto as a way out).

Personally, we have the idea that people like Elon Musk or Jack Dorsey, successful dreamers and geniuses who tend to believe anything is possible, might utopianly see crypto as a way to break free from the traditional economic system and create an independent alternative. It is a pity that currencies are supported by the ability of states to manage their enormous resources (states also go to war…) in the collective interest, while crypto is supported by the individualistic desire to make money. The latter, if not the noblest fuel, is certainly the most powerful in the universe, but history tells us that it is not infinite. In the end, someone will be left holding the bag. With this thought I leave you to go to bed, not without first checking that there are no pods under the bed….

Invasion of the Body Snatchers (2)

Ascent and descent of one of the internet messengers

Some people compare crypto to a positive revolution similar to the birth of the internet. In a way we think this is correct. The internet bubble of the 1990s created awareness among the population of the existence of a medium that could interconnect the world by making information (and misinformation) more accessible, bringing down barriers (but creating new ones) and making distant or new contacts easier (but physical and pre-existing ones more difficult). Despite its side effects, the Internet represents a significant step towards a better world. The bubble made the Internet possible also thanks to the huge investments in research and infrastructure that it undoubtedly stimulated. The first players, let’s call them the messengers, however, sold a very successful future idea, but one that would later develop in very different ways. Almost all of them ended up in ashes. Today, cryptos are the messengers of the era of digitisation of private rights. Whether these are property, commercial or civil rights. Among the former are currencies, real estate, shares, credit, etc. The underlying technology, the real treasure, is the blockchain. Current crypto, designed as they are now, will probably turn to ashes. New ones will be born with a real underlying. They could represent the currency backed by a state, a basket of assets, funds, rights etc. In addition, through the blockchain, methods of payment and information management will be revolutionised. Inefficient and very expensive bureaucracies ranging from credit cards, market routers, custodians, depositaries, paying agents, transfer agents, land registers, notaries and many others, risk being undermined or revolutionised. Financial products as well as real estate will be distributed and traded on more transparent and democratic open platforms.  Banks will lose some of their prerogatives, but they will remain vital players, lending money and giving financial advice, as when they were born 500 years ago. Just as they sell insurance today, they will sell professional services. Because professionals will start selling financial advice. In fact, independent financial advice will blossom with more advisors starting to question whether it might be worthwhile to go out on their own and associate as many professionals already do. Much of the new payment fintech with folkloric valuations will be wiped out. A few will survive and chart their way probably through blockchain, becoming at least for a time, pachydermic. However, if you don’t have the ability to invest for the long term in all players (with a good hope then of catching the winner too, Baillie Gifford model) it is advisable not to invest in anyone. And maybe in 10 years’ time we will ask the question whether to launch on the ashes left by this revolution the Blockchain Victims Niche, as we launched in February 2019 the Internet Victims Niche within the multi-Niche balanced fund, Pharus Asian Niches. However, we have doubts that the victims here will somehow be able to rise again.

November Rain (Gam N’ Roses)

CD cover of “November Rain” by Guns N’ Roses

“It’s hard to keep a candle (lit) in the cold November rain” is a line from the famous Guns N’ Roses song, and those who hold shares in the management company GAM know this well. In six months, the share price has halved, and since the beginning of November it has been falling every day without raising its head. By now the net cash on the balance sheet is not far off the market capitalisation and almost no value is placed on an organisation with a presence in 14 countries, with a major infrastructure and which manages over CHF 30 billion directly and almost CHF 70 billion indirectly through its Private Labelling division. The company has repeatedly reassured us about the risks of litigation, which can do a lot of harm given its track record. Gam’s products are of a high quality, although with market rates rising a prevalence of fixed income products does not make this phase any easier. In addition, one of the company’s large, illustrious and well-managed funds, GAM Local Emerging Bond, is going through a difficult phase (as it is bound to do from time to time) and is losing a lot of money. The CEO, Peter Sanderson, ex-BlackRock, has spent two years transforming the firm into one of the world’s most sustainable asset managers, but he probably doesn’t have the experience to handle a complicated situation and seems internally disliked. Silchester, a prominent and capable London-based asset manager who owns 15 per cent of Gam, is silent. So is Gabetti, a famous activist value investor with a 3% stake in the company.

Like all equity investments, this one is not without risk. An asset manager unable to restructure and relaunch itself gradually sinks. And although there is plenty of net cash on hand, the cost structure can become unbearable in the long run if assets continue to decline. However, the risk/reward profile is even more attractive here than it was when we last discussed GAM.

The company either needs a vigorous turnaround (with a new CEO) to significantly reduce costs without touching products, or a buyer. Some well-known industry players could, with a little vision and courage, find an opportunity here, through a bargain purchase, to justify the generous valuations at which they are trading. As the song November Rain ends, ‘everybody needs somebody’…

Chile, here comes (back) the sun ( link )  

Gabriel Boric and Antonio Kast

The Economist began this week with an alarming article on the Chilean elections. The idea is that in the lead to get to the ballot there is Antonio Kast, far-right extremist, and Gabriel Boric, far-left extremist. The election of either would be a serious mistake and would bring instability to the country. The prestigious newspaper goes on to say that it hopes that either the right or the moderate left will be chosen. Here we need to take a step back. Since 2019, the country is being lashed by violent demonstrations demanding greater redistribution of wealth. This demand is more than just right, although it is demanded in the wrong way. From there, a Constituent Assembly is elected to create a new Constitution to replace the current one, which dates back to Pinochet. Less than 50% of eligible Chileans vote, and a large proportion of those who do vote are the promoters of social change, many of whom had never voted. So a left-wing Constituent Assembly is elected, somewhere between the enlightened and the revolutionary.  After the election of this Constituent Assembly, the stock, bond and currency markets collapse. At this point the Chilean middle class becomes alarmed. The thought of ending up like Argentina or Bolivia after decades of prosperity terrifies them. A person was chosen who could firmly oppose the drift to the left, an exponent of the less moderate right. As a candidate for the left, on the other hand, it is not a communist extremist who is chosen, but a young and democratic interpreter of the recent demands for redistribution of wealth.

What do we deduce from the above? 1) The country does not have a revolutionary majority; 2) The just demands of the left in terms of greater redistribution of wealth will be at least partially satisfied, whoever wins; 3) If the far right wins, it will be a moderate far right, combining immigration control and street safety with structural reforms to improve the welfare of the lower classes; 4) If the far left wins, it will be a moderate far left again, remaining democratic and respecting market laws. Here too we expect attention to emigration and control of the most violent revolutionary groups.

From the above it is likely in our view that the stock, bond and currency markets will recover in the coming months. Chile is uniquely positioned in terms of its budgetary fundamentals and mineral resources (first for lithium reserves and second for copper). In addition, it is an advanced country (the only non-emerging country in South America), at the forefront in fields such as infrastructure, environmental management and renewables. In the NEF SDG fund, we have a significant position, 1.4% of the portfolio, in Enel Chile, which is included in the Renewable Energy portfolio or trendSDG. The company is one of the world’s most advanced electric utilities in terms of its use of renewables (70% of generation) and green growth projects (it will soon become a hub for exporting green hydrogen around the world), with a solid majority shareholder (ENEL) that we believe is interested in acquiring a majority stake over the long term. On fundamentals, we believe Enel Chile is undervalued.

In conclusion, we are cautiously positive on the country and see the current weakness, or that which may emerge after the elections, as an opportunity to increase exposure slightly.

And in Chile, summer is coming…

Little darling, it’s been a long cold lonely winter

Little darling, it seems like years since it’s been here

Here comes the sun do, do, do

Here comes the sun

And I say it’s all right