Dear Client
I am penning this message on one of the rare, recent pairs of up-days for global stockmarkets, as the ravages of Covid-19 give the impression of abating marginally. Indeed, I hope it arrives as our Prime Minister is back to full health too – our prayers go out to him, his team and all those working in the face of this storm. It is good too to send something which is not a banal letter saying investors have ‘lost 10% of their capital’ since their last letter/ valuation. As I write, this note attests instead that accounts have risen by over 10% since that most awful of low points though still only consolation from where things ‘were’. Indeed, if letters were obligated by the regulations, most advisers would have now sent out two or three ‘up 10%’ letters since the nadir.
I hope you and yours are keeping well – and sane in these testing times. Certainly ‘isolation’ is surreal and has made me realise that some professions are better prepared – like farming for example and they will be stronger accordingly. We count our blessings as we have a lovely home and grounds – not everyone is as fortunate.
Some of my comments are excerpts from recent eshots (please ask for these for more regular, free contact). Participating clients know they have had more updates as things developed.
Volatility is acute. I wonder how it will be when you receive this. We have seen some of the greatest weekly volatility, upwards and downwards, since WW2 and the biggest daily percentage gain for the US since 1933, only for the end of that same week to see new pessimism. Was that the point of maximum pessimism? Perhaps. No-one knows yet but if not, it is nearer than it was and indeed, the underlying markets may just be reflecting the fact that those forced to sell-out to meet margin calls on speculative investments or hedges may have ‘happened’ (and indeed some companies have gone under as a consequence – and ABN Amro Bank lost $200million on one such customer’s default alone). We know of several big and small institutional managers who panicked and sold rafts of equities at the markets’ worst points. We didn’t. We see Mr Trump tweeting about oil and the price of crude jumps by an ‘unprecedented’ (I am fed-up with that word) 50% and oil and support industries rally slightly as a consequence (if you call a 40% gain in one of the UK’s biggest companies ‘slight’). We hear from other managers who would buy at depressed levels but they don’t have funds from new investors and of course too many existing ones have instead asked them to sell stocks to send them cash. Then we hear from some who had cash reserves and have been nibbling-away at what they can and very cheaply.
We have passed the latest valuation point and reports will not make pleasant reading for anyone. For the disciplined who can look-past current traumas, it is time to think about new tax year ISA and Pension contributions and needless to say money goes far further. We have had several deposits from those with spare cash availing themselves of such low values and the tax boost from the earliest possible start but it is not easy.
There is a sense (and I ‘feel’ it) that we may have seen the worst though I cannot afford to be blindly optimistic, as human emotional panic can continue to drive irrational behaviour – such as those (including big fund managers who are simply humans) who crystallise real and big losses to grab cash. Remember you do not experience a loss unless you sell. You may well imagine that you will buy-back again cheaper but despite your perceived rational beliefs at the time, you won’t and you see each subsequent fall as justification and prediction of further weakness. Instead, it is likely to be far higher when you feel conditions are so much better. I have recounted before that the Chinese use different characters to write the word ‘crisis.’ One stands for danger, the other for opportunity. In a crisis, be aware of the danger but as hard as it is, recognise the opportunity and no, I do not say that glibly either as I know acutely how painful things are and in so many ways. That principle may resonate with you in your personal and work life too – however hard it might appear momentarily.
