So Sterling has hit its highest level against the Dollar since April last year and the Euro since August. Whilst it reduces the value of investors’ overseas’ assets, strength is positive and I can say ‘expected’ though whether it is on confidence in the UK and our economic prowess (or others’ regression) is hard to say.
In part, it is negativity about high wage levels and persistent inflation needing higher interest rates for longer, so we are more attractive for international deposits. That is then ‘bad’ in my book anyway (though high Sterling reduces imported inflation don’t forget).
Indeed, rather than threatened recession, the economy grew again too, which is good news but to tackle inflation, of course it is ‘bad news’ as it suggests there remains too much spending regardless of price. However, will the ’reaction’ (interest rate levels) act to not only kill-off inflation but also to cause more grief than it is designed to attack?
Sometimes I wonder about the policymakers… they increase costs to business, etc so prices must rise to reflect them (eg wages). Then they worry about the very inflation they have exacerbated. Instead, they could manipulate prices to quell inflation (eg cutting costs like inert taxes in/on products) which would cut the headline inflation rate. They dole-out more benefits to needy people to pay these unnecessarily high costs swollen by purchase taxes (and ‘benefits’ and Income Tax cuts do not trim inflation rates). If they cut headline rates in this way, then costs to government also fall (eg inflation-linked benefits and pensions and government’s own spending) and wage demands drop (and directly or indirectly government employs as many as a third of all employees).
So, we all suffer and interest rates rise – not only impacting consumers with mortgages but business expansion and profitability too (a ‘profit’ means a penny above a loss, remember). Companies with big borrowings become hammered by the markets as well. Of course, the State benefits from high inflation when it owes big debts as these fall in real terms and its tax receipts rise from the same inflationary increase. Bank shares usually rise with higher interest rates but for this latest 0.5% hit, the worries over recession and bad debts have perhaps taken precedence now.
I have said before, interest rates are a blunt instrument to tackle inflation and they don’t always work… other recipes are better at certain times.
Markets
I sense something is happening underneath the surface in the UK market. The 0.5% increase in the Bank Rate is enough to dispel any sense of shorter-term optimism which had been beginning to show… values generally are again far too low – and far too attractive as a consequence.
You will know we are value investors. So even with closed-ended funds, if their prices rise too much and the shares trade nearer to their asset value, we can often be trimming or selling altogether. (That isn’t the only reason to buy or sell of course. We watch a colossal quantity of different assets and sectors and not just those where we are buyers or holders).
One such Fund we trimmed heavily (so we only hold a little now), selling gradually and at attractive prices. However, I have to add it back-in now… The share price has continued drifting and is now as low as November 2020 levels, just after the vaccine rollout began. I like its portfolio, its management and its track record and it pays an income around 4%pa. It’s not big but is over £100million and the discount to its underlying assets has widened and is brushing 20% – unwarranted and inappropriate. It’s dropped 40% since April 2021 and whilst the income is solace, clearly, impatient investors have been dumping stock.
So, for 80p, we buy £1’s worth of shares and see dividends on £1’s worth. If the next day the management company or shareholders decide to give-up the battle against an apathetic market that doesn’t want its shares and it decides to wind up the Trust, ignoring the nominal costs of that but we’d receive £1 for every share for which we have just paid 80p. Meantime, we are exposed to the equity markets’ movements like all other funds.
Don’t catch a falling knife’ say pundits. We say ‘throw those falling knives this way please and we’ll take them off your hands and relieve you of any more worry’. Of course all of that is in proportion – no asset we hold is much above 2% of our total client funds presently.
More good news
The Investment Company Plc’s tender offer has arrived and we shall be paid based on the portfolio value on 14 July. That’s around £3.57 ‘today’. We have 9% of the Company so have benefited handsomely from the proposal made by Chelverton. I am sure the new mandate will do well but its remit is not what we want – hence taking the cash but we shall watch developments! Meantime we can redirect that cash into other similarly depressed closed-ended funds trading at deep discounts and hope for similar news from these!
