New Year reflections: Looking ahead and a tip

Looking back at the financial markets for 2022 and ahead for 2023
Well, a Happy New Year to you and let us trust a more prosperous one too! I hope that you have had a good and comfortable Christmas time. It wasn’t so cold though the rain seems to have arrived with a vengeance now. We’ve been very fortunate compared to those in North America.

It seems that prices of certain things are slipping fast – UK natural gas for example. Let us just hope the authorities and companies have not reserved colossal supplies at the temporary spikes. This was £6.40 a therm on 26 August and now £1.90, 70% less.

The crude oil price is also 35% less than May. Governments seem intent on creating Recession though – sucking spending out of their economies to attack inflation. They’d never admit that but that is a sure-fire way of reducing prices, snuffing-out demand.
Conversely, we don’t really want the economy to slow or regress and so footfall numbers for Boxing Day sales were better than expected – there’s money to spend on stuff probably people don’t really ‘need’. However, pinch-points will arise and prices will now fall fast. Remember what I have said about other base commodities and metals’ prices, etc.    

Reflections – the tip of the year?  

It is time to reflect and look forward. Investment-wise, we did very well comparatively – both by avoiding the things which had fallen the furthest but also having some of the things which responded positively to many of the unpalatable events and outcomes which arose over the year as well. As investment managers, we were in the minority.

One of the big things we did was to shout about avoiding US Tech, which had become so overblown with enthusiasm and that also meant avoiding the same funds and indices which were bloated by the same stuff. For us, it wasn’t so much a call of peak prices to avoid it but as so many other things were such fantastic value all our money was spent before we even had to consider that. (The same applies to UK houses for investment with paltry rental returns and a long way for capital values to fall).
The tech-full Nasdaq100 dropped almost 35%, full of the same things driving the main global indices (Apple, Microsoft, Meta (Facebook), Google/Alphabet, Amazon, Tesla and NVIDIA). We had none. The S&P500 fell over 20%, saved to some extent by miners and oils. The FTSE100 was actually marginally up – it better reflects our views! However, as it has been in the doldrums so long, most ‘other’ investors won’t have this in their ISAs, Portfolios, Pensions, Bonds… because they’ve been chasing yesterday and not tomorrow.

I said to many people when Tesla was at its heights that ‘even if it dropped 90% it would still be expensive’ and look what has happened to that (down 75% so far). Exxon has now retaken its position in market valuation, from where Tesla overtook it in 2020. Cathie Wood, the apparent tech guru heading Ark, lauded by her followers, has seen its funds managed drop from $60 billion in February to $11billion now and I still wouldn’t touch with a barge pole. It was not alone. Find me other investment managers who were brave enough to declare the same as us – instead the masses were all chasing exactly the same stocks and investors have paid the price for their assets linked to the colossal flows of money into exactly the same sort of stuff. Fund management groups like Baillie Gifford skewed everything towards this tech bubble and did very well for a while but of course now, a once-revered house has had horrendous losses and I am still no supporter.

Conversely, our money was going to other things like energy, reinsurance (you could say funds of investments used for insurance), Natural Resources and Miners (inc precious metals), Commercial Property, Latin America, Turkey, Banks, Uranium, Silver, Cocoa and Livestock, winding-up Secure Loan Funds, Shipping and Defensive industries, amongst myriad others including some very bombed-out holdings which have been recovering steadily. We also sold all our wheat and ‘agricultural products’ trackers at top prices.

Of course we didn’t miss all the bad ones but not having any of the main offenders and having others which did well instead has been one of those multi-generational ‘calls’ which we have again made successfully for clients, driven by the simplicity of ‘value investing’ and not ‘momentum’ for its sake alone. It can be a very uncomfortable place some of the time but fundamentally it is based on underlying factors and principles which are not simply driven by herd-investing mentality, short-term excitement and ‘fear of missing out’. It also pays a handsome dividend income whilst we wait and invariably delivers bonuses from corporate takeovers.

We also didn’t have any investment grade bonds – or government bonds/gilts and these caused a significant upset to most investors who were sold the tale that they were ‘safe’. That may be 25% of loss we did not suffer on our Defensive assets. I am still not buying those now, though there is less to lose I suppose! And as clients know, we saved them fortunes by having zero ‘cryptocurrency’.