Whatever happens and when (and there will be more central government/bank involvements too), things will be different afterwards and we all have to pull together to make the best of things then. Our societies have endured far, far worse (and that is not being unsympathetic to anyone who has lost a dear one through this virus) and recovered and gone-on to do even better. That will be true again. I couldn’t help think of WW2; real isolation and physical carnage and what the Queen endured then, as she delivered such a poignant and appropriate message last Sunday, heard by millions across the world. We may well look back and recognise that the alleged ‘austerity’ years North Devon’s Leading Independent Wealth Managers (which actually reflected the biggest ever spending on welfare and public services by simply slowing-down the rate of our annual overspend and doubling our National Debt in that ten year period) may soon seem a golden era of opulence instead. Indeed, the other oft-quoted figures of ‘those in poverty’ in our society will soon shrink because the statistics are based on ‘average incomes’ and not ‘real’ poverty, so as average incomes plummet because of the Virus and those at the bottom are being better supported temporarily so incomes rise, then there will be fewer ‘under-average’. However, that will not make any of them, or us, feel any better-off whatsoever – so perhaps this will be a time to start looking at the numbers in absolute poverty going forwards – and remembering those across the world who still survive on less than $1.50 a day – and be appreciative for what we have and shall still have through the other side, including all our great public services. Indeed, the developing world will be hit savagely from the economic reverberations from all of this with escalated poverty, starvation and related diseases.
Remember too, we are there for our clients. We can’t change anything but we are trying our hardest to communicate as much as we can and with facts reassure if that is the right thing to do. Sadly, we are hearing more and more that many product providers and advisers have ‘disappeared’ – no contact whatsoever with the very clients and investors who have paid them well over the last many years and that is not good enough. If they are still engaged through the other side (and already some advisory firms are cutting back on staff and salaries, let alone growth and recruitment programmes), I hope their clients will remember that.
DIVIDEND AND INTEREST PAYMENTS – IMPORTANT
The unprecedented times have encouraged prudence with companies and funds and many have stopped or reviewed dividend payments to hold cash and in fact the market has almost rewarded companies doing that though recently, the opposite has been true as some confirm payments are safe. Whilst oil stocks, banks and miners count for a big chunk of the market’s income, if they cut payments the knock-on effect could be very damaging to investors needing the income. The worst prediction I have seen is for 50% of dividends to be cut, though so far, the two oil majors have not and plan to continue paying. Other high-payers should also be better insulated, from tobaccos to supermarkets, food producers, pharmaceuticals and most life insurance/pension companies too; the latter realise they are also investors needing the income as much as their own customers.
Companies still affording it must not just follow the herd as investors need income too – the same goes for rental payments to their landlords and interest payments on their debts. They should not all panic themselves into cutting payments altogether and we hope that afterwards there will be a catch-up opportunity as deferrals can be paid then. Some sectors are hit more too – for example property companies are suffering from rent payments being missed – Hammerson only received 37% of its due payments this quarter and Intu 25% – are these enough to pay their debt servicing? The bigger fear is what happens if their tenants do not survive and so with lots of empty properties, costing money to keep safe and with capital values shot too. Even a student accommodation company like Unite has severed payments as it is offering conditional refunds for students where they cannot be at university. Most thought that investment idea was rock solid. Hammerson notes it has £1.2billlion of cash and undrawn lending facilities as well as the £395million due from the sale of one of its assets and for which a deposit has been paid. Today in theory you can buy all its shares for only £500million – that is how ridiculous it is – and brokers Peel Hunt has revised its share price target to £2.70 – £2.20 higher than now. If you think the company is going bust it is a bad buy. If you think it is not, then its value in say two years could be cheap at four times higher and dividends on top. I suppose you could say that a small investment is low risk versus a good prospective opportunity – and there are loads of similar examples now.
Where do we stand? Yes, we have companies and funds which have cancelled their payments. This will affect us but we have some advantages which will better protect our clients. We have a vast range of components and whilst the hit from one is unwelcome, we do not have a big proportion of any investor’s capital in that one situation. Secondly, as we use Investment Trusts rather than open-ended funds as most investors have, they have different tax rules and also often hold income reserves so even if some of their components cease payments, it should mean they can continue payments for longer and hopefully till things ‘normalise’ through the other side. Open-ended funds don’t have that advantage – they can only pay what they receive.
