UK Equities

Dear Friend

A two-sided story here.  UK equities have been doing atrociously, both absolutely and also comparatively to, say, the US market full of over-puffed ‘tech’. The proportionate investment allocation in UK equities has fallen to a record low of only 29% according to the Investment Association and despite an increase overall in shares’ investment of 10% in 2019.

There is a number of reasons for this and the Brexit uncertainties (meaning ‘not knowing’ rather than a ‘bad certainty’) have not helped.  The percentage has dropped from 47% in just ten years.  There have not only been sustained outflows of cash and inflows into other geographical areas but the UK market has traditionally been full of presently out-of-favour sectors from oils to banks, financial institutions and insurers and other sectors like telecommunications and supermarkets have also been lacklustre, as have some pharmaceutical companies.

What does this mean?  Well, Sterling is very weak still and fundamentally seriously undervalued regardless of what happens through the ‘other side’.  Any strengthening will result in currency losses on your overseas’ investments, whereas over the last several years, you have gained by the increases in the Euro, Dollar and Yen etc against the Pound.  Secondly, it means that UK shares are some of the cheapest in the world and fundamentally also seriously undervalued and again, despite the ‘backdrop’.  This also means that through the other side and a return to normality, the levels of income (dividends) which the average UK business will be paying will be considerably higher than elsewhere in the world but the capital appreciation ‘catch-up’ is also likely to be significant.

Finally, if valuations of companies remain so low, something else will happen.  The Corporate World will take advantage of the ridiculous under-valuations and will act.  It will start to buy and take-over whole companies and will profit considerably from the undervalued assets represented by depressed valuations on the Stockmarket. There will be a feeding frenzy and Private Equity will be in pole position to do this – stuffed full of cash burning holes in their pockets and with borrowed money costing next to nothing.  That will be sad in many ways but what it also means to the UK investor is that the opportunity for a takeover of the company in which you have shares is there for free as a considerable extra reason for buying whilst prices are so low (you may already have been patient for years too).  Guess where we see some of the best value in the world and where we are continuing to allocate even larger sums of clients’ capital?  And just think, let’s imagine for one moment that we secure a fair Brexit deal, then the opportunities for British Business in the world after a period of indecision, hiatus and lack of confidence afterwards are immense, even if that is to just return to some semblance of ‘normal’.

HSBC has recently been to its lowest levels since 1995/6, twenty-five years ago.  It is events like that which are keeping the UK indices restrained.  HSBC is, additionally, a global business with far more impact overseas than in the UK.  It is worth £57billion still but it ripped-off nearly £100billion from the UK indices since December 2017 alone.  Do I believe it can regain its poise? Absolutely.  Are the shares cheaper than they were in 2017?  Yes, of course they are.  (We don’t hold any at the moment but it has to be compelling – though if you sell investments because of ‘bad performance’ then upon what basis would you possibly buy them otherwise?). An Ping, the Chinese insurer, increased its stake to 8% and the shares jumped the most in one day for eleven years.

What is the Risk?

It is interesting to note that if on 1 January 2020 had you invested in the very high risk AIM (Alternative Investment Market) for really tiny companies (typically) which are not listed on the main London Stock Exchange (AIM All Share Index), you would pretty much be looking at having your money being unchanged now.  Instead, if you invested in the safe, bigger companies of the FTSE100 or indeed the FTSE All Share Index (dominated by the same big companies), you would still be down by a whopping 23% or so.  (This excludes any income and costs of course).  So yes, if you had a nice, cheap, ‘passive’ index tracker invested in the British Stock Market, you’d still be down that 23% – oddly the passives’ zealots haven’t told you that!  So is AIM a risky place to have your money?  Yes if it is all there and in just a couple of spivvy stocks but if you had just some money in these micro companies, it wouldn’t have increased your risks – it would have reduced them.  Indeed, the FTSE Smaller Company Index is still down but ‘only’ 15% so having some funds in there too would have further diversified-away your risks, at least marginally.  Indeed, AIM stocks even fell further in the Pandemic than the bigger stocks (35% versus 31%) and thus their recovery has been much more impressive and more quickly.  In mathematical terms, something having dropped 35% and returning to where it was before has rebounded by a significant 54%.

