Just for a change, it is very difficult to interpret what is happening at the moment and to note the effects on markets. I say that tongue in cheek as of course, it is always difficult and when it appears that it isn’t, that is when complacency can preface an upset, so beware!
The US has been trundling along to new all-time highs, powered by tech – an oft-quoted mantra it seems. I was reminded last week too that the S&P Schiller PE Ratio has just hit its second highest level after the Dot.com Bubble, so hardly an encouraging portent for the US market nor its dominant tech sector counting for most of that power. This ratio reflects how cheap or dear shares are, compared to their average 10-year earnings.
Last week, Liam Halligan reminded us in his Sunday Times’ article of the excess by noting that 45% of the US S&P500 is now tech and AI related, up from 23% when Chat GPT was launched five years ago. It doesn’t bode very well but as I have said for a long time, there is so much great and under-appreciated value elsewhere that excellent potential investment returns can be secured without the inherent risks of over-indulgence in dragon-chasing. Perhaps this article on the higher risks of passive investing (where ‘most’ investors out there have most of their money) is even more prescient now:- Passive strategies now riskier than ever – FTAdviser
Here at home, inflation rose to 3.3% and well above target, yet at the same time as unemployment has fallen (apart from within younger people). Cynics are pointing to the dramatic increases in the numbers registered as sick as the primary reason for the outcome, not more people overall in work from the available contingent. I fear they are correct as employment conditions are worsening not improving.
What will happen to government borrowing rates if the election results for Labour this Thursday are as bad as expected and Sir Keir has to go finally? The fear is that the alternatives are far worse than the present, however economically incompetent they seem now?
As for the markets, even the Deputy Governor of the Bank of England seems to have been reading our eshots – she has shared her view for the overpriced global equity markets – a rather unusual opinion to voice for such an official to share but perhaps also prescient. Readers and clients will know our stance and a most crucial regard to ‘downside protection’ which excludes excessive exposure to the rather over-extended parts of the world… namely the US.
Good news/bad news
Yes, there are some esoteric investments out there! We have a few and they provide ‘different’ returns and also potentially different safety in times of troubles and indeed being uncorrelated to what else is happening with ‘stockmarkets’ so they fulfil different purposes. However, sometimes we need to be patient and of course everything does not always ‘work’ either..
We’ve been nibbling-away at a German residential property fund and it has now announced a capital repayment programme, the start of more to come. So, we shall receive some money back – at a 60% premium to the price of the shares on the market the day before the announcement. The Trust is repaying 7.45% of its shares at the net asset value. So recognise, this is nothing to do with the ‘markets;’ – simply a mispricing anomaly in that the shares in the fund are seriously under the value of the assets the fund holds.
Long term clients will know we like these technical opportunities which have very little to do with the underlying assets’ performances as such, so all special bonuses on top of what we hope the assets held are doing naturally anyway. Yes of course, it’s never quite so clear cut and there are ‘risks’ but that’s what careful and assessed management is all about, I suppose, isn’t it? Still, it is a small exposure for us overall. The shares rise 6.25% on the news, on an otherwise ‘down day’.
The RM Infrastructure Tender price has been set and the shares stand at a 16% discount to the cash to be received. So, another good result for our investors though clearly the remainder is a more concentrated portfolio and needing more guile to review and the share price reflects that, especially as a few of the loans are under ‘special measures’ shall I say. Still, another grand bonus on top of the price we have paid for the shares initially and simply for waiting but we trust it will not all evaporate on the rump coming to an end down the line.
On the same theme, Taylor Maritime announces another cash return – the shares are at 61p but we’ll be receiving 85.83p – thank you very much. That’s a 41% bonus.
And if you thought residential property was a no-brainer… look again at Home REIT, the social housing entity which returned to the market last week. There’s probably some fraud involved there too but you don’t always win on houses, however ’noble’ the cause. Lots of well-intended individuals supported this Trust at its £1 launch and the shares have slumped to 9p.