Investors must take care and try to ensure that their income is confined to what is being produced and that they do not inadvertently start to spend capital by taking more than they could or should without realising it. Of course, there are degrees – a small excess for a limited time is not a problem but if an investor takes far too much then the capital hit can be detrimental. This is the time to review; if you have not done so already – do you have cash reserves you could spend-down for a period so you stop taking as much income from market investments? It should only be temporary – but it is wisdom, that’s all. Whoever holds/manages your investments, have a look at that and act if you can. We have always endeavoured to retain a reserve of several months’ payments regardless for our clients who know our systems are very flexible and there is always something we can sell to top-up the pot but clearly, we don’t encourage that at the wrong times. Please don’t ‘just’ carry-on regardless but review (as well as seeing if you have surplus cash reserves, National Savings, Premium Bonds or whatever of which you could use parts to pay the bills instead for a while) and recognise even that maybe your weekly costs are far lower at the moment as you cannot spend on things you used to be able to enjoy. If even for a matter of months you can cut your income taken till we can all look again later, then that is prudent, as well as then using cash on your investment accounts available to buy depressed assets instead.
NORMAL WORK
Showing the need for efficient diligence by all staff everywhere, always, because failure can create exponential loss if it happens at the ‘wrong’ time, recently we had submitted a market ISA transfer for a High Street Bank. The original forms were acknowledged to have arrived on 23 February and the Bank’s Investment Unit received copies to execute the instructions on 24 February.
The Investment Unit failed to act and demanded the originals – the branch, by then, had lost them (probably shredded)… it tried to demand new forms but we insisted that it had confirmed it had had the originals and had to act then. We have now received £74,013.67 including compensation of £18,306.09 as the Bank did not act when it should have. It acknowledged the failure in its processes immediately when the subject was raised.
This client is very fortunate because that money was and is available to buy assets much cheaper than they would have been too. It shows, however, how crucial it is to have a robust system and procedures and which crystallise what action is needed and when. We demand clarity from clients when issuing instructions and remember, a client can also be an agent, an executor of an estate or whatever. Second-guessing is unacceptable and when volatility is so extreme, the consequences of acting – or failing to act – in an appropriate way can be very costly. We have always tried our hardest too to act appropriately – for example, with an Estate account for a deceased client we bar purchases as soon as a death is noted and then try to secure a sense of ‘likely’ instructions from the executors/beneficiaries of their requirements so we can informally manage the account.
It is the same with clients who may want a capital sum (eg from a pension) some time later – we try to manage the account over a lengthy period so that we are not left facing volatility a few days in front of when the funds are needed and having to sell things at depressed prices. This also means we are accessing funds gradually, selling when the good opportunity for them arises and doing so over an extended period. No one will ever hit the top to sell nor the bottom to buy but having so many components helps us in that objective. Yes, that might mean we are holding more cash and in buoyant times the investments we have sold may have carried-on rising but the flip side is that we have lots of accounts for deceased clients (sadly) in different states of completion and ‘long-future cash demand’ clients where they had significantly higher cash balances totally protected from the recent market conditions. Whilst an unpleasant subject in many regards experience shows that most executors (especially lawyers sadly, it has to be said) take no market action whatsoever when a client dies – despite being trustees who must act in the best interests of the Estate immediately from the date of death and as if the assets were theirs personally to manage. Instead, they wait for Probate and instructions (which can sometimes be years!) before they can or do act and then frequently it is all or nothing with such investments as opposed to endeavouring to ensure the beneficiaries extract the best value from the deceased’s market assets (eg transferring them/some as opposed to a blanket sale can save/enhance up to 10% (or more) in costs and market makers’ spreads for example). How many estate beneficiaries over the last year or so may have been expecting a big legacy and could now be looking at say a third less because their executor took no action at all with the investments? Anyway, you know what we try to do for all clients and it is times like these which really show the care and value – and no, we are not paid any more to do what we believe is the right thing.
ndeed, for any investors thinking of switching from one market investment strategy to another during such heightened volatility, be very, very careful. You could find you fall between the stools. Your sales could be enacted on the worst possible day and then the money arrives at your destination two weeks later and when the market has rebounded by a third. Yes, such extreme moves really can happen. Just wait and review things during a time of better normality – which will return.
