Elon Musk is basking in the light as the world’s richest man again as his investments have recovered some followers and at the same time the froth has blown-off the top of the French luxury brands’ world. We feel both stocks’ and sectors’ sun-bathing remains transitory.
So US inflation has slipped some more and the US may be loath to increase interest rates further. However, here in the UK, average earnings have rocketed – which is no surprise after the colossal increase in the National Living Wage in April… all inflationary pressures of course as prices have to rise to accommodate these increased costs.
Some more good news
One of our Closed-ended funds has benefited from a ‘technical’ adjustment as its major asset has announced a review which could lead to the disposal of that asset. It is a strange Fund in that it trades at a very deep discount to the value of the assets because of the effective constrained ownership of the Trust and this significant single holding.
Whilst there is no assurance anything will change (and we don’t ‘mind’ as it is a broadly-based, internationally balanced Trust at a deep discount anyway) but if it does… then the Trust will benefit handsomely and potentially its very nature and existence may change. If so, this is likely to be an even bigger bonus for our investors and nothing to do with broader market sentiment per se. I continue to repeat that we like these sorts of situations. The Trust’s share price has risen from this year’s low by 21% but still only reflecting the increase in the main asset’s value and not any discount shrinkage – yet.
Abrdn Latin American Income Fund has now been delisted pending wind-up too so investors should receive around 63p a share within six weeks with a little extra later. Remember, the share price was in the region of 46p at the beginning of 2022 and it’s paid good income to us since too. A good part of the 37% uplift is the removal of the discount at which the market priced the shares. We own £3million of this Trust and shall be moving the funds into other opportunities for hopeful future uplifts!
And bouncing off the bottom – a very subsidiary asset for us (almost fully written-off for its inconsequential value) but the main shareholder has increased its stake and the Managing Director has at last bought some shares… and they rose from 0.4p to 1.7p… yes, 325%. We’ve had to wait a long time for this, after slippage after slippage and we shall have to wait longer I am sure before a fair price is possible. However, maybe at last fortunes have turned and new investors keen to participate. From its low risk roots it now remains high risk and very speculative and it is true that for most investors the gain is still academic, in that it is simply reducing past losses. We mustn’t be ungrateful but ‘nothing’ is in the bag yet.
Markets this first half
It’s been a difficult first half of the year albeit starting promisingly and (which, you will recall, saw the FTSE100 hit a new peak). However, two ‘events’ have caused frustration to that.
The events impacting ‘us’ specifically have been:-
1. The banking collapse contagion in the US and then the Credit Suisse affair – nothing affecting us directly but impacting the financial sector where we are overweight and indeed where we benefited handsomely in 2022 – and expect to continue doing so as a general beneficiary of higher interest rates.
2. Stubborn inflation at much higher levels than worst fears and thus the overall rising interest rates affecting ‘safe’ investments such as government bonds and their impact on other forms of usually ‘safe’ investments.
These factors have had other reverberations such as upon the commercial property market, smaller companies and Private Equity where values have widened despite sanguine outcomes and indeed good underlying results in the two latter categories particularly. Worries about refinancing term loans have been enough to cast a pall over the former too. It is suggested as much as $1.5trillion of commercial property debt needs refinancing over the next few years. However, as usual, the good has been blighted alongside the bad – for instance, British Land has been relegated to the FTSE250 from the FTSE100, despite its vast, varied portfolio. Purposefully, we have a useful exposure to Real Estate Investment Trusts at deep discounts to their underlying asset values and with good rental yields but they have contributed to a lacklustre shorter-term outcome.
There are two other factors at play too. One is ‘regulatory creep’ which appears to be ‘boiling the frog slowly’ and we are seeing this with many specialist Closed-ended funds, as I have mentioned before. Not only are they seen as ‘too small’ in many instances but compliance teams at investment houses are simply deciding they can’t tolerate them in clients’ portfolios (they used to relish them before) and the matter of simple headline ‘costs’ (regardless of the benefits and greater return potential) takes precedence over the potential rewards. I have encountered several where we do not participate but where perhaps we should. For example, any sane investor could have bought a share in, say, Seraphim Space Fund at £1 at launch in 2021 and have since seen those shares for sale at 35p this year yet with the underlying asset value of its component funds still north of 90p and progress on its initial objectives:- To the moon? Investors can have a slice of the space tech industry…
We have been affected by some of this contagion in the short term but frankly, as I shared in the last eshot, even if we had bought that mentioned secure infrastructure loan fund at 90p (a fair price at the time and 10p below its launch) and it is now 73p, why would we want to sell it after it had drifted 19% and is paying 9.5%pa dividends? That is the reality.
I should add too that as the real yields on Treasury Bonds and Gilts rise, then this is considered the ‘risk free’ return and so ‘something else’ paying a steady return almost in the ‘guaranteed’ space, like infrastructure, is not as attractive as it was unless it could raise the interest it can charge to its component businesses.
