Have been listening to this strange noise outside today – the pattering of much-needed rain. I appreciate if you are on holiday here it’s not so good but the ground needs it desperately so please forgive us!
Pleasing to see the latest Quarter’s economic growth rate at 0.4%. It is still lower than it should be and even then it is some artificial recovery from a really depressed level and bolstered by football spending and other merriment which will have evaporated as quickly as it arose in the first place.
The damage from the last Chancellor’s budgets continues to be felt but so far, by not saying very much the new Prime Minister and his Chancellor have presided over a sort of welcome ‘calm’. However, the expected rise in inflation to 2.9% here is unwelcome and meantime, interest rates on the longest dated Government Bonds have hit their highest for years, rates last seen in 1998. With higher rates in the US too, it’s a bad portent but hopefully short-term.
If you bought nice, safe, government bonds in 2022 then you would be nursing hefty capital losses; so much for bonds like this being the low-risk option. In May 2020 you may have bought £100 of the 0.5% Treasury 2061 for £100. Today, it is worth £22.45 and you have been and are still only receiving 50p interest on each £100’s worth of paper. At some point it will be a great investment but when will rates hit their highest short-term levels? So far the effect is really only on sentiment and new mortgage deals for consumers it seems.
More significantly than the FTSE100’s position in hitting new all-time highs but finally, the more UK-centric FTSE250 broached its highest level seen on 3 September 2021. In some regards it is bizarre in view of the poor economic backdrop but of course that has only caught-up with five missed years meantime and how much of that gain is because of takeovers of our British institutions by overseas’ predators?
However, we cannot complain as our strategies have been full of deeply undervalued, unpopular and unloved companies from within this universe. Indeed, I have said it before but we seem to have a preponderance of direct shares (after our major exposures to quoted funds I should add) which feature on the ‘most shorted’ stocks list (those which investors have short-sold in the hope of buying-back those shares later and cheaper than when they first sold).
There is something quite nice in seeing a heavy short-seller stung as the share price keeps rising against them so finally they capitulate and buy-in much higher than where they sold their ‘borrowed’ shares… more and more managers, however, say they rate the UK market for its value but not the UK economy.
Some things do seem too buoyant presently however, so some caution is necessary, especially as quietly but consistently those bond yields have been ratcheting upwards. Markets don’t like that nor inflation so do be careful. We hope our defensive and downside-risk-based strategies are as best positioned as possible of course with plenty of uncorrelated alternatives.
A Yen for progress
At last too – concerted US and Japanese action has started to strengthen the too-weak Japanese Yen. We were far too early in calling this but that means too we are fully up to weight with our calls on the Yen and so our strategies will benefit, even if a stronger Yen will make it harder for Japanese companies again. However, we also have a direct currency call so that helps our defensive strategies! A 4% move in a week is significant in foreign currency terms.
Good news/bad news
Managers’ due diligence for their clients can sometimes be shown by what we call ‘technical outcomes’. Readers will recall that one of our larger collective funds, RIT Capital Partners (which has performed comfortably since we started buying, though our interest was piqued especially because it had become most unloved and the shares were trading at a large discount to the underlying asset value (you know the plot, we buy a share for 75p and receive the interest and returns on £1’s worth of assets etc).
So some of the discount was unlocked as the Company decided to return £300million to investors via a tender offer and at a discount of 15% to its latest asset value, cancelling c8.3% of its shares. So, whilst still a discount to the underlying worth, quite clever as every pound spent would enhance the returns for the remaining investors of course. However, mercenarily, we took a judgement to tender our stock, for two reasons. The first was that we needed to trim (and cost free) because of the bounce we have enjoyed already and to redeploy some of the funds elsewhere.
However, the second reason was quite simple – we expected the shares on the market to settle again at a discount in excess of the 15% and in fact at time of writing that is c22%, so we can rebuild our stake at a lower ‘price’ than we have just been paid. It might only be a simple ‘7%’ but that’s not to be sniffed-at regardless and it all helps! And remember, if you don’t hold quoted investment funds but only unitised holdings (as the big institutions want to sell to you and big brokerages only seem to buy), will never give you an extra penny as a result of such events. I should add, we don’t dislike the underlying portfolio which RIT has, incidentally so expect the discount to narrow in due time – more gains for our clients.
So what is the due diligence? Well, many investors didn’t tender their shares so we were accepted for just under 33% of our stock, a quarter more than we should have hoped. This means our clients have had the basic bonus but also an extra bonus because 25% of RIT’s investors didn’t tender a single share. We had had just under £1million for redeployment, thank you very much!