SELLING PROTECTED INVESTMENTS
So, when do you, (when do we) sell things which have withstood the ravages, to use that money to buy more of those which are most depressed or do we conserve those ‘safe’ things till uncertainty goes? These may now be gold, pharmaceutical and health companies, supermarkets, tech stocks boosted by the new working environments, currencies or food producers for example. Equity sales have not been based on fundamentals but simply forced selling from those either panicking or being called-upon for cash and without enthusiastic buyers on the other sides of the deal. I have to say that we have not sold our ‘protected’ holdings though we have been subscribing new cash and spare income to top-up certain holdings, buying cheaply from depressed and distressed sellers but so often, the stock isn’t there or certainly not at the prices the market is pretending to quote so we are left emptyhanded.
But how can any investor, any manager, work rationally in such conditions? Let me quote a couple of examples to show how ludicrous things have been and still are.
We own a stake in Pollen Street Secured Lending Fund. It has £0.5billion of market capitalisation and is a large portfolio of loans. It is still using free cash to buy-in and cancel its own shares. Yes of course, some of these loans will now be causing short-term concern but on 25 February, Waterfall Asset Management indicated it may bid for the whole company (at what transpires is around £9, with a quarter of the company’s shareholders already agreeing) and amongst other reasons because the fund’s shares are trading at a significant discount to the underlying assets. The shares held steady at just under £9 and right afterwards, ‘everything else’ all fell badly but then on 19 March, so too did Pollen Street where the shares plumbed £4.16. The Fund has paid its dividend on 27 March and after another announcement on 24 March that Waterfall is still very much interested, the shares have since been back up to £7.16, a 72% gain from the low point the preceding week.
Then what about SQN Asset Finance Income Fund. The managers have suffered two sets of troubles with popular ‘green’ investments before these latest problems affecting us all. They had a problem with a US Solar energy investment (before our time) and then announced that its investments in anaerobic digestor plants were struggling and it had to appoint KPMG to review the holding values. So, the fund’s shares, owning a good range of different secure assets, fell on the initial news from about 85p to 60p then 50p where they stayed till the latest market rout, reflecting fears for the manager’s carelessness too. Then on 18 March the Company announced clumsily the cancellation of all dividends pending clarity on market conditions in case some borrowers cannot service loans (despite being in the alternative energy space, amongst other virus unaffected sectors). The shares fell to 16p. However, with real value still within the secure base of the Fund’s loans, on 31 March the price rallied to 42p – a 162% gain. On that day, KPMG’s report was published noting an asset value of 72.5p a share for all the loans, after writing-down the anaerobic digestor investments (though the Manager believes it can extract more over the next few years by certain actions). The manager also noted dividend suspension was temporary. Presently the shares are 29p. Is the underlying value 80p, 70p, 60p, 50p? However, there will still be investors selling-out and crystallising a loss rather than waiting for the loans to be repaid and even if big write-downs happen, even 60p is 107% over the current share price and that ignores income resumption.
Here is another – ICG Enterprise Trust, a £0.5billion smaller company, private equity trust and one we had trimmed previously as it had done so well. So on 13 March the shares were £8.50. On 19 March they hit £4.60. On 26 March the Company announced its cash reserves were ok and it is comfortable with its portfolio. The shares are now £6.70, 46% higher. People were selling at those low levels.
Or CQS New City High Yield Trust, a high-income fund trading at a premium to the value of its assets in February. It was at 62p but saw levels whereby foolish investors were panic selling as lowly as 22p. They have since doubled and if the income is secure then investors will see a 9%pa payment. No doubt some of this won’t happen but there is a big margin of comfort.