Investment Returns – bear with me on some simple maths

You can’t change the past.  That counts for paper investment losses suffered too – you have to look forwards.  It is crass stupidity to invest based ‘just’ on what the past has done – positive or negative. If something has doubled, probably you should trim it and not add more ‘cause it is so good’ and if it has halved, probably you should buy some more (but in either instance not from blind superstition but mathematical probability in the face of emotionally erratic investors, as we see now).  £100 bags of Pound coins are presently being sold for anything from £20 to £500 a bag – take your pick and which ones offer best value…?

Following the  above statements on UK shares particularly, if the Market does not reflect the real underlying value of a business then corporate buyers will take out whole companies and perhaps it has started already.  If you are not invested in the possible cheap targets, you will miss-out on some fantastic windfall opportunities which are there for ‘free’ in that in most cases it doesn’t matter if it doesn’t happen as they are too cheap anyway.  Last week, William Hill had a bid at £2.72.  That is a ‘mere’ 7.4 times above the March share price low.  G4S Plc has enjoyed a similar attack – now £2.04 against 92p.  So here is the simple maths.

On say 24 March, you had £100 in ten mixed companies. That’s £1,000 so the maximum loss potential £1,000 but the likelihood of that arising is non-existent unless our whole economic system has imploded and nothing matters anyway any more. Yes, these ten were worth much more only months before the pandemic hit but you can’t change that (and some fools were selling in March at these lows). These companies include some we have for clients. They are William Hill, G4S, IAG (British Airways’ parent), Premier Foods, Marstons (pub chain), Rolls Royce Engines, Costain, Stobart, Funding Circle and HSBC. They are a mixed bunch but are actually reflective of reality, so not conveniently selectively chosen in many regards and not every one has recovered. Some on the list have dropped much further – Rolls Royce is down 70% and Stobart is half so it’s not a cherry-picked list. Of the companies which we held on the list, we carried-on buying more at their depressed levels and we encouraged investors at the time to do the same. Do you know what those ten odd companies’ £100’s each of shares would now be? Roughly it’s turning £1000 into £2250. Even if you stripped-out William Hill’s windfall altogether, the figure is £1600. So, ok, forgetting costs and any income received, that is a 125% return, profit for the ‘risk’ – which was actually a tiny risk in reality from those levels.

What were we saying at the time?  We were trying to encourage people to invest if they had any spare funds or simply too much at the Bank earning nothing or little.  Was it high risk?  Not really at all – as the risks had already been suffered by losses shown to that point.  The losers?  Those who cashed-out (we had so few investors who did not listen to our counsel at the time and indeed since) and those who chose not to buy at what may have been one of the best opportunities for generations.  Today?  The UK market is so ridiculously cheap – not as cheap as in March but too much quality is still being given away.  You still need patience – as did new investors in March but they didn’t have to wait long.  If you think the world is going to end well, wave goodbye to your bank deposits and property values as even the lump of gold won’t have much value.  If you aren’t quite that pessimistic then act wisely and buy UK shares and not the spivvy stuff linked to US Tech.

Is this speculative?  Hardly – you’re spreading the risk and having a very mixed bunch of different prospects.  In normal times too, you would expect a share of the trading profits of these companies (dividends) so say at the ‘moment’ that would be regular income payments of around 6%pa or so (but it’s not ‘normal’ now).  For our clients, we spread their risks far, far wider and primarily use funds which smooth volatility (downs and ups) but investors can join our managed system with as little as £1000 and if they do so without advice, there are no subscription fees – it’s a great way to learn too of course and you can start small and build-up, even with regular monthly savings (ISA/Portfolio/Pension etc).

VAT on Management Fees

For a long time there have been inconsistencies in the investment management world in terms of what is liable to VAT and what is exempt.  We are obliged to charge VAT on investment management fees and so must many other fund managers.  However, there is light at the end of the tunnel as one after another, rulings have been secured and rebates gained so we shall be seeking the same rulings.  No doubt there will be nuances within the approaches and we shall need to make sure that nothing breaches those provisions but it will be great if we are able to announce a 16.67% fall in the charges levied to clients for the management of their assets and on top of that, a rebate for the past several years’ worth of VAT too.  We shall keep clients apprised!

