A General Election looms! So the Dow Jones has pushed higher again, breaching 40,000 and almost double its March 2020 pandemic low. At the depth of the financial crisis in 2009, it was 7,062. Still, you know my sentiments in the short-term here… what possibly could go wrong over there?
The UK has been pushing higher too and the markets are much better valued than the US on fundamentals and with attractive dividends as well. Yes, we now have a General Election – not being blasé but in the short-term I do not believe the outcome will affect those values dramatically but watch the underlying issues and concerns depending upon which party is in power thereafter. Inevitably, a significantly higher spending administration could worry markets and Sterling’s value and that in itself could impact interest rates, the inflationary outlook and indeed the fragile economic recovery now underway.
I am pleased to say that ‘we’ have been enjoying a much overdue purple patch as so many of our ‘value’ positions have at last begun to reward. It is a pleasure to be able to see that reflected in valuations and benefiting the patience we and clients have needed to demonstrate for such a lengthy time too. Much of this is predicated on the UK market which is at last beginning to be recognised, not as a basket-case but as the cheapest of the big markets of the world (the FTSE250 possibly the overall cheapest of all), words we have been resonating for some years now.
It is still very cheap compared to the over-valued US and not only that but supported by tangible value which gives a far greater protection in the face of storms too. I have no respect for Coutts’ recent decision to dump its UK exposure to use globally-centred indices instead – selling £2.7billion of UK stocks from its managed portfolios, effectively to pile more into the over-valued US. If I was a UK-based investor I should be moving-out of Coutts… Still, at least HSBC recognises the value – taking the same tack as we have.
Effectively UK values reflect the fact that pension funds and many other institutions have turned their backs on the UK and left; only a little buying interest now will exhaust the small supply of available UK stocks and thus could fuel an explosion in prices as buyers chase prices. Last autumn I was saying that I should not be as surprised as many pundits would be if value assets rose by some exponential sum – as much as a third or even 50% in a relatively short time, similarly to the post-pandemic moves. The FTSE250 has already been 24% higher than its end-October low and that doesn’t include dividends.
If you are a client, thank you for demonstrating your patience and faith during what have been testing times. If you didn’t listen… there is still time to rectify things! Remember the need for asset protection too, please and to recognise when others promote investment which is simple ‘gamblers’ speculation’ and not investment at all. We don’t do the former.
Inflation and the economy
So our economic growth is defying the naysayers at the IMF and the OECD (and it is supposed, all those who operate within a philosophy, whether politically contrived or not, to prefer to expect things to be ‘bad’ generally). However, inflation fell to a mere 2.3% but not to 2% and impacted by higher than hoped rises in certain areas. Along with rapidly rising commodity prices, these two factors could defer interest rate cuts, despite the Bank of England’s Governor’s views of a cut in June.
I repeat again, governments have the ability to manipulate inflation by changing taxes on spending. It almost seems they don’t ‘know’ this. If they cut, say, VAT on UK hospitality or construction (two sectors which would benefit from the economic boost), this cuts prices – aka inflation. They also seem oblivious to the fact that raising the minimum wage is very inflationary whereas cutting employee National Insurance does nothing to impact headline inflation. It really is not rocket science…
Investment Trusts – playing the discounts
Recently we have done well by ‘playing the discounts’ on two good quality Trusts which had been trading at or near to their asset value but when each launched takeovers for other Trusts and grew their size, there was a case of indigestion in the market and discounts widened, partly because those taking new shares had not realised that under the ‘rules’ they would be issued above par so they would have been better taking cash and then buying the same shares cheaper in the market instead, as we did.
Each Trust has since begun to see the discounts narrow and I should expect them to return to par or close to that, so effectively our investors not only have a good investment but they have had perhaps a 10-15% ‘bonus’ whilst that technical narrowing has been taking place, aided, no doubt, by our buying too. It’s not a recommendation – it never is but the two Trusts are Henderson High Income and Shires Income.
What else have we done recently? Majedie’s new managers have managed to cut the discount savagely and we have been bid for stock which we felt compelled to let the market have, to recycle into other opportunities which offer more attractive value. When this happens, frequently we secure top prices on the day too. Likewise, last week we were bid for some Migo shares and let some of our ‘excess’ go at £3.60, at a mere 1.5% discount to the underlying asset value compared to rather wider recent levels.
I repeat to those who concentrate naively purely upon ‘what are your costs’ – the extra bonuses we are able to unlock by these technical trading opportunities, worth what we target as the odd one or two percentage points on a portfolio’s value in a year, do not show in the ‘costs’ but of course they do show in overall bottom-line results. If you don’t have any Investment Trusts in your portfolios elsewhere, you will never enjoy these opportunities – let alone the very special bonuses when deeply discounted funds wind-up, selling all their assets and returning all the underlying cash to shareholders.
Good news/bad news
So Hargreaves Lansdown rebuts a takeover bid and the shares rally 13%. We hold the shares as a seriously undervalued asset – well they were at £6.94 on only 19 March when all the negativity was intense. They’re up nigh 60% since then (dividend income on top!) – how daft. Indeed, there were lots of speculative short-sellers then too so I do hope they have been sorely stung, having to buy-back stock at a hefty premium to cover their positions. As usual… do we have enough… probably not!
Bad news – reassuringly there is no new discouraging news of proportion to report and affecting our assets. There are still some frustrations and delays with some of our closed-ended funds but nothing adversely affecting prospects dramatically but in some ways making the assets even more attractively priced at cheaper levels.
The Economy, resources and commercial property
So the Economy may well have turned a corner. Yes, interest rates are almost inevitably going to come down but if there is too much buoyancy, the trajectory may be affected to dampen the consumer. Whilst we are not complaining at all, natural resources have been bouncing dramatically from their lowest points with some significant gains from tin and nickel to silver and wheat (all of which we own) and in the end, these will feed-through to higher prices of goods, added to the exorbitant cost of labour (where already unemployment levels are rising and vacancies falling).
However, being more positive, one area which is so undervalued presently is commercial property. Big funds are also adding to the woes by selling into a market not so keen to buy and maybe, just maybe, some economic growth will result in more demand across the board for commercial property as commerce generally grows and needs the space and as planning laws become ever more expensive and difficult to navigate, having a property with extant consents has great attraction – and added value.
In this regard, a very unloved sector of the market is the plethora of commercial property REITS (Real Estate Investment Trusts). Most of them pay handsome incomes (the rents they receive from occupied properties) but where their shares are trading at ludicrously significant discounts to the underlying properties’ values on the books, values already heavily written-down by worried valuers reflecting the general sentiment. If you want a great income, discounted assets and a sector which could easily rebound strongly as the economy does the same, then some would not be unwise, just as we have acquired. Yes, some have refinancing with which to contend and that can cause issues but the good are blighted alongside the bad presently and there are some great bargains out there.
Answers on a postcard please
So tell me. Where, for just 24p, can you buy a share in a quoted, collective investment fund which has this week declared its latest quarterly dividend of 1.2p? Yes, that suggests an annual income yield of 20%pa. I should add, based on the value of all of its fully transparent assets, if it closed-down ‘today’ and all these fetched values ascribed to them (commercial property, cash and so on, less loans), shareholders would receive, shall we say after costs, 70p? Even if some fire sales meant only 50p came, we shouldn’t complain.
Yes of course there can be issues but how many companies pay away that level of dividend if they can’t afford to do so…? Guess what… yes, we hold it.
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