The problem is that if an investor looks at his valuation what is it saying? It says nothing very helpful to anyone whatsoever, it is simply a single historical point (perhaps an hysterical one), that is all. Indeed, even top name brokers are struggling – they issue opinions on quoted companies but these can be wildly different from the market; Goldman Sachs noted fair value for BT shares at £1.90 and they rose 4p to £1.16 – a mere 40% less.
WHEN TO BUY AND WHY?
Even in normal conditions it is not an easy judgement. It is even harder now. There is so much value and some ‘blue chip’ companies are so cheap and they won’t disappear during this crisis. There are companies like Standard Life Aberdeen which is still using its surplus cash to buy-in and cancel its own shares which were unloved before all this but halved. But why haven’t the cash rich companies been pouncing whilst the value is so good? Why aren’t companies with cash using it or some even buying-in and cancelling their own shares? Whether these are the Apples, Facebooks, Amazons, Microsofts or the Berkshire Hathaways of this world with hundreds of billions of spare cash, what is stopping them putting that money to great use? Sadly, they too are driven by emotional humans who in the main choose to want to worry about further future uncertainty rather than being contrarian (as Warren Buffett’s reputation usually shows but I am waiting). Directors have started buying their own companies’ shares but this activity is muted even if it is at a five-year high point. That is a good sign but why do more not do it – even the likes of SQN Asset Finance for example to prove confidence in their own company’s future? It is not asking much even if the purchases are token.
THE FUTURE
Anyway, here is the prospective outlook. When you and I look at the present financial situation, we do so with eyes distracted by the storm causing the prices. We are very fearful – both at individual levels but collectively as humans and also in relation to the health fears. We are also very alarmed for our jobs, our businesses, our investments and their income and the likely state of state finances and how the hand-outs will be funded – tax increases, even capital levies on private and corporate bank deposits perhaps or Corona Bonds (like War Bonds). I say ‘our’ here to signify not just ‘us’ but our concerns for everyone else too. There is mass unemployment – what will that be like afterwards? What about house prices if many borrowers cannot afford their excessively large mortgages taken-out when they had high-powered jobs which have evaporated?
The current situation has not ever been faced by the modern world. So much is inexorably interlinked whereas for previous issues, countries’ trades were so much more limited and events in one would hardly be noticed in another. It is also true to say that as the world has become more affluent that it has so much more and thus so much more to lose too and economic speed doesn’t slow-down but just stops when something like this happens.
But we must keep perspective. There have been far worse situations. The last two world wars killed millions and the physical devastation destroyed whole countries. Look at how bombed cities and countries have recovered. At the worse times it would have been impossible to imagine a future but it happened and Japan and Germany went on to become two of the most influential and prosperous economic nations in the world. There are still 8billion people in the world, concentrated upon Asia, which is coming through this shut-down already. In northern Viet Nam, there was not a building left standing at the end of that conflict and likewise most of Japan and Germany’s big cities and towns; London and most of our cities were blitzed too as we know.
What I want you to do is to remember the chart of stockmarket performance. Yes, this is an historical record, a simple line on paper showing the ‘market’ over the decades, back to when the opportunity of investing and trading in companies started. Imagine the Great Depression in the early 1930s, centred upon the States but not excluding us. I want you to think about what the deaths and destruction of WW1 and WW2 did to our nations and indeed others worldwide (and I am excluding other regional wars of course but their impact on many nations has been similar). There was also the Spanish ‘flu which killed more than died in all of WW1. Remember the 1970s and the three-day week, the ‘great’ strikes, the oil price shock which saw our inflation hit almost 30%, or when mortgage interest rates exceeded 15%. Technologically now, we are so much further advanced than ever we were. We have so much more and indeed cash reserves across the Nation are immense compared with whatever anyone would have had thirty years ago let alone 100 years ago. We are and shall remain very wealthy as will all the developed and developing world, the investing world.