Defensive Investments

For some time, we have been buyers of some of the quoted loan funds.  These all floated some years ago and to great fanfare, basically raising many hundreds of millions (billions) which they then recycle and lend to typically secure projects.  I have touched upon these before.  Come the shake-out and the prices at which the shares in these funds trade have fallen – primarily as holders squeezed in other areas have had to sell at any cost as they needed their money.  I am not going to touch upon the few (the very few) which did silly things and where there are problems but there are two principal ones we own which have declared their latest valuations and they don’t have any trouble with their borrowers.  One has just declared its latest income payment to investors – uninterrupted throughout the problems.  That is equal to 7.8%pa interest.  However, it has also noted that its loans are worth 29% more than the shares are trading and mark my word, at some point the Company will close-down as it is not big enough to justify continuing and guess what?  Investors will receive a 29% bonus for ‘nothing’ and meantime 7.8%pa whilst they wait.   So let’s say that happens in three years’ time – that is a bonus of 10%pa on top of the interest.  Of course, the Fund will have costs to wind-itself-up and something could happen to impact the values of one of the loans say but the values are independently audited and there is plenty of leeway.  There is a second one which we hold too with a similar tale – its running interest payment to investors is a whopping 10%pa and its share price is at a level where wind-up will yield a 30% premium.  Guess what – that one has already agreed to close-down so it will simply take the time till the last loan matures!  Something else may end the wait earlier but we don’t mind waiting meantime.  Isn’t that a rather attractive investment and in a rather safe environment? (Conversely if you hold it, why would you sell it today?).

These are just two of the types of things we are reviewing constantly.  Why do these anomalies exist?  Because someone who paid £1 at the start is looking at a capital loss of 24p on one and 34p on the other, though having had good income throughout.  Those holders will think it has been a ‘poor’ investment and want to sell-out but that is our opportunity for the future – not looking-back at the past.  We own several other such animals in our clients’ portfolio and to benefit, all you have to do is send us some money to manage for you or to add to what we may have already – it is not ‘rocket science’ but please don’t miss the opportunity even if we cannot promise the ‘future’ for next week or year.

Woodford Investors

Sadly they face a further year-long wait for their final funds…  It is sad and this latter aspect is really so unnecessary I feel.  Alternative reregistration could have allowed investors to choose to sell (at a price) or keep, though the horse has bolted long ago now as it could have been done at the ‘beginning’ with proportionate allocation of all the unlisted stocks for example.

The primary lesson is ‘don’t put too much in any single investment fund’.  That’s where too many have come unstuck and sadly there are still plenty of investors who allow inertia to mean they do the same again today – probably full of tech stuff instead.  It only reminds me of what can go wrong too when those chunky ‘unmanaged’ holdings which were ‘fine’ not very long ago turn-out to be bastions of the investment world like Royal Dutch Shell or BP – and you know what has happened to those.  They are probably brilliant to buy today but if you had a large chunk of these (maybe inherited and kept for purely emotional reasons) then your finances will have been devastated.  As an investment house, even our biggest collective fund only counts for something around 4% of the total assets we manage – there really are so many great opportunities out there.

Dream Lodges – Update

As we went to ‘print’ last time, the ex-CEO was banned from being the director of any company for fourteen years.  That is little compensation for the investors who have lost everything.  Oddly enough, he was selling these dreams to investors and holidaymakers alike without even owning the ground upon which the cabins/lodges/etc were being situated…. It all sounds rather familiar – there are typically no secure arrangements for owners of these things at all and many will have mortgaged the freehold ground upon which they stand so the only way the parks’ lenders can secure good title when or if things go wrong is by knowing they can eject any ‘tenants’ from the asset.  Please do NOT buy static caravans, lodges, proportionate ownership, timeshare or whatever as ‘investments’ – they really are NOT. They are also certainly NOT regulated.  Buy proper investments instead – please!


Risk Warning

Stock market investments offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.

To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!

If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website We celebrate our 35th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.

Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.

Philip J Milton DipFS CFP
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers