So, if you could buy an investment which gives you a guaranteed 11%pa till December 2022 would you take it? Yes, there would be some negligible costs involved in buying the investment but even with those taken into account, it’s not unattractive. It is not related to share price movements either – it is a simple ‘loan’. Curiously, this quoted Fund agreed for up to 25% to be repaid early at a premium above the present value.
So, in theory, you could have bought some and instantly exchanged a quarter for a higher price – some 7.5% more but only 19% of investors bothered to send their stock along!
We have acquired quite a chunk of this Defensive asset. Back in November, it was priced far too very cheaply – 21% lower than now (meaning that holders and buyers then have enjoyed a return of 33% on their redeemed investment!).
Are there risks? Yes, in theory the Company (like any borrower or bank!) may not be able to afford to repay everyone but the likelihood of that is very slim. It is still why we spread our defensive assets across a very wide range of different opportunities too. Is there a problem? Yes – it is very hard to buy stock as there are few sellers – and the Company itself wants to buy-in stock as it makes an instant profit in doing so. All that said, it is just the sort of investment management job for which our clients are paying us – and we started by buying some big shareholders’ stock simply because they didn’t want it anymore and hence it was too cheap. We honestly don’t mind when we are offered such opportunities… if we manage some of your money, this is just the sort of thing we are seeking all the time.
Our purple patch is continuing, and I keep saying it can’t carry-on for ever…. Unloved and undervalued companies are steadily and securely recovering and with a vengeance too. Banks have been marching onwards and they aren’t alone but these days, as they have been so decimated since the financial crisis in 2008/9, most people don’t own many, and they don’t feature highly in the indices so most investors have little exposure – we do and you will remember me saying we have ratcheted-up our exposure too. There are several similar sectors where we are over-weight but I shan’t share all our secrets at once! However, undervalued stocks with good dividends to keep paying clients’ living expenses, yet not limiting opportunity for exemplary capital gain as well, have always appealed to us!
When we see several of our holdings featuring amongst the biggest gainers of all investments in even the last three months it is good news – and of course you don’t want to feature in the ‘biggest losers’ either!
Global equity markets have climbed by $50trillion since the nadir in 2020. It is an epic bubble driven by so few companies in the tech sector and modern speculators who believe in gambling (especially the younger element) rather than ‘investing’, enticed by online platforms and the ease with which clicks on a mobile telephone equal speculative nirvana and of course, they only win, don’t they. What makes this worse is that so much of it is driven by opportunities to invest on borrowed money (‘margin’) too – estimates suggest this has spiked at $822billion in March in the US alone (this debt was reducing from 2019 but since has exploded by $350billion in 2020/21). Believe it or not too but global equity markets have attracted a colossal $569billion of new money these last five months alone – more than the last twelve years combined, Bank of America notes. It all bodes badly for those in the wrong places… tech or global trackers especially I guess.
So, if I said that there is a multi-billion-pound, quoted collectives’ Investment Company out there with a vast and diversified basket of securities within its portfolio and for 37p you can buy £1’s worth of transparent underlying assets, I suspect you wouldn’t believe me. You also wouldn’t believe me if you heard that if you invested £100, you’d receive an income of £4 every year based on present rates, would you? So, I’d best not tell you… It’s partly because there have been a couple of big sellers who don’t care about the price. And of course – if it is this ridiculous, well, it can’t be true, as it is too good to be true, isn’t it!
However, yes, unbelievably, there is. It has always traded at a ‘discount’ from not long after it started (and there are some reasons for that, but no way is ‘this big’ justified). Even if the discount simply contracted to its longer-term levels, you’d see a capital return of 54%
So why am I telling you this? Because we have it. That means our clients have some (maybe not enough, so we must buy more whilst this price endures, though even then, we spread clients’ money so widely and always look for great things like this). And if you are not a client yet? Then I suggest there is a 98% chance you don’t have it and indeed, most non-clients out there, private investors and savers, instead have what is sold ‘at them’ the most – unitised holdings where the management group makes money every time you buy some from them and where you pay £1 to acquire as little as 94p’s worth of underlying assets instead (plenty of self-select platforms won’t allow you to buy this Fund either!). Isn’t it time you gave us some money to manage for you so you can have some… no contribution costs for new investments with us and no fees for unadvised subscriptions!
And do you know what is so bizarre about this silly valuation anomaly – it has nothing to do with the ‘Stockmarket’ as such. Yes of course it invests in such things as shares, bonds, loans, cash and other assets but this is simply a technical trading opportunity where this special return opportunity doesn’t rely upon what happens with the Stock Market.
So, the FAMAG names (Facebook, Apple, Microsoft, Amazon and Google) have a market worth at the moment twice the Topix index (the whole of the Japanese stock market). In 1989, thirty-two of the biggest fifty stocks in the world were Japanese.
The US is now around two-thirds of the value of all global stocks and Japan 8%. At its worst, Japan fell 82% from that peak, twenty years later. Now, you either believe the latest US tech model is here for ever or a big crash in the US could be on the cards. Remember too that Sony was one of those companies so ‘tech’ is not new – over 100million ‘Walkmans’ had been sold… are they different to Apple’s products? And remember the new phenomenon now too – ‘cheap’ index-tracking, passive funds. If that’s what you have, most are ‘weighted’ to the same big stocks so you are full of the same stuff.