This chart ignores all the ‘noise’ from those times. We look at it dispassionately, it is simply a line and we can see when it was cheap and when it was dear. The reasons for either are almost irrelevant. We are aware that now, even the dividend income from the market is being cut – something which has not happened with the present ferocity since the wars though even that would have been far more gradual. But do not forget, there were other catastrophic consequences which created those other times too and to which the line of history, the chart, is oblivious. The FTSE100 has broached a dividend yield of 7% – one of the highest real rates after inflation ever – it won’t be paid now but that too is still an historic line in the cement.
So why do I say all this? First, there will still be roughly 8billion people. These people all want feeding, clothing and sheltering. They want communications, energy, heating, water, travel, finance and insurance. The majority has or can afford medicine, education and care and yes, it will also entertain itself, holiday, relax, collect things, garden, visit, eat out, watch and do sports, play and attend music events. From this ‘normal’ activity, business will survive and thrive and whilst many are likely to fail from this, those enduring will be in great demand, even if people have to review their own finances and spending in terms of what they can afford and sadly there will be personal bankruptcies too.
So, if not now, at some stage we need to look at the chart and disconnect from the storm. The chart will continue and it will reflect things through the other side and in time, we shall look back at this blip and see it as a small interruption. It is hard; we stand in the cross-hairs of two related events – health and economic and it is very unsettling and distressing but at some point certainty will replace uncertainty and this too will begin to be reflected in the economics and indeed, our own personal and business lives as we perceive we shall be able to make sane and forward-looking decisions again. There will be phenomenal opportunities out there. There will be many victims too and hundreds of millions more economic ones than the physical ones, however sad even one death is. Indeed, it is poignant to think that only the month before all this began, for the UK we saw the highest ever numbers in work, the lowest unemployment since 1974 and the highest real-terms’ weekly wages ever. Those facts will not be regained for a very long time. I am reminded of a customer of the Bank where I cut my teeth as a sixteen-year-old. He had accumulated a comfortable pot of funds and when chatting to him, he told me that during the Blitz, as families had been desperate to move out of London, they could not sell their homes so he bought three for £10 each. One was bombed but he still had the site and two left after the War. Are the present market conditions just that? The infrastructure will still all be there and indeed in say a year we may look back, sad for all the deaths from this evil disease but see the economic reaction and action as one of the greatest opportunities for the brave or wise there has ever been and in so many ways too.
PRACTICAL THOUGHTS
Just a couple of comments. First, don’t keep watching the ‘news’ – you can’t change it and if it is depressing, it won’t help your own health and capacity of coping with the negative events we are facing. Limit the times you watch perhaps. Put investment valuations and reports in a drawer and forget about them for several months. Remember that all media sensationalises news to sell stories – media is doing very well at the moment – if it has the advertising flows to fund them of course but even newsprint is surging. Watching the news is like watching the storm. If you see instead how you can plan to come through, it will pass and indeed you will be uplifted by concentrating on constructive and positive things as you cannot change the storm’s outcome. If you have a faith in which you can trust as you have done before – or all your life – hold onto that too.
Take each day one at a time. Stop trying to predict the unpredictable (or believing others who think they can) but cope with what you have to do that day. Yes, be prudent about the present and the future but there is no point trying to bridge build for things that are unlikely to happen. However, it may seem, it is not all doom and gloom – there are bright spots and especially in the simple things. Take small steps with issues you perceive are big problems to resolve. Small steps can lead to big change too – a bit like ‘eating elephants’ – eat them in small pieces and don’t tackle them all in one go.
I hope that you find my comments helpful. We are here to assist as best as we can and even whilst working remotely. The world will be a different place afterwards. Our Company is strong enough to withstand this through prudence from reserves put aside in previous years but inevitably even our industry will contract for some time regardless.
And if you have spare cash funds, think about committing that to some of the cheapest buying opportunities you may see in your life, whether doing that in an ISA or a Pension or whatever – we are happy to help and receive your funds to use as wisely as we can.
Please keep safe, try not to worry unduly but concentrate on the hope which the future brings to us all. Till then, the very best wishes from all of the team here and signed on their behalf.
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager,
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers
