The science of investment explained

The science of investment explained


So US inflation is tidier than expected and the NASDAQ rises by 7.5% on the day (as it is hoped further interest rate rises may not happen and indeed the next may be downwards) and a further 2% the next day. The mainstream market likewise rocketed and the US Dollar fell significantly too.
Generally, investors need to expect greater volatility and if you don’t happen to be in ‘it’ when a major and positive event happens, you miss the best trying to scrabble-in with everyone else afterwards. That’s over a year’s fair returns in two days. Some folk quibble over the few bips of what the fees are to be engaged.

The science of economics and investment  

Investors need to remember that the sciences of ‘economics’ and ‘investment’ are not primarily about finances and money but more importantly, the collective human interactions with these instruments. That’s what changes prices, not some giant machine without any human input. If you and your neighbours are feeling worried, maybe that is what the majority feels and thus the collective emotion is translated into action or inaction on the ‘markets’ to reflect that.
If you are feeling very confident and euphoric about the prospects, then that will be reflected upon markets. Indeed, the big funds are run by emotional people too and there are very few contrarians who fight through the short-term noise (as we try to do) and who have had enough experience to be able to know that the short-term is just ‘that’, a temporary point – and that a semblance of normality will always return after a period of great uncertainty. That’s as long as you have a realistic valuation base upon which to re-pin your calculations (far too many US tech stocks’ valuation pins are still way too high for example). You haven’t missed ‘it’ too much yet but as I have said before, little positivity is priced-into the markets here at the moment; buy whilst stocks last.

It is interesting to see too that however defined, at its depths at the end of 1992, ‘tech’ counted for 6.3% of the US S&P 500 and that included things like telephony which had driven the Dot.com bubble. That rose at its peak to almost a third (and telephony is relegated to ‘utility’ status now). This industrial revolution will continue but as with past ones, will the entities creating it in themselves turn into utility status like electrics, white goods, automobiles, radio and so on? I suspect so.

The UK’s FTSE100 has been a star performer this year to the end of October, ‘only’ losing 8% compared to the ravaged global indices though sadly, many recent investors ‘elsewhere’ won’t have this index nor big exposure to it any more as its performance for too many years looked lacklustre (a real lesson for them of remembering to buy tomorrow and not yesterday!). However, if you only had the smaller 80 companies in the Index, you’d still have lost 26%. BP and Shell, two of the bigger 20, gave us 8% of increase. The FTSE250 has since jumped a fifth off its bottom. We have lots of the bigger 20.

Here’s another fact for you – up to last week but the US market, led by those tech giants, had seen $13trillion wiped-off its value this year, the worst since the financial crisis in 2008. Indeed, many sophisticated ‘volatility products’ designed to hedge against the worst didn’t work as expected or desired and so the ‘insurance’ which some investors had bought still saw them lose an average 20%. This is partly because the daily volatility downwards was not extreme – it was just an unrelenting drip, drip so the ‘Vix’ volatility index, based on how it is calculated, offered little protection. Hmmm.  

   

Stress testing  

So those ‘Liability Driven Investment Strategies’ (substitutes for holding good old-fashioned Gilts and things like that) had had ‘stress-testing’ to see how they could work if a movement in interest rates was extreme. The Bank of England, that august institution with responsibility for the UK’s financial stability, had tested scenarios if long-dated Gilt yields moved by 0.25%, 0.5% or goodness no, 1% and all the way as far back as 2018. They tested against all interest rate scenarios, maturity dates and currency movements.

So after the Minibudget when the yield moved 1.6 points on a day, the system cracked and the carnage wreaked as a failure from inadequate testing and the clever chaps at Schroder’s, BT Pension fund et all lost tens of billions because their ‘solutions’ were not so fool-proof after all, as if record non-existent interest rates would stay thus for ever.
Instead, as pension funds scrambled to meet margin calls against them and were forced sellers of their other assets (someone was buying remember), Apollo Fund Managers in the US picked-up £1billion’s worth of the related CLOs (‘loans’ in simple terms) – a very significant quantity of the total selling (a third of the lot maybe) and at a tidy interest coupon of 8%pa. So not only can it now sit back and enjoy ‘8%pa’ but the capital value of these assets has rocketed as things have reverted to earlier levels.

I am sorry but this was a failure of those promoting the things. Schoolboys know that even a small nominal move on nigh zero interest rates counts for major percentage alterations and you need to make allowances for such events. What else are the ‘experts’ using to model their created financial structures – house prices to fall by as much as 5% perhaps and not 50%? You have to imagine the unimaginable if you are talking about the system’s stability, even if you don’t provide for it but you have to at least consider the ramifications.
 
   

More good news  

Crystal Amber, a stock I have used often to epitomis the very special sorts of technical trading opportunities in quoted funds we love (as opposed to open-ended funds most investors have, when you are not with us), has announced it has sold one of its strategic holdings at a 60% profit above its purchase price and so will pay another special 10p dividend to shareholders (equal to 9%pa on the share price). The residual holdings are still worth considerably more than the total value of all of Crystal Amber’s shares on the stock market and the Trust must wind-up over the next few years.

As I have shared, we don’t only enjoy the normal exposure to the underlying holdings at a deep discount to what others are paying but these discount bonuses are in for clients for free. Thank you very much! Even if the best boat has been missed, we’ll keep buying (even if it is a struggle to acquire stock now) whilst this discount endures. This is just the sort of opportunity we seek for clients and we have a string of similar ones.