Reminiscent of the bubble burst which we also missed altogether, global ‘media’ stocks have lost $0.5trillion this year alone. At the peak, Telephony, Media and technology counted for 40% of the value of all the world’s stocks.
Remember, when something so big falls, it loses more real money on the way down than it ever generated on the way up which was mostly artificial, paper profits and the same with the big fund groups as everyone chases them with ever more capital the better they do. Think about it – if I managed £1,000 and turned that into £3,000 that’s 200% and then I attract £1billion on the strength of my 200% performance only to lose 10% the next year – that’s £100million of losses for the fund over £2,000 of gain. Who is asking the tech manager aficionados how much real money they have lost?

Yes, we have had some dogs too sadly, but we have to expect that – not everything we have does as hoped but that is why we diversify widely – our biggest holdings remains at a little over 2% of client assets. Smaller companies and some UK FTSE250 companies were hit harder than anticipated and some of our smaller company funds had too much in ‘growth’ stocks – we should have picked our own instead, where we have done much better. Some of our larger collective loan funds were repriced and now sit at silly discounts to asset values – we’ll just have to sit and wait for them to return to ‘normal’ levels but not to be sold meantime.

We underestimated the strength of the US Dollar but held steady and have enjoyed the 17% bounce-back of Sterling since the low – it should continue rebalancing. We should have trimmed the profits on our commercial property Trusts too as they came off their top after the Minibudget but remain very good value; we’re still doing well.
Our Utility and Infrastructure Trusts (which we had trimmed savagely at their peaks) fell faster than the main market and if they had assets in emerging markets they were especially impacted. Likewise our Private Equity Funds – we trimmed some but maybe not enough and several of those have fallen further and now stand at very deep discounts to the underlying assets owned. Our couple of biotech Trusts were hit hard too and are very depressed in value against what they actually own.

Fund management groups have been mixed but have rebounded sharply from autumn lows as other assets continued falling. Companies like BT have disappointed again just as expectations for advancement were there, almost halving in the year and such losses not compensated by other exemplary gains elsewhere. European funds did especially poorly too – not that we held many. Management at the Blue Planet Investment Trust, only an inconsequential 0.5% of our total assets, continued its diabolical behaviour without apparent regulatory involvement as nothing’s changed but we continue to press for action to recover any and all negligence losses which should not have arisen but regardless, our overall performance carried that in its stride.

The imperative outcome is that our biggest calls were more right than wrong, both what to avoid (the biggest losers) and what to have (the top-performing sectors). Even if that means just about standing still or a little above, that is against dropping by anything between 15-40% as we have seen elsewhere. The minor areas of loss thus cost us much less than the significant gains we made instead.

Compared to the main indices as most investors out there have, we have therefore outperformed the Global indices quite dramatically in yet another of the most challenging years in my four-and-a-half decades in the world of finance. Still, we continue to be frustrated when something goes awry and trust we don’t rest on our laurels when something does as best hoped too. We have to keep learning and using that knowledge and experience to hone our future actions as it is tomorrow’s investments which matter, not yesterday’s. So here is the call – if you are not with us – what did you or your adviser do – the same as everybody else? Time to change for a wealth manager who has substance behind their strategies if so.

One for the future. So, we like value-based assets. I have written about this one already. Perhaps it is one of the most attractive investments, with the lowest of risks based on its depressed price now. We have acquired £2million’s worth for clients already and are likely to add more, up to £5million, when funds are available and if the price remains attractive.

I am going to simplify things here. It started as a £1biillion ‘ethical’ fund. It invests in residential property (which granted, I believe is over-priced and why we avoided it at launch). These properties are let to housing entities on low but assured rents and these rents pay investors’ incomes. The shares started at £1. They went to £1.20. They have since been as low as 35p. Why? Because a small US firm has published a damning letter of allegations against the Company suggesting shenanigans.

I believe most of these are unfounded and defamatory and the attacker is simply out to make money on the shares’ fall. Maybe the share price in today’s conditions should be 90p. At the present 37p, there is a significant comfort in our investment. If the shares recover to 80p, we have more than doubled our money. Meantime, if the initial dividend payments continue (one just paid!), we shall receive income of 13.5%pa.
This investment is good for low risk and growth investors – all investors. Risks from here are negligible (will it fall further and if so, how much might we receive back if the fund goes into wind-up?). The reward opportunity is fantastic and we are paid a handsome income to wait. The usual caveats apply but Happy New Year!
If you are with us, if you had cash available, we may well have some in your strategy. So far, institutional investors are supportive – Liontrust and M&G have both bought shares since the report and Black Rock is steady too.


