How awful the recent earthquake in Turkey and Syria is. Our prayers and hopefully support go out to those devastated communities not only facing what they have lost but also at a bitterly cold part of the year and for Syria, already reeling from the Civil War there and not recovered.
So no Recession yet (again) although there remains concern there will be something in 2023 but not as bad as feared. That’s good. The FTSE100 has nudged higher before treading water and despite BP and Shell’s results which the market feels will be ‘one swallow’ as the oil and gas prices have been drifting, BP has jumped-up however in long-overdue reflection that it is under-valued compared to others like Shell. These giants are now paying colossal contributions towards the Country’s overall tax intake, especially as past losses have finally been absorbed (yes, they have made amongst some of the biggest losses of any quoted companies in previous years).
We read ‘conflicting’ reports and arguments about deprivation, comments about food bank use by those earning over £35,000, the impact of inflation and Saga’s holiday telephone lines being four times as busy as they were at this time of the year before the pandemic. What are we to make of it all? This is not a challenge to those who are definitely struggling but it’s never as clear-cut as it may appear – or the media may present to us all. How do we take investment decisions in the face of that, with the FTSE100 at an ‘all time high’ as I write and heading towards 8,000?
Discounts on investment trusts
There are many who don’t understand these technical trading opportunities where effectively a basket of transparent investments worth, say £1, are selling on the market in their respective receptacle (typically an Investment Trust) for 70p. Our clients know that we like these and for a number of reasons. The first is that more often than not, at some point the discount is unlocked by some corporate action. The second is simple – we receive the investment return (so capital gains and income) from £1’s worth of assets regardless and well, even if down the road we have to sell when there is still a discount, so what? Of course that is still no justification for buying a really bad asset too but it can be a reason for buying one as well depending on ‘what it is’ and the price! Some of our best past investments have been buying what others may have said was a ‘poor’ investment but at far too cheap a price. I remember Somerfield supermarkets which was priced as a tenth rate grocer… the move up to its ‘third rate grocer’ status was excellent thank you and we did very well from that appropriate rerating.
Yes, the discount can ebb and flow according to short-term investor sentiment. That’s for us to do our best to manage when necessary. We also need to consider how we deal and often it can be smaller Trusts (eg sub £100million) but how we deal puts us in pole position to benefit from these where the bigger managers cannot do so because they cannot buy enough or sell when they may want. We have some on a 65% discount believe it or not!
Today, one of our biggest and longest-held trusts, Abrdn Smaller Companies Dividend, Trust has announced it is undertaking a ’strategic review’ so the share price has risen 14% (34p). It’s one of our biggest assets because it has done very well for us over the lengthy time we have held it and we are one of its largest holders (7% of the shares we have built-up in that time) so our votes count on any proposal. That also means most clients have it.
That’s nice news first thing in the morning – a £500,000+ gain and more to come on either wind-up where we receive cash at the net asset value or a meaningful merger, etc. Putting this another way, even though this holding is still only just over 2% of our clients’ total assets, that gain today is equivalent to the whole value of every client’s investment in the Blue Planet debacle, a Trust which is also now winding-up, unlocking the tiny remaining discount (which had helped make it attractive once) and returning 100% of the residual asset value to shareholders.
We have many similar situations where we have waited a long time – and shall continue waiting. We have very little or nothing to lose by waiting and investors still have exposure to the underlying asset class whilst we wait. Some say a ‘discount’ is a reflection of poor investor appetite and ‘it could worsen’ – which is true but the lower it becomes, in the main the more likely the Board will have to undertake a review to reduce the discount – or someone else from outside will do that (as has happened here). Of course that is not ‘guaranteed’ but those are the sorts of attributes it is our job to consider.
Anyway, well done loyal and faithful clients. Not everyone will have it but most of you will so well done for your patience. I write about these opportunities often and when they happen, it is a lovely bonus. If the Abrdn Trust liquidates, we’ll have had a 20% uplift so on our 2% holding of all clients’ assets, that is 0.4% TOTAL return today on clients’ overall assets for ‘nothing’ connected to how the underlying portfolio is doing. Put another way, that is 0.4% return which is a large chunk of whatever investment management costs you pay a year, being a client, on one asset on one day.
If all you have is cheap index-tracker/passive funds or open-ended funds you will never receive such bonus, ever. Of course these are not guaranteed extras but history says they will repeat and it is up to us to find the next one, when the backdrop is right too of course.
What is risk?
We can all define ‘risk’ in different ways. The crucial thing is recognising it exists everywhere and that the ‘only’ way of mitigating it is by taking precautions and managing it. You should spread your money very widely indeed, across all forms of asset and type so not having ‘all’ in one type of thing. If you have all cash, then the biggest risk is inflation – a pernicious ‘tax’ you are suffering which presently is eating your cash at over 10%.
I checked a report for an investor last weekend who had been a day-trader in the 1990s in the Dot Com bubble and who ultimately lost his shirt. He noted that he sees any form of market investment as high risk. He has gone on to own a portfolio of homes for letting and holidays worth £1.5million but doesn’t see these as ‘high risk’ despite having many hundreds of thousands of debt against them. It is fine if he sees the risk and decides to carry that but he needs to recognise that the risks to him are immense and he could lose everything (including his net income from them) through a limited series of events, which can happen.
Another new prospect noted zero risk with everything but wanted us to give him advice on a guaranteed annuity pension. So the only advice is to take the annuity as they wanted no uncertainties about the future. We didn’t advise them in the end – because they wanted to take the cash to spend towards a camper van… what were we meant to do? We declined to assist as we would be the vulnerable ones then.
