The US Dollar’s the lowest against Sterling since April 2022. That’s a 20% ascent for Sterling since the Sept 2022 low. It has been weaker these last few weeks as it is expected that interest rates will be cut even though US inflation readings are mixed. Currency volatility can work for you or against you – be aware!
It’s generally good for us – your US shares will have lost that on the currency movement but it helps inflation as most commodities are priced in Dollars so they are cheaper. It also means overseas’ investors here have had a 20% increase from the UK just from the currency movement. Meantime the Euro has been steadier against Sterling too.
Life reality
Last weekend I was chatting to a relative whose neighbour is worrying themselves silly over the increase in tax that they fear they will be paying under the new government. They are concerned they will not be able to afford to live, what with the removal of the Winter Fuel payment. There is early onset dementia for this retired professional who does not have an advisory contact. From what my relative says, they have little over which to be worried, but they have no one to tell them that.
To them, this is the reality and they are petrified – without someone to approach and who can guide them, give them reassurance and to encourage changes which may help make their finances more efficient and tax-friendly. Of course we are accessible to them without obligation nor cost for a chat. However, it is sad too they have not made an independent advisory connection already and who they can trust in their time of real need – and probably in growing ways over the next few years for them too. Please don’t be like them.
What is risk?
Constantly we look at this. In theory we all want investments which never fall in value, always go up lots, pay a good income which rises too, compensate for inflation, are tax efficient and accessible when we need it… the reality is that instead we must recognise that risk exists for all decisions we take and thus it is up to us to manage that risk.
To achieve a better outcome means a degree of risk. Doing ‘nothing’ (typically meaning keeping everything as cash or at the bank in this context) is not a ‘decision’ – the real value will deteriorate with inflation and when that rockets as in recent years, the real value of that cash plummets and you have nothing else to offset that impact. Your cash only route is then a high risk strategy; you must spread your eggs around asset classes widely!
If it helps, it is good to recognise there are risks in everything we do in life – we adjudge that taking them is to obtain a positive outcome and better than not taking that action – a managed decision. If you don’t believe that, even think about alighting from bed each morning or consider how many people have died when going to the toilet. Yes, there are some statistics and history on the matter!
Here’s what Wiki says about it!
Here’s another one on risk for you to consider. If average life expectancy for a 60-year-old is say 86 (so you’re planning how long you need your funds to last maybe!), remember than half of us will live longer than that – that’s statistics for you!
St James’s Place
I don’t believe the Telegraph has a vendetta but its ‘Money’ section on 17 August really heavily lambasted not only the Firm’s continuing high charges for ongoing management of investors’ funds (even after the small cuts last year) and initial charges which are twice the industry average for initial advice too but also the fact that the Company again headed the ‘Dog Funds’ rankings, for the seventh consecutive year.
Why problems at St James’s Place are more than a blip
The firm still has some great attributes especially on its slick sales’ machine and from time to time we come across a number of its tied advisers (their advisers can only sell SJP funds of course, despite often trying to give the impression of ‘independence’ by noting they select from the ‘world of investment opportunities’). Sadly, very often there is an element of ‘arrogance’ presented at us but whether that is an inferiority, defensive mechanism we don’t know as these sales’ reps (‘partners’) can only sell the same funds to new clients and will hardly tell existing clients to go elsewhere, whether they are in the ‘dog list’ or not. However, we can buy from whatever is accessible as we are staunchly independent. Do you have some of the £13billion in the SJP Dog Fund range? We can buy any funds, remember and we don’t have any of these – it makes no difference to us – simply what we believe will do the optimum job for that part of our clients’ strategies.
It is interesting too that so-called ‘ESG’ or ‘Ethical’ Funds generally have also had a torrid performance time. There is still a disconnect between what conscience-salving investors are acquiring (or what they are not) and sadly very often a deselective investment policy achieves nothing whatsoever to promote or satisfy the investors’ imaginary expectations simply by buying company ‘X’ and not buying Company ‘Y’.
We do agree that ‘past performance is not necessarily a guide to the future’ though under the Regulator’s well-intended Consumer Duty, one outcome is that some managers are using that as an excuse to close some perfectly ‘good’ funds if they fail some subjective and short-term ‘fair value’ tests so that investors will concentrate even more in a smaller offering and ultimately buying all the same things, till one day that bubble will burst big time. Some of that may be simple window dressing too, to ‘prove’ adherence to the rule’
However, it is hard to use the ‘excuse’ forever and certainly, spreading one’s eggs over many fund managers is wiser than having too much with just one group (like SJP which only sells its own funds). At least as staunch independents we can do that for our clients, including Investment Trusts which many advisory and management firms don’t or can’t use! And finally, remember that with any data set, half is below average and half is above… that’s the premise of simple maths depending upon the measure of ‘average’ you use.
Finally, as that rare beast – a value investor – we can pick-around in the depths of despair where we see value too, regardless of what the past performance line of an asset has been and the cheaper it is, the better the opportunity in many instances but clearly, with collective funds it is a different ball-game as it depends what the manager holds, etc.
Value investing
It seems prescient for the FT’s writer Rob Arnott, Chairman of Research Affiliates to suggest this strategy is now due for a big comeback!
Value investing is due for a big comeback
Yes of course, behavioural bias et al but yes, I agree! Global ‘Growth’ has surpassed ‘Value’ in 15 of the last 17 years. So yes, you either put more into Growth now as evidently the only way forward is clear, or the Growth you have already you at least trim, to rebalance. I add another dynamic – something which is so markedly expensive cannot maintain an artificially high level for ever, especially if alternatives are being undervalued by so much (and representing fundamental assets, profitability, income or whatever).