We are taking cash for 15% of our Sancus Zero next month, at £1.65 per share, trimming for clients with ‘too much’. These have returned 5.5%pa since launch. They were £1.10 last November however so some lucky investors will see a 50% return in just over a year – if you could find any (we bought what we could). We shall roll the rest and at an assured return of 9%pa for five years and expect to buy more stock as it may become available over the next few years.

On 13 October, Majedie Investment Trust’s shares were £1.58 and we were buying as many as we could as they were at such a deep discount to the underlying asset value. However, the Trust has now announced a new manager strategy and the shares have jumped to £1.90, a 20% gain in a month but still fair value. This is still only a retrieval of previous higher levels but it shows what can happen, one of those ‘bonuses in for nothing’ about which I keep talking! Meantime, whilst we waited we have been enjoying a dividend income of over 6% from those lower levels.

Two of our Secure Loan Funds are also distributing more cash as planned – both equal to roughly a quarter of the present share prices. However, we still believe there will be almost twice the present share price in cash yet to come for each. We’ll continue to accumulate some more afterwards – if we can find any – from foolish holders not bothered to wait.    

 

Blue Planet  

The saga continues. We monitor and act when we can and the latest information before the FCA is the unrelated legal shenanigans which Mr and Mrs Ken and Maga Murray have had regarding ‘their’ holiday let on Sanday in Orkney apparently owned by ‘their’ offshore Maltese Company in which name the legal action was started against their neighbours, the local couriers and shop owners.

All this may seem very unfortunate, but one has to wonder if concentration upon their main income-producing asset (the fees going to their investment management company which manages and administers Blue Planet Investment Trust Plc) has anything to do with the dire results for shareholders over the last few years.  
The capacity to jump from one entity to another in the Murray fiefdom seems par for the course based on our experience since we dared to challenge the misguided investment policy and potential breaches of regulations and investment authority realigning the strategy so recklessly and without consent from the regulator let alone shareholders. For example, letters from BPIT Plc to clients were sent yet the Trust is still not registered with the Information Commissioner for the management and maintenance of personal data.  

I should have preferred if the Murrays had engaged with me professionally when I first raised my qualms about the apparent deviation from the published strategy but clearly there were seriously compromised interests and distractions involved and ones about which we were unaware. Just how much in legal fees has this futile and desperate action cost them ‘personally’? Banker who bought a home on remote Orkneys island LOSES £600,000 court battle against local shopkeepers  

And guess what the manager has done when the NASDAQ may have finally bottomed so if you have become an outright speculator then the time to invest big makes sense? From running nigh 50% borrowings as prices slipped (so losing shareholders’ money and then even more on the borrowed money), the latest factsheet shows that was cut to a mere 15%. The factsheet shows, almost proudly and certainly not apologetically, that the managers have lost over 64% in one year and with no dividend either.

Just think what the outcome would have been if we had been managing the Trust over that same time, a proposal put informally to the management when it appeared something had started to go horribly wrong. Since the trough in March 2020, we have enjoyed our best ever investment performance period by using common sense, at the same time that this Trust’s net asset value has dropped 60%. If they had kept all the shares owned on 31/1/20, they too would have enjoyed a world-beating result and none of the excessive costs incurred in churning all the assets in the Trust (as still seems to be happening with five of their ’long-term investments’ sold last month alone).

     

Government debt  

I think we all realise that the giant Ponzi scheme of colossal government debt will continue happily (fuelled by ‘Quantitative Easing’ where central banks buy their own nations’ debts to prop-up prices and supply the necessary finance to fund over-spending).
However, the recent shock in the UK reminds us that things can destabilise rapidly. The collective confidence can be shattered and the ramifications severe, let alone the ‘future generations having to pay the cost’ syndrome.

Interest rates are remarkably low too and these same governments can’t afford for them to rise as the servicing costs on the national debts would be unaffordable. Indeed, it has been suggested that a housing mortgage rate of 6% today would be equivalent to 15% in 1989 in terms of the carnage it would wreak on so many over-extended house investors who thought their homes could only keep rising inexorably.

How about Japan – an interesting case with still a ‘zero’ interest rate policy and low inflation too (but with pressures upon that). Before I convert it for you, try to write-down in numbers the half a quadrillion yen owed by the Government. That’s equal to $3.6trillion. Meantime the Yen has reached long-term lows and it is far too cheap (making it a great holiday destination incidentally, alongside Turkey!). Investment wise, we like Japan – the currency will rebound and the market is good value so we can gain twice.

     

PensionBee Group  

Well, super-lossmaking PensionBe delivered for its initial investors – the owners of the company that is. The shares hit £1.85 after the float last year and have since been as low as 51p, but I wouldn’t touch them still nor would I use their services.
Alongside other bucket-shop consolidators like True Potential, it is times like ‘these’ when the benefit of having an experienced adviser to whom you can relate comes to the fore – if you listen that is! A bigger proportion of unadvised investors will have encashed their funds at the depths of the market, pushing that big red button on their mobile devices, crystallising losses they are unlikely to ever regain elsewhere and not waiting for things to recover – or better still, buying more cheap stock when prices are so depressed.

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