Being squeezed till the pips squeak  

The simplistic view is that if a government needs more money for its welfare payments and public services then it need just increase taxes and of course, that the richest pay more as they can afford the most.
That all sounds very dandy and equitable but what is the reality? Norway has experienced similarly to what France faced when M. Hollande increased Income Tax to 70% for top earners. Many left (London was a prime beneficiary – an hour on the train from Paris). Over 30 of the richest Norwegians have fled the Country over wealth taxes levied by the ‘leftist government’.
So these billionaires and millionaires have gone, including fishing magnate Kjell Inge Rokke, who was Norway’s richest person and who paid NKr181million tax last year. More are planning to go as the rich are concerned about the Country’s competitiveness and attraction and once they have gone, they won’t rush back.
This was one of the ‘good’ things about Kwasi Kwarteng’s Minibudget – the signals it gave to attract the wealthy and their economy-generating wealth and investment, but that will have to wait for another day. Sadly at present our tax regime is not far away from a very heavy burden and the highest since WW2 and we hope it is not too much so that our biggest payers are not encouraged away too.

The latest Norwegian leaver has said that a wealth tax imposed a burden that often the rich cannot afford as the money is all tied-up in assets, not cash. The rich Norwegians who have gone just to Switzerland this year had a combined fortune of NKr29billion and paid NKr550million tax every year according to the publicly available information.
Norway has not only increased the level of the wealth tax but is taxing dividends from business more so these same business people will use their skills in more favourable regimes (and without public disclosure too). If a trend has started, then it is hard to reverse what could become a deluge and then, the only ones left to pay the tax burden are the ordinary Norwegians – or to see their public services and welfare plummet

The lesson for the left wing is that you must only tax the golden goose at a level where he neither dies or flees and whilst he may still regret the extent of tax liability, he pays it. If you push too much, you make him sickly, kill him or encourage him to fly away and then, rather than collecting more money, you lose even the tax that he was ‘happy’ to pay in the first place. Remember too, the ‘sentiment’ also encourages or discourages others to want to come and join you – certainly Norway has put paid to that – and maybe our present excessive tax regime has done likewise for the UK too.


Salary-related pension schemes  

There are far fewer of these available to employees these days and most are unfunded or part-funded in the public sector. However, there are still some big pots for deferred and present members which will play-out till the last of pensioners passes-away.

In the old days, they used to be sensible, balanced pots of managed capital, but they have mostly turned into ‘liability matched pots’ and boy, this year did they make some big mistakes as too many of them relied upon sophisticated ‘Liability Driven Investments’ which were not adequately stress-tested and well, didn’t work when faced with more than a simple rise in underlying interest rates (as if that was not likely to happen after a 40-plus year descent to almost zero).  

In 1998, these funds owned 22% of all UK shares and in 2020, that was down to 1.8%. It is testament to the capacity of the market to absorb such a strategic change but also points to another reason for contemporary increased market volatility as those sorts of holders tend to be very long-term ones versus too many private individuals who can now push the big red button at the drop of a hat, exaggerating the peaks and the troughs. For us that pushes value opportunities to extremes to make our contrarian job easier and more rewarding (like this year?) but perhaps we’ll need even more patience than before too.


St Jame’s Place  

When your products are amongst the highest in charges both to buy and to maintain, you have to hope that the performance reflects that commitment by investors. However, the latest ‘Dog House’ report by Best Invest suggests the firm has the largest number of its funds in the ‘Dog House’. SJP has largest number of funds in the ‘dog house’  

We don’t use the firm and for a number of reasons. However, remember, we can and do use any fund so can go to who we hope will be the best for that specific job for clients’ portfolios. However, we more often use quoted funds on the Stock Market (not the more vast, mass-market ‘open-ended funds’) as they offer better opportunity and value – it makes no difference to us – it’s what’s best for our clients. We’re staunchly independent too – not limited to a restricted range like SJP of course.    

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