On 8 December the shares were £2.53 so that will be an uplift of 41% since that low – and its biggest asset presently? Gold bullion! We had treated this asset as a ‘Defensive stock’ in view of its components so truly a case of low risk and a handsome return too (with dividends on top). As at 30 November the net asset value of the portfolio was £3.46 so you can see most of the increase has been the simple removal of the 27% discount at which the shares traded then. We don’t mind – it had little to do with market sentiment per se. That gain is approximately £450,000 for our holding – 0.2% of our total client assets. It’s an ’extra’ and everything helps to pay the bills!
And on 20 June, yet another of our largest Trust investments has announced a strategic review which could lead to liquidation of the assets and the unlocking of the discount at which the shares trade. Whilst again this would be good news for our investors, it is a good Trust, with a good income and it will be a shame that yet another is no longer available to us – though the discount at which we have been buying its assets has been one of the attractions to us. If that outcome arises, the uplift will be some 35-40% as the assets are realised and cash returned to shareholders; we must just wait. Of course the shares have risen on the news regardless. This is our seventh such bonus for our clients this year. Every little helps – especially in these challengingly sideways or drifting market conditions awaiting positive news.
And another of our closing-down funds has received the £35million expected from the disposal of one strategic stake and is paying a 25p special dividend to shareholders. That’s almost a 30% dividend, and of course the share price adjusted accordingly but we can’t expect that every time! The fund is still trading at a deep discount to the value of the remaining assets but all is progressing according to plan, albeit still needing patience!
Investment updates
One of our jobs is, of course, to seek updates from our component holdings. This can include meetings with management (rather easier now with ‘video conferencing’!). One of several I had this week was with ICG Longbow, a secure loan fund which is redeeming its assets and returning cash to shareholders.
Of course information cannot be divulged other than what is in the public domain but it is often useful, particularly in such special situations, to be able to chat with board members, managers, etc about progress and thoughts going forwards. We have to assess continually whether we are buyers, ‘holders’ or sellers and this is part of the process – partly dependent upon the price at which an asset sits too of course.
It is never a precise science but so often, being contrarian (meaning independently-minded) is the best recipe in the face of sellers who simply do something through impatience. It is not a saintly process either but more often than not, we have to have patience and to implore our clients to have the same. (That saying is from Revelations 14v12: ‘This calls for patient endurance on the part of the people of God who keep His commands and remain faithful to Jesus’).
Naivety and common sense – or is it simple stupidity?
Two lessons from the same situation are coming to haunt the UK. The first is the windfall taxes on North Sea Oil companies (remembering we can’t impose windfall taxes on non-UK companies, and taxing UK oil companies where most of their trade and profits are from overseas will simply push them to relist somewhere else too, probably the US). Our biggest UK explorer, Harbour Energy, has announced it is stopping investing in North Sea projects and it is not alone (see Apache suspends North Sea drilling, cuts jobs)
It’s prioritising work in other parts of the world. Indeed, it is exploring a merger with a large international company to do more of exactly that. It says that, last year, it had an effective 100% tax rate so what reward is there for high-risk and high-cost exploration projects?
So here are the lessons. Lesson one is simple maths for any chancellor. If you overtax something, rather even than receiving what you may have had before (eg 50% tax), at a top rate of say ‘75%’, you end-up collecting zero tax, losing what you had been collecting and indeed the loss of jobs and inward investment will cost even more in tax that would have been generated. (That’s also a lesson for politicians with threats on ‘non-doms’).
Second, ‘yippee’ may go ‘Just Stop Oil’ but instead, we see Brazil striving to become the biggest oil producer in the world with a giant exploration just off the precious Amazon delta and guess what? Brazil divided over oil drilling proposal off Amazon delta
The UK will have to buy its oil and gas from far seedier regimes if we aren’t extracting it in more environmentally friendly ways, with superior controls, governance and constraints on the process than apply in many countries. And yes, then there is the environmental and financial cost of transporting it as well as not protecting our own energy security.
ESG – Environmental, Social, Governance
After the ‘worst month