Latest on the banks crash and why forecasts are unreliable

So, a mini bank collapse (compared to the larger ones) which has passed without significant contagion, saw bank shares across the globe fall in value by $0.5trillion in a week, the most since the pandemic panic. This will affect investors’ portfolios everywhere as banks represent a large portion of market indices too.

 
Goldman Sachs loses $200billion with its wrong bet on interest rates and UBS has acquired Credit Suisse for a song – potentially. However, banks have been offered another lifeline – interest rates rising once more, here and abroad to keep attacking inflation which is proving resistant short-term, in the UK art least. Banks make more when interest rates are above the ground as passive depositors don’t chase rates aggressively enough. That is probably good reason for filling-up on the shares of financial companies right now. However, some asset classes don’t like it – especially property and that is reflected in the deeper discounts to net asset values on commercial property trusts but watch it percolate down to the residential property market too.

I am reminded here of John Maynard Keynes’ quotation which investors would do well to peruse at all times (and the regulators too): ‘Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally’. Anyway, whilst possibly opening myself to accusations of foolishness, remember Warren Buffett likes his banks and financial conglomerates and has done very well out of them. Terry Smith doesn’t – I go for Warren. There will still be very sound banks through the other side – businesses which count amongst many of the oldest of all businesses and joint stock companies, so don’t write them-off just yet.

So just how dodgy are things (the banks)? Not as dodgy as the reaction can suggest. The remnants of SVB Bank have now been bought for a song by a rival and we are told that money market deposits rose some $285billion last month as people fled the banks. That gives a total over $5trillion in these things now (just think, they use banks too…). To put that in perspective, the whole UK Stock Market is just over $3trillion. Incidentally, all of our clients’ deposit funds are fully protected regardless – held in special Client Trust accounts whereby the bank involved completes a regulatory declaration that these funds cannot be mixed with general funds and are segregated for absolute client protection. All our clients’ securities are held at totally unconnected global custodians which again cannot mix these with their own assets either.

Remember too – last year in the UK, the biggest 20 stocks went up 16%, dominated by oils, banking and mining stocks. We had these. That’s why the FTSE100/Allshare outperformed the US/global indices. However, the next 80 holdings lost 17%.

Still, whilst the French are revolting, our State Pension age isn’t being increased to 68 as some had predicted. That will ‘cost’ the Exchequer £60billion we are told (though when is a cost something not done?). Apparently life expectancy projections have peaked so it may not be necessary. We do remind clients that this is not the age to which they have to work but when the State Pension starts. People have ample opportunity over fifty years to make life choices to save into personal/employer pensions and other asset plans to enable them to choose when they stop/reduce/de-stress work; this is an option based upon having enough money behind you and income to be able to afford to make that decision.
 

A financial adviser’s job
 
So, recent new clients who have moved here from overseas with limited funds… as part of our comprehensive review we have investigated their State Pension position. So, the lady can contribute £12,334 and instantly qualify for a State Pension of £5,501pa! That goes up alongside everyone else’s too of course. That’s a great annuity – the best! She will have had all her money back in just over two years and tax-free as well as she has negligible other income. Payment to us for this work? Zero. We’re just doing our job.

Then another existing client visited, one who had kept some funds with another advisory firm with which she had a long-standing connection but now choosing to move everything to us. That firm has been badgering her to take internet-only copies of the quarterly valuations (which she didn’t want) and she hasn’t had support or advisory guidance from her appointed representative from Wales (the old firm was in North Devon) for the several years since the new consolidator firm took-over. It moved her old bonds into its managed portfolios at a £3,000 fee she tells me (and despite it taking its ‘advisory fee’ every year of some £1000 plus) but she was more bemused to have learnt through us previously that the firm had been taken-over by a US Private Equity firm but clients weren’t informed. Why not? Did they think that clients would up sticks and rebel if they had the news? It’s just courtesy, surely? Anyway, it has back-fired on this one regardless and that needn’t have happened.