More good news – one of our larger loan funds (GCP Asset-backed) redeemed more shares at the net asset value so we receive the full underlying value of our stock despite having bought shares typically well below that level. It is becoming harder to find comparable alternatives for the cash now however, as our funds are being closed-down gradually (with bonuses most times) – a sad indictment of the ‘industry’ which ebbs and flows from overt enthusiasm (exuberance?) to downright apathy and prices to match. I suppose as a ‘value vulture’ sitting in the wings waiting for such ennui by investors who buy things when they are popular, I should say it is just the conditions we relish!
Investment Trust usage – ETFs
Interesting news last week that a survey by ‘Boring Money’ suggests even fewer investors now use Investment Trusts (a mere 9% of investors), a five-year low. We could say that’s sad (and how other advisers don’t use them is something of an anathema especially if they are ‘independent’ which means they are meant to consider all options, not just a limited list) but also we can flip that over and say what a wonderful opportunity that is for us as we do!
What is bizarre too is that the use of ETFs (exchange traded funds) has rocketed – I can understand some (where there aren’t alternatives to do the job) but active ETFs – really? Apparently 20% of investors have one at least. Our clients don’t need to worry – we deploy funds into strategies which can use ‘anything from anywhere’ – just what we believe is the best tool for the specific task we need fulfilling, as part of a very diversified overall strategy – clients don’t have to worry as that’s our job too!
Turning risk on its head
An interesting recent report has suggested that the old adage of higher risks, higher returns might not be working. The Investors Chronicle referred to it:- Why high-risk, high-return could be a myth
In fact it is interesting because we have been saying things like this to clients for quite a long time and maybe it is a reflection of the excessive concentration upon passive, index-linked funds by so many that lower risk ‘traditional’ investments/companies etc have been so unloved for so long. Indeed, at their prices they offer some of the best upside yet with some of the lowest risks whilst the theoretically bigger and more mainstream companies which constitute most of the indices (eg the US and tech) are actually the highest risks and also potentially the lowest return potential because they are so high already!
The good thing about avoiding the expensive presently is that so much out of favour stock is just such good value that it can provide these exemplary returns yet without the degree of risk from exposing oneself to the likes of the latest SpaceX flotation or whatever.
One of our best such assets over recent years was silver – we held the real precious metal (in an EFT) and it increased seven-fold from its low to its recent spike, before halving again. Silver, quasi-cash effectively for us at the time, was a very defensive asset priced at the lowest levels against gold since pre-World War I. Did we expect such a big rise? No but we’ve since sold the lot (we still hold some miners but that’s another, albeit related story). In company terms, many of our out-of-favour stocks and sectors have had grand times and many direct stocks rerated or simply taken-over by corporate predators as they have been so cheap. Of course, it’s never universal but it is the concept which resonates and with lower prospective risks – what is there not to like?
And remember that with investment let alone life, politics and economics (and this is what is the most worrying) that the biggest thing you never thought was a risk is the biggest risk of all. We have a prospective list of what these assets and risks might be – and are avoiding them (typically they are also too expensive anyway). But really, that is because we are full of more of the unloved instead, the neglected which pay us a handsome income overall whilst we wait too (versus the US S&P500 providing an income of just about 1% whilst 30-year US Treasuries and UK Gilts are nudging towards 6%…).
REITs
After the agreed big for Segro, interesting to see strong results from a shop-orientated REIT, Hammerson. Not only that but it is raised money to buy the other half of the Arndale Shopping Centre and investors lapped-up the new shares available. After the decimation of the values and prospects of shops for investment, who would have believed this feat!
Perhaps at long last this very depressed sector is receiving some positive news and after all, despite the much-lauded ‘cost of living crisis’, clearly people seem to have the money to spend.
Releasing your True Potential
At the time, readers will recall my scepticism about True Potential’s offer to acquire advisory businesses, giving the selling adviser 8% of the value of funds moved across to the firm. We said it smacked of ‘commission’ and that it was far too generous a carrot which could, in some instances, encourage the old adviser to be somewhat enthusiastic to transfer his clients, whether it was in their best interests to dispose of whatever they had before or not – and the cost consequences to them of such a move.
A firm in Scotland has seen letters written to the affected clients offering a revisit of transfers… and funds put aside for redress. In 2022 we had a run-in with its Compliance Officer ourselves over the aggressive behaviour and were not impressed… I hope things have improved; rather than address the issues we had raised, we were ‘approached’ by rather expensive London lawyers but I can only assume things are much better now than they were then. However, despite being staunchly independent, we aren’t buying True Potential funds now anyway, for myriad reasons.
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
