Investment psychology and trusts

Brainstorming concept, knowledge sharing
What is the psychology of investment and why do people react too soon?

Albeit a little belated, I hope you had an enjoyable Coronation weekend. Whatever your views on the process, no other country in the world can replicate what we can produce so all applause to the thousands involved in whatever way they achieved such a successful event – and a restful holiday weekend, I trust too.   

I know some people comment upon the ‘cost’ but there is the ‘benefit’ too – the amounts of revenue generated by the actual process itself, let alone the global advertising model for UK Plc and what it offers even if simply tourism as the instant promotion. Estimates suggest that 1 in 11 people in the world watched proceedings…      

Coronation comparisons then and now  

I am indebted to the FT’s Lex Column for some comments about what investment conditions may have been like in 1953 and compared to today. Invariably, the age-old chestnut of ‘performance’ was raised, not that shares were held so universally then regardless. That said, oddly enough, the dividend yield on UK shares then was around 5% and today it is not far from that – just over 4% (that’s part of the profit companies pay-out to shareholders). So, the report suggests the compound annualised return from shares since then was around 7% after inflation. Cash was around 1%. Bonds were 2%, all figures without any costs of course. And one day, I am happy to share why the ‘7%’ figure average’ should remain mathematically attainable going forwards, even now.

However, I must also share the risk warnings, of course but pity that person keeping all their investments in cash 70 years ago… they were oblivious to the biggest risks of all – risks meaning their money would do atrociously. Don’t make the same mistake.

Meantime, the media is keen to remind us that Bank Base Rate is the highest for 15 years – back to 2008 levels and there seems an undercurrent that future movements could well be downwards again even if possibly peaking a little above now. (I should remind central banks and governments that there are also other ways of reacting to inflation too). The media also informs us sarcastically that the UK economy grew by ‘only’ 0.1% in the first quarter. This was also stifled by strike action and cost-of-living negativity but we must remember – we had numerous predictions of Recession (two consecutive quarters of regression). The flip side is that without repeat of these negatives, progress will be stronger and indeed tax receipts and related lower government borrowing do point to a slightly rosier position. Of course the alleged 0.3% reduction in March (monthly figures are usually revised later) suggests that stubborn inflation will fall as a consequence of that too, as higher interest rates bite consumers and businesses. Still, Germany’s disconcerting industrial production figures suggest it might have Recession, so some other countries are doing worse than us.

Note: This picture is of the Queen and Prince Philip in November 1952, the autumn before the Coronation. Credit to the Sarah Grant collection    

Unlocking value from closed-end funds

Blast… one of the Trusts to which I have referred over recent months in view of the ‘silly’ discounts to the underlying assets has been approached for a takeover. Whilst it is not in the bag but recommended by the Board, a long-term Hong Kong-based property investor has bid for Civitas, the social housing provider. Its shares hit 51.7p at the end of March and the bid is at 80p so a 55% uplift from then (and don’t forget the generous income from rents distributed as dividend, equal to 11%pa based on the last payment).

Why do I say ‘blast’? Because it has been on my watch list some time but we don’t have that one for clients. TriplePoint (a similar fund) has also jumped and we don’t have that one either – just the suspended Home REIT and this bid should give an underpin to valuations of these long-term assets and will help prospects there regardless (we await the Board’s announcements of a new manager and the publication of the accounts).

Yes, I am frustrated as whilst we have lots of these ‘types’ of situations but without possible systemic change, there has been a reluctance recently to increase our exposure to these special value opportunities despite the underlying fundamental value. Clearly said Hong Kong investor has seen beyond the short-term negativity of UK investors (buying cheap Pounds too of course) and perhaps even the regulatory qualms as well as the volatility and risk-fixated backdrop which deters investment management individualism too. Who would buy Civitas which had dropped 57% since 5/8/21 but that is just what you/we need to do after such falls and then a hefty dose of patience.
The last book value of Civitas’ assets was £1.09 so the predator is still buying on the cheap but the takeover stabilises prospects for the company, its staff (the management company is being retained) and tenants. However, if those asset values are realistic, the predator could sell some assets carefully over the next few years and end-up with a portfolio almost for free, whilst running rents cover all the capital servicing costs of the deal at these levels.