We read too that after an awful year for rock-solid investment grade bonds in fixed interest and inflation-linked government stock (you can’t lose on that can you?), January saw the second-highest withdrawals from funds with this sort of stuff within it. Yes, that is investors selling after the event, not having anticipated the almost inevitability in this regard that it would happen. On top of that, many of the very funds which hold these sorts of asset have revisited their ‘risk ratings’ after the bad performance and volatility and have increased them to high risk – when obviously the risks are now lower than they were a year ago and investors will also be paid more (some!) income for holding the things too. Were the risks explained to investors a year ago? Will those investors have recourse? We had zero in these sorts of things.
I have mentioned Investment Trusts at a discount. If there is no discount or the Trust is trading at a premium (ie its shares trading above the value of all its assets) then that is higher risk than one trading at a discount. If those assets are a bag of 100 £1 coins for sale at say £70 then the lower the price of the bag, the lower the risk as the mathematical probability begins to be staked in your favour but again, many investors and the ‘computer’ may say this has increased the risks of the asset because it has fallen in value. Isn’t that ridiculous? Of course there are more things than that to investing but!
The announcement of Abrdn Smaller Companies Trust today has cut the discount significantly and we are very pleased. However, it is now a riskier investment than when there was a far bigger comfort cushion, till the news is finalised though we make a judgment, a management judgment, that something very positive will arise. The converse is therefore also true (though not universally but generically) that a bigger discount for that 100 bag of £1 coins is then a lower risk. Regardless of the fact that some investors would lose say £65 if they sold-out at £35, so they suffered a very high risk before, the probability of further declines in the price versus a likelihood of a significant upside has created a very attractive investment.
Take BH Macro – one of the most expensive Trusts in annual fees too and it has just raised over £300million by selling new shares and yes, its shares trade above the asset value. It did very well last year and investors are chasing the skills of the managers but regardless (and that may be justified) but the risks are higher as there is no discount. A performance fee could suggest the manager has nothing to lose by taking speculative positions too. We don’t own that.
Despite all of that, we still spread clients’ money very widely indeed, not only to protect them and us from any excessive exposure to anything (as the unexpected is what all of us must expect, I mean, who expected the outcome from the Mini Budget last year?!) but that also because that enables us to give them more opportunities as well.
Financial planning in action
So a lot of work on our part but this shows what is possible. A client over pensionable age (55) with a benevolent and helpful employer needed a car loan for £10,000. Simple – borrow the money. Here’s a suggestion we made. The employer will lend you the money and take an interest charge through salary sacrifice so saving National Insurance. Rather than repaying the loan, why not direct the monthly instalments into your Balanced Pension with us?
Your monthly premia too can be ‘salary sacrifice’ so saving National Insurance and the Taxman will add an extra tax bonus on your contributions. So effectively, rather than repaying a bank loan elsewhere out of net pay, the gross equivalent can be redirected to the Pension. The NI saving is then also available to gross-up as extra pension contribution not affecting their monthly net income!
Then, after the three years expected for the car loan, added to something already in the Pension pot and the employer’s contributions too, the client could take the Tax-free cash and repay the loan. If the client can afford the high-level monthly contributions, then continue with them to bolster the Pension as much as possible as aside from the State Pension, this is all they’ll have in retirement.
So, after just over two years, there is a Pension plan which has done very well, worth over £40,000 and they can draw their 25% tax-free cash, clear the loan and continue their contributions. Or, as we guided, leave it untouched, with the employer’s support, and instead place a dealing bar on the Pension to allow the monthly contributions and investment management disposals in the usual course of events to accumulate and when they total £10,000, then take the cash and don’t incur unnecessary brokerage costs on selling components.
Of course there are risks with everything but the Taxman and National Insurance help big-time. They also have a residual pension pot which they wouldn’t have had and that can generate an income in retirement and tax-free up to the Personal Tax Allowance of £12,570pa. Whatever remains is still ‘invested’ and can be left to their beneficiaries – or of course all drawn-out and spent if needed.
How much did we charge for all this advice and making the arrangements with employer etc? Nothing. How much do we receive from the Pension (the only income we receive from the Client)? A small amount of management fees for managing the pot and there is brokerage for transactions within – the same as any managed pension arrangement anyone has. Value to the client? You work it out.
And do you know what’s sad about this sort of invaluable advice? There are plenty of people out there who are suspicious of professional financial advisers, or that they may charge too much or that they have ulterior motive in their guidance. We can only speak for ourselves and what we have tried to do with integrity for almost 40 years now but there we are. We are not criminals and act with integrity in all we try to do, with clients’ best interests at heart in everything. That doesn’t make us perfect and we strive at all times to do better than the best we perform today but we are also totally transparent with everything.
Tesla – short?
Tesla had been falling… and falling… and suddenly in this year, enthusiasm for the shares returned and those who had sold short (some 4% of the company) caught a cold, losing an apparent $7billion. Of course, if like me they trimmed their shorts when the price was at its lowest levels, they will have done well. I hasten to add we don’t take such positions for clients but as a personal hedge occasionally – it was an ‘expensive’ position when Tesla rocketed on excessive investor enthusiasm. They were $109 on 27 December and have since almost doubled but in my book still not worth nearly $700billion… Remember, they were $407 on 5/11/21.
Chooseday – please join us!
The third coffee morning went well
on 7 February and it was good to welcome guests to share some company and coffee. The next one is at 10.30am till noon on 21 February [correct?] – please do feel free to come along and join us!
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 |