And well done Felix on his podcast interview for Desert Island Funds… not quite his usual work dress code and not recommendations as such but enjoy here:-  ‘It’s a $1bn trust that could be $3bn’: IFA Milton’s underdog fund
 
 

Economic forecasters
 
So on Laura Kuenssberg’s Sunday Morning show, Mr Richard Hughes, head of the Office of Budget Responsibility, says all forecasts will always be wrong. I hope that reassures you but it shows too that even from the ill-fated Truss/Kwarteng Budget, they were wrong about the financial projections and lo! there is no recession (unlike many places including Germany). (Yes, I have said before – not the content but the dreadful handling). Well, I am going to make a very accurate forecast – that is, that all economic forecasters will invariably be wrong. On the same programme, we were reminded that the colossal tax-take at the moment (on the poor and the rich) is likely to reach 35% of all our economic output, the ‘most since WW2’. When will governments realise that taxes (increases especially) are inflationary? If taxes were cut (especially on goods/services), then inflation would fall. Businesses, organisations etc have to raise prices (inflation) to reflect higher costs (eg over 10% minimum wage rises next month).

I have also noted that despite what the media likes to recount, average household incomes have risen since the trough of the financial crisis in 2008/9 (the retired doing amongst the best incidentally). The commentators need to remember that people rarely stand still. Indeed, in most of the public sector (like nurses etc) for example, it is not all down to general annual increases but engrained annual increments for most employees, whether good or bad and regardless of inflation. People better themselves too and are promoted – or move to better positions by experience. And remember, for spending to be so strong, you have to have it in the first place and whilst some won’t, the majority is doing better than the statistics suggest. I repeat the link here:- Average household income, UK: financial year ending 2022
 
And finally, for all those shouting ‘inequality’ as it suits a political rhetoric regardless of factual base but the UK is one of the lowest in the developed world in terms of proportions of assets owned by the wealthiest 1%, say. Most European countries are significantly higher and many as much as half as high again as our figures.
 
 

Exceedingly good value out there
 
There is a number of very interesting investment opportunities in the quoted ‘Fund’ space presently, some we have and most we don’t but should we add them? Many started on excellent credentials and logical reasons and for the underlying assets, they have done or are doing ‘what it said on the tin’. These range from funds created to invest in social housing (so ethically box-ticking too) to the Space industry, hydrogen developments, biotech discovery companies, commodity or energy funds, secure loan funds, funds of funds, leaseholds, shipping, forestry, energy storage, infrastructure loans, reinsurance and song rights. I expect I have overlooked a few others and that excludes traditional ones like commercial property, private equity and so on.

I raise this because when a legitimate fund with a good idea starts at say £1 in the last couple of years, securing good investor support for the model and today the shares are trading at say 43p after having hit £1.30 and nothing has changed to the investment concept, something is broken. ‘People’ have been bailing-out, exacerbated by the regulatory and compliance regime which hates anything ‘different’ or more ‘complicated’ or ‘small’ and which it might not understand (or is it of little consequence, value-wise so it doesn’t ‘want’ it) or the financial crises ‘force’ certain holders to dump stock at any price and then private investors, happy to have paid £1, frighten themselves into selling to avoid losing more and of course the problem is that there aren’t many out there keen to buy as the share price performance has been awful. Often too they are quite ‘small’ funds, say £100million and so bigger managers can’t (or won’t) buy as they can’t buy enough or sell when they may want to do so.

I am going to give an example which we don’t have and I am not promoting but… it is HydrogenOne Capital Growth Plc which only started in July 2021 and where the shares went to £1.23 on popularity right after. Presently, they trade at around 39.5p. Its assets are quoted today at around the starting level (£0.97) but that reflects the cost of the projects really. The company was projecting a 10-15% annualised return on its assets so would that suggest to new investors now 20-30% at half the price! And yes, many of these have very environmentally credible investment principles too and that may have been what sold them at the beginning. They’ve been a falling knife but at some point a big bounce is likely but is that from here? All the pundits pushing it at the start have gone very quiet…

For those of ‘you’ and us out there who are attracted by ‘value’ then clearly, do we care what others are doing? It is uncomfortable going against the crowd and care is necessary (and vast diversity necessary to protect against idiosyncratic risk) but these things may well be like buying £100 bags of cash for £39. What is good too is that these things are quoted companies so ultimately if the underlying concept does not continue to have enthusiasm, then the company can do a number of things such as using its cash to buy-in and cancel its own cheap shares (boosting the value for everyone else) or it could close-down totally, sell all its assets and return cash to the shareholders.