Average Private Equity Trust discounts have widened too and represent opportunities, not constraints. Even if some valuations of underlying investments are cut, there is a comfort cushion there and typically good cash reserves to buy-in and cancel their own shares too.    

Investment psychology

So we learn that positive life events only stimulate half the brain. Now, does that mean that we need twice as many good things as bad things to balance our emotional reactions? That might explain why we react so much worse to a loss on investments than we do on a gain such that people can react foolishly when they see a loss, as they perceive it is worse than the equivalent gain (and remember that markets are simply collections of people all doing similar things, albeit with some real value underpinning what ‘they’ represent longer-term).

Some wag has suggested that one way of coping is simply to not look at our investment values so much (after all, you invest for the sensible-term, right, not the next week, month or year?) as that will then cut-down on the numbers of ‘bad news’ events (as a market can easily be down a few points as it is up, from one day to the next). It might make it easier too to buy cheap investments (which have fallen a long way and appear higher risk as a consequence but in reality are far cheaper against the fundamental value they represent, so the lower risk they are likely to be compared to when they were ‘dear’!). Add to that a big dose of patience and you have the recipe for most investment success!      

Professional indemnity and regulation  

Clients will be pleased to learn that we sailed-through the renewal of our Professional Indemnity insurance again this year, with accolades of one of the most thorough and well-presented renewal applications one insurer said they’d seen – which is reassuring for us too. However, as an obligatory provision against unknown future negligence (or past unknown problems manifesting themselves down the line) that still dents the bank balance by a six-figure sum – ouch. On top of other professional costs related to regulatory duties reaching into multiple hundreds of thousands of pounds of permanent annual commitment in meeting latest rules and maintaining them, it means that the cost consequences to all those using some form of financial service and the protection they have that is provided by the ‘system’ will also inevitably cost them more.

Curiously this is all at the same time there is hope the renewed regulatory approach will cut costs and make accessibility to financial service and products easier, especially to those with little. However, whilst the initiatives are much lauded and come on the back of far too many unacceptable scams which have defrauded so many of so much, these very regulations to better protect consumers will increase costs, reduce choice and reduce advice and service accessibility (especially for the poor), the exact opposite outcome.

By 31 July, advisers and product providers must undertake reviews of their entire product/service ranges and record the findings of their ‘fair value assessments’ to ensure that their fees are ‘fair’ (and transparent). Different assessments have to be undertaken across different client categories, especially to ensure certain consumer groups are not being ‘disproportionately disadvantaged’.

One reaction to the reviews which individual funds must conduct to satisfy the new ‘Consumer Duty’ is that products and services will disappear so their participants may be disadvantaged. Franklin Templeton for example is closing a ‘raft of funds’ from its offshore range of 170 as it says keeping them will become ‘less economically sensible’. The duty requires each ‘fund’ to assess the target market, distribution strategy, fair value and consumer understanding and support for the product(s) towards ‘delivering good consumer outcomes’ and indeed to ensure the promoters of those funds likewise satisfy the same criteria for themselves too.

It will be curious to see which companies and products conclude that their arrangements represent bad value and expensive/unreasonable prices or that their funds are so atrocious that investors should not to use them – and what they will do as a consequence!

Bad news  

Our small holding in Wood (J) Group Plc fell 34% as private equity suitor Apollo pulled out from its £2.40 bid. Brokers Jeffries still cite a target price of £2.37 for the shares but this is the second daily consecutive withdrawal by Apollo after dropping the THG bid on Friday – maybe it is nothing about the target companies but cash, higher interest costs and borrowing concerns at $0.5trillion Apollo itself…. however, despite the news, the shares seem far too cheap now based on prospects going forwards but as ever, this cannot be a recommendation.

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