The UK stockmarket
It hit home again last week when I reviewed a large, Local Government Pension Fund’s assets. It had a mere less-than 4% in UK shares, despite its bread-and-butter dependence upon the UK economy… it frightens me – do those employees, pensioners, realise that so much of their financial futures is connected to the US market for example and not their home economy? This is not making a play for the UK though our shares generally are too cheap (despite this Government’s endeavour to discourage much hope for our economy and for investment generally…).
The other aspect I have noted many times is about ‘risk’ – the US could have a long way to fall whereas the UK is far lower risk as it is much cheaper – and it pays far more dividends whilst you wait.
Spaced-out
Seraphim Space Investment Trust has had an interesting ride. Launched in 2021 at £1, the shares fell to as low as 23p in 2023 and since have hit £2.23. We toyed with some exposure for clients but sadly didn’t – a truly speculative investment well up there in the stratosphere with events and the rockets. Some of its latest movement has been through a component investment having armaments’ exposure (inadvertently I suppose) but clearly rockets, trials, satellites et al have made ‘space’ the speculative theme at the moment.
It is very hard to value unquoted assets in its portfolio but ostensibly, presently the shares are priced at a premium of perhaps 40% to the underlying asset value and an ideal time for it to raise some extra cash to invest in more opportunities. Yes, that is what it is doing but we shan’t support it. However, what it is doing is absolutely right – ‘when the ducks quack, feed them’!
Shall we in a few years find exposures to this Trust in new client portfolios as ‘it seemed like a good idea at the time’ just like past hypes so often proved, from Dot.Com funds and Scottish Mortgage to Terry Smith’s Fundsmith or even Neil Woodford? It’s easier to sell a great story on the back of a fantastic past rather than a seriously undervalued one which could become tomorrow’s stratospheric performer – because the latter starts at a superior level – simply ’far too cheap’. Trouble is with markets, people like buying exciting past stories and not cheap ones because they may have fallen so far.
Natural sustainable income
Clients will know we like this. This is where you invest, enjoy a by-product from all the components and you know that month-in, month-out, you can count on that till the cows come home, regardless of what capital price your investment may be one month from the next.
Premier Fund Managers has produced a helpful guide explaining the concept in simple terms and significantly more depth:- Retirement-Income-Solutions_A-guide-to-natural-income.pdfuncertainty as US highs
Whilst we don’t have any Premier funds presently (we do own their shares) and believe what we do is even better as it is more diverse than their offerings, it explains the simple concepts very well indeed. Remember, we can and do have funds from any managers – we have no axe to grind and as we see Investment Trusts are superior value (especially because of discounts to underlying fund values), we have opportunity of enhancing returns as well. If instead (and seems the case most other places) you go for all-out growth and start spending-down capital gains; it’s fine till the tide goes out and you spend your capital…
Transferring investments
In Saturday’s Telegraph there was a sad case of an investor moving from one company to another who ‘lost £34,000’. ‘I lost £34k after Scottish Widows messed up my pensions transfer’
We try to warn people and in some ways, I don’t think Scottish Widows was totally to blame. Here, it was as much the new adviser/firm’s responsibility to warn the customer that the process will take some time (of course that is no excuse for ‘very long’ either!) and that it is unwise to move during times of heightened volatility unless they have taken some actions to diffuse that first.
Sadly, whilst we always try to explain to clients and prospective clients and we do our utmost to manage things (and during escalated volatility suggesting precautions or to defer till ‘normality’ may reappear), many other advisers seem more interested in their own bank balances than their new customer’s. For example, in this instance, very simply the investor could first have done a free-of-charge internal fund transfer with Scottish Widows to cash, if they were concerned that the value may fall – and then transferred. Why didn’t Penisonbee (the recipient firm in question) guide the customer. Maybe the lesson will be that the existing company will write to clients and advise them of the option – so then they wouldn’t be liable for compensation afterwards if clients didn’t act.
Well next week, I am being forced to take a break to the Antipodes; one of the perils of a daughter who’s decided to doctor in Brisbane. I’ll be taking my work with me…. But shall take the opportunity to visit Tasmania as well – amongst other things, I do love my ferns! Seeing Australia’s oldest bridge and the first settlement spots and penal colonies both in Sydney from 1788 and Tasmania in 1804 are also on the list. I shall leave the day-to-day to our most capable Team here at home in my absence!
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