We aren’t there and in some respects are the exact opposite – for two reasons. The first is simple; we believe these tech stocks are excessively overpriced and whilst a drop of 82% is not expected, a significant awakening is well overdue, so we don’t want to be caught in that. The second is easy – there are so many ‘value’ stocks which the trendies are not holding and at such cheap prices that we can hold those instead, so then two factors come to play. The first – they aren’t over-priced by any stretch of the imagination and therefore are more closely aligned to their assets and trading values and secondly – many of these could easily double over the next few years whilst the expensive stuff halves – maybe extreme analogies but you see the point. I am often told the concept of ‘disruptive industries’ to justify vast valuations for this stuff but a colossal reduction in Tech shares would be very disruptive and the zealots of the theme don’t seem to have allowed for that.
Commodities And Inflation
Curiously, little is being spoken about the rises in many base commodities, from metals to agricultural products. We don’t mind, in that sense, in that we hold these direct commodities within our overall diversified investment strategies for our clients – what safer thing can there be than some of these when they were trundling along on multi-year low levels, but things are changing. These higher prices don’t reverberate immediately but will result in higher input costs and bigger prices on supermarket shelves. When added to the increases in employment costs and other overheads, a larger hit on inflation may happen than expected. Copper has just hit its highest level for ten years (back over $10,000 a tonne) and electrical installations need lots so think again on all those green requirements. Coffee is up by almost 50% since its summer low for example, even if still not above the January 2020 level (which was still 80% below its 2011 peak). The Agricultural Products’ index is up 58% since its summer low and pushing to breach its 2016 peak. Then, my colleagues reminded me – two lots of fish and chips from a great takeaway in Ilfracombe with two soft drinks and that’s £20 now, so inflation’s with us – watch out! All I’d say is… don’t keep so much on deposit as purchasing power could be in for a shock. Remember, if mortgage rates start nudging-up… that’s toast for residential house prices too!
If you really want to be frightened – check lumber prices – the lumber index is up 513% since 30 March 2020. There may be plenty of timber but it’s not instantly accessible nor treated and aged!
Environmentally Friendly Investments (Not Forgetting Social And Governance Ones Too!)
ESG funds have attracted about $340billion over the past two years – almost twice as much as the rest of the stock universe combined. This has done two things – it has pushed allegedly ‘friendly’ investments (on very dubious and partisan criteria) to frightening peaks where a crash is inevitable to many extents, but it has also hit ‘sin stocks’ which have seen their universe of culprits increase as Society’s latest trends for exclusion widen further. The FT says ‘investors lulled by optimistic back tests and wishful thinking, assuming they can do well from doing good, could end-up being disappointed’.
Curiously, back testing the sin stocks shows that investors would have done remarkably well over time by holding these. I am not suggesting ‘it’ (or not – and we are talking about totally legal and legitimate business pursuits, most of which we all support in one way or another even if not realising it) but we could be on the cusp of a similar period of out-performance by these entities, at the same time the over-bought ‘friendlies’ come unstuck. There is an economic model too that says they must charge higher prices for their goods, as they have bigger barriers to their legitimate trades and thus, they will reap more profit to counter the extra risk and costs of accessing the scarcer capital they need. The article suggests that for many of these ESG investors they may learn that ‘virtue will have to be its own reward’, that profits are not generated and indeed that the risks are very high when you buy at the peak of a trendy time like ‘now’.
It is an interesting one though. Would you like to invest in company ‘a’ which creates life and planet-saving technology, or ‘b’ producing, say, paint? The heart would say the ‘first’ please but what if that is 10,000 times too expensive and the second, the paint company, is making so much money it is struggling to distribute it or reinvest it quickly enough to shareholders and is priced at a give-away level? Sorry, but whilst it might sound and feel ‘fluffily nice’ to buy option ‘a’, you need to buy option ‘b’ and then make GiftAid donations from your vast profits to your favourite charities for your core interests. Do you understand the difference? We believe we do – we must keep irrational behaviour at bay for our clients!
IG Index’s Gerald Ratner Moment
Recently IG Index decided arbitrarily to cancel clients’ ability of trading in 900 typically smaller stocks. There was no ‘reason’ for the retention or removal of some – according to demand it seems. However, it simply decided to write to all affected clients, large and small, very profitable, or tiny and to tell them ‘tough, if you don’t make arrangements yourself, all those affected stocks will be sold off and you don’t have long to do it’. There was a compromise – you can have a new form of account whereby you put-up significant margin capital which IG was covering previously.
There was a ‘consultation’ which was where the new Chief Executive told you why it was happening and how it had to be an efficient use of IG’s capital but the process didn’t listen to clients at all. As a consequence, many clients have been forced to explore others’ services and guess what this one found… that yes, other reputable firms out there are offering markets in several of the affected stocks and not only that, but their terms are more competitive than IG’s and not only on those affected stocks but often on others too.
When you have long-term (through thick and thin so not just the sunny times), loyal, very profitable customers who do not shop around, why would you do such a stupid thing that may appear to save you a few pennies on a limited range of commodities yet treating them so poorly from the top but which ends-up alienating them all and losing you the bank?
Don’t Keep Us A Secret
I admit – I am borrowing another firm’s strap line but yes, if you are happy with what we have done for you in looking after your capital, don’t keep us a secret – tell your Family, friends, colleagues and if we can help, we’ll be delighted to try our best!
The Missing Link
Link Group UK is in hot water at the moment over the Neil Woodford issues. I wonder what checks and balances have gone awry. Last week, I received a formal ‘Open Offer’ document inviting me to subscribe for £42,682.85 worth of shares in a very small company in which we have exposure, with the shares worth only £1,000. I contacted Link (on Twitter in the end after giving up trying to find a simple email address to approach). I have now received the revised document with a figure of £426.83 being the request! How on earth did this pass audit protocols! (What audit protocols…).
Stock market investments can 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 www.miltonpj.net. 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.
My best wishes
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