Finally, the main US tech stocks are again making the running in 2023 (not having learnt from 2022) and the natural resource and energy sectors have drifted backwards, bringing values down but not necessarily profits for the underlying companies nor the dividends we enjoy. However, whilst short-term we may have ‘missed-out’, if we can buy deep value, with a very good income level and with solid underlying assets behind our purchases, we have far greater confidence in the security of our portfolio than one which could, in reality, fall a very considerable way and still not pay many dimes of income to our investors to help them pay their regular bills.
I mentioned before the ridiculousness of Apple being valued at more than the entire FTSE100, something likely to haunt investors down the line. Conversely, we have so many rather drab assets which in themselves still have the potential to not only generate dependable and steady growth and income (dividend yields typically at an average which may be four times as much as Apple’s) but where the shares could double too as they are so undervalued.
Of course, with ‘funds’ it is different but so many of the closed-ended funds we own have special merits for advancement – again, as the examples above and given before for that infrastructure loan fund which, if that winds-up in four years, would generate 16%pa for us from ‘here’ regardless of what happens to the ‘stock market’ (ignoring any special costs or unanticipated portfolio losses of course).
Finally, the underlying discounts to the average net asset value on ‘Investment Trusts’ have widened over the last six months. This has affected us slightly in the short-term – but this should prove to be a temporary aberration which, of course, when it corrects will provide an ‘equal and opposite’ out-performance against other fund asset types.
We have had some good technical outcomes this year (including six wind-up proposals and the above ‘review’ noted) but sadly these have not been enough to counter the general apathy – but there will be more such ‘bonuses’. Indeed, short-term, sales of that infrastructure loan fund’s shares have continued and the price has fallen in the short-term rather than risen on the optimism of an expected early exit opportunity – bizarre!
This has also affected Momentum Multi-Asset Value Trust which is in wind-up – shares were saleable at £1.60 a fortnight ago and have since been £1.43 despite the asset value remaining similar… that again is only a matter of short-term patience to receive the £1.60 (say). However, that is a 10.6% drop in an investor’s valuation temporarily! Instead, not as a recommendation but if someone can buy any such share at £1.43 they could be securing an assured return of maybe 11% (£1.43 to £1.60) in mere weeks, if some impatient fool is prepared to sell their shares (and costs and possible market movements considered).
60th birthday
A small group of friends and family helped celebrate Helen’s 60th on Saturday evening at the Park Hotel in Barnstaple, which looked-after us all so well.
Helen was humbled by the generosity of the guests with their wishes and presents but she requested that donations could be made to ROTOM – Reach One, Touch One Ministries which helps the elderly in Uganda. She is visiting Uganda again in October, the Charity’s 20th anniversary. Guests were so generous and the Company’s Charitable Foundation is topping-up the amount given so that £1,500 can be passed to ROTOM. Thank you so much to everybody! Here are details on the Charity:- https://reachone-touchone.org/gb
Client and investor vulnerability
I have mentioned this before and have just completed the latest Just/SOLLA certification in ‘Consumer Vulnerability in Later Life’. I am pleased to say that we have always been more alert than many to prospective vulnerabilities in people and how these can manifest themselves. The latest regulations also place more of a burden of evidence on all financial firms to demonstrate how they are acting and have acted. This is good news as it will reduce scams but also it will flag more ‘difficult’ and embarrassing situations such as family members coercing or abusing them financially.
It might lead to more difficult conversations to demonstrate there are not problems in relationships, before funds can be released, etc. Of course, in genuine and appropriate actions this in itself can be a positive thing, helping to protect the acting family members themselves (especially if there are other affected siblings, or the authorities, etc).
However, the extra layers of obligatory regulations also add to costs suffered by financial firms and these will have to be passed-on but I suppose if ‘the rules’ protect more people, that is a price you and we all have to consider it is worth paying. Indeed, I could see even for a small firm having a staff member almost entirely allocated to such awareness issues and their reporting.
Savings tax
Investors have been realising that the Taxman is really after them! To harbour savings from his attention, this April a record £9billion was added to Cash ISAs alone, on top of £6billion in March.
However, for many savers, the biggest ‘tax’ threat is not the extra tax for them on their cash savings from last April (especially as interest rates are up, so more taxable income received) but a hidden cost. The special ‘tax-free’ rates are being savaged to only £1,000 for Basic Rate taxpayers and £500 for Higher Rate ones (45% taxpayers don’t have any) and dividend tax freedom has fallen from £2,000 to £1,000 and only £500 next April.
So, if your interest or dividends exceed these sums then you must report to HMRC. (If you do not, you’ll be discovered a few years later and with penalties to pay as well). Excess income is likely to mean a full Tax Return covering all your income and for many, having a tax professional like ourselves to help. Even if our fees are very competitive and only a few hundreds of pounds to assimilate and file things, that is a pernicious ‘tax’. Capital Gains Tax on ‘unprotected’ assets is also up as allowances are being savaged too.
What can you do? Exploit your full ISA allowances if you fear you will fall into this trap. Sell any non-ISA shares and funds and we’d be happy to put that cash into a market ISA with ourselves – we have a programme where clients can shuffle funds across automatically from a ‘portfolio’ to an ISA to optimise their allowances and cut their tax bills but we need clients’ consent of course. We charge no ISA subscription costs either.
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