Trends will always come and go and people pay too much for the excited things and sell-out at too little for those out of fashion (but yet which may have tremendous value from real underlying business and investment themes within them). The other great benefit of these things is they are different to the mainstream stock market. They spread risk across different asset types and are not all related to ordinary ‘trading companies’ shares’. Many pay great incomes too so you are paid to wait but that is what you must do – be patient but these can be a great diversifier in times of volatility. What you won’t find however, is that the vast majority of advisers or investors has any of these; they don’t know about them or can’t even buy as their ‘platforms’ or their advisers won’t allow them to do so.

Our biggest asset now is an odd fund at a ludicrously deep discount to its assets and we have kept buying. I wish we had had more but that’s being greedy – it recovered by 27% last year and paid us 4.5% income and this year, bank crisis or not, it has risen another 9% with more income for us. Here’s an industry update on the concept of ‘alternatives’:-  CEO Summit: ‘Not all asset managers should go into alternatives’
 
Another one we don’t have in the private equity space reminds us of the great value too – its shares trade at a 40% discount to the net asset value (which the industry has been challenging generally recently, suggesting distress in private equity values) but as this one reminds us, it realised 25% of its portfolio for cash in its year and pays a dividend of over 6% so the opportunity is compelling.
 
 

Good news (?)
 
If you have reason to take a complaint to the Financial Ombudsman Service, the compensation limit has now been increased to £415,000 – a rather significant sum and enough for most people’s successful claims against those in the financial services’ industry who are deemed to have done something ‘wrong’ or negligently.

One of the problems however, is that if there is a systemic issue (such as fraudulent advice) and a number of claims, then typically the miscreant goes bust and then the compensation payable is limited to what the FSCS will pay. For interest however, the industry itself has to fund all these compensation payments and buy Professional Indemnity Insurance which becomes ever more expensive as the liability issues increase and these costs (and those onerous ones of general regulatory adherence and responsibility) must be passed-on to the consumer. Still, that is better than the ‘Wild West’ which used to exist even if you must still watch-out for the occasional bandit!
 
 

Scottish Mortgage Investment Trust Plc
 
I said it at the time… successful James Anderson’s retirement could have been one of the most successfully-timed exits ever. He announced it in March 2021 and left in April 2022. Did he see the writing on the wall insofar as the values of their tech stocks were concerned? On 5 November 2021 the share prices was £15.44. Recently it has hit £6.42, a drop of 58% but don’t forget that has also been when many other funds have been going ‘the other way’ too, so lost opportunity value.

What else has happened? The Trust has seen borrowing increase (great on the way up as you make money on borrowed funds too but worse on the way down) but much of that has been in buying-in and holding its own shares in ‘Treasury’ – 77.2million shares, most of which it bought at very hefty levels and not at £6.42, so again, adding to the pain. What has also happened is that the share price has begun to widen-out from the asset value (if you can ‘trust’ the value on the unquoted assets which one of the ex-board members didn’t it seems – in view of the recent spat there. He has now publicised that he has gone to the FCA with his dossier of ‘evidence’). So, an investor buying at the top has not only seen the assets fall a long way but a discount of over 21% has arisen as well. They were issuing shares to hungry investors at a premium once…

Are we tempted? Sadly, no. It is still big – over £9billion but I fear Baillie Gifford’s time in the sun of the bloated tech sector is gone so the attrition is likely to continue as forced sales of the Group’s assets (even if through investor boredom rather than ‘judgement’) may continue to see the blight continue and of course, with such a big pot now, it is harder to find the small special asset which can make the same degree of impact to the overall kitty as they were very successful at doing before. Meantime too, you don’t see much in the way of dividend either. It’s easier for us to say that our money is spent on really lowly-valued funds with good incomes and still the potential to rise significantly and backed by more traditional assets. Sorry gents and ladies!

I am reminded of BH Macro too which did well last year – a specialist fund and one which raised £315million at a premium to its net asset value and really a bell ringing at the top perhaps – last month it had its ‘worst month ever’… be a contrarian – not opposite but independently-minded and don’t chase ‘yesterday’.
 
 

 
The next one is at 10.30am till noon on 4 April – feel free to come along and join us at Choweree House in Boutport Street (opposite the Green Lanes entrance)! Come and share some company, coffee and cake.
 
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