In 2005-07 he notes that Value was expensive in historical terms when comparing the stock price to book of the 30% of cheapest stocks versus the 30% most expensive. Those registered at 40% of the total versus a ‘normal’ 25%. Presently that ratio is 12%, translated to mean that the most expensive stocks are being priced now to grow at eightfold the rate of the boring, Value stocks. Hmmm. That’s something with which I struggle but if I can buy value which can double and double and still not be expensive (and am paid a good rate of income to wait), I don’t have to worry how over-extended something else may be, I suppose but yes, more patience from participating investors please as it doesn’t usually happen overnight (though some individual stocks in that camp do demonstrate that and it’s too late scrambling in afterwards!)Interestingly, Dimensional Managers have just produced a report too using almost 100 years of data suggesting that value stocks (those with lower price to earnings ratios) have higher expected returns, with an annualised 4.1% out-performance since 1927.
When It’s Value vs. Growth, History Is on Value’s Side (dimensional.com)
So the greater the imbalance from Growth, that may mean the uptick when it comes will be greater too. What do you think!
Good news/bad news
Pleasingly one of our stalwarts has come good of late with better figures and prospects than hoped and buying interest has seen the shares hit their highest since March 2020, more than tripling since June 2022. As clients know, our bigger holdings are collectives, funds of assets but we do hold several special situation direct stocks too and Costain is now our largest because of the gains and so far we’ve been pleased to run with the recent buying momentum. That doesn’t mean it will continue, etc but we assess constantly.
Alongside Funding Circle and McBride, because of strong price rises, these are our largest direct holdings presently and they have done very well indeed as they have all moved upwards dramatically from their lows when so out of favour (yet still all only around 1% of total client assets each). Of course some investors will still be sporting losses if they held them during headier times but clearly again, this is a pole example of not selling something simply because it has fallen in value, the opposite of buying something simply because it has risen. As ever though, the hard work is not lying-back and marvelling at the result but finding tomorrow’s seriously unloved assets.
On the downside, commodities have slipped backwards quite markedly recently and surprisingly in many regards. We have trimmed a little at the heights but not enough and there are new contenders for seriously under-valued positions. Check the graphs for uranium, wheat, aluminium, oil, cotton and silver to name but a few.
Whining investors
Gimmick time again. Investors in unregulated wines have come a cropper. Yes there are always gimmicky ‘investments’ and people who have done well from them, whether teddy bears to trainers or handbags and the past ‘performance’ dupes new investors away from traditional and regulated assets. All I’d say is – please don’t do it – you don’t need to do so when there are oodles of appropriate, transparent investments out there for you with just the prospective risk:reward you might want but ones that are accessible too and protected by regulatory compensation against scams and negligence.
Oeno, one of the bigger schemes, has $83million of wine for clients. Holders are seeing difficulties in selling their wine at prices they’d like – or being able to sell it at all. Hopefully it is not you… you can always drink it, but that’s not much of an investment then, is it!
What type of funds for best outcomes?
Wealth Club, an investment service, has researched the differences between funds run by the same stable – open-ended funds (which most investors and advisers out there buy) and closed-ended funds (Investment Trusts) run by the same firms.
Investment trusts – why you should back the older, better sibling
To us, it makes no difference what we use; we just select what we believe is best for clients – end. However, the research showed that over the longer term, the Investment Trust variant outperformed the same firm’s open-ended vehicle by 5.3%pa – a significant difference! Investment Trusts started in 1868. Closed-ended funds started in 1924.
The cynic has to say that the latter is preferred by fund management groups as they make far more money out of investors than the Investment Trust alternatives. There are benefits with each and differences but does the average investor and indeed adviser understand those to select one over another, or is it the extra money which is generated for the fund manager from every sale of open-ended funds which pushes those?
Dividend Tax – stealth taxes
So an FOI request from A J Bell notes that 3.6million people are due to have to pay dividend tax this tax year, double those from 2021/22. This is worth an extra £18billion to the Chancellor this year alone.
As I have said many times, it is the ignominy of having to file a Return that is worst for most people, though we are on hand to help people if they wish to appoint us and for a very competitive cost. Remember too people will be caught with interest at the bank, Building Society and National Savings as well however – not just dividends, as the limits for tax free income have all been savaged. You do want to file a Return if you are liable too – don’t wait for the penalties when HMRC contacts you in a year or two, as it does receive the information!
Watch-out too for what Chancellor Rachel Reeves might do in the Budget – some changes may be immediate (eg CGT?) and some deferred till 6/4/25 but as sure as eggs is eggs, there will be some nasty hits to those with capital of any form and on Inheritance Tax rules and allowances too, possibly even restrictions on what you can put into ISAs and Pensions as well, so don’t delay action if that may affect you.
This is hot on the heels of the latest announcement of very high borrowing for July, principally to fund the enormous public sector salaries and pensions and also increased welfare payments, as well and the fact that as many as 25% more estates paying IHT this year than last and that’s before the allowances being reduced.
Electric cars
We have an electric car, a Tesla this time. We commend the idea to limited companies especially in view of the attractions and once a pattern of usage is arranged, the principle works very well.
However, will a fire in a Korean garage affect their futures (ours is in an outside car port!) An unplugged, parked Mercedes caught fire and that damaged 880 other cars parked there as well as the property – and they don’t know ‘why’. The product liability from highly flammable (and hard to extinguish) lithium-ion batteries could be immense. In Korea, Mercedes sells one in eighteen cars there but of course is instantly looking at the battery makers, not its cars. What’s the risk? Apparently at 25 fires per 100,000, electric cars still represent far lower risks than gasoline cars at 1,530.
Following on from that, we hear that Tesla’s giga factory in Germany has required the clearance of 500,000 trees, the cost of going green.
The challenge
Yes, so the challenge last time – too much work, clearly and wearing-away the letters on the keyboard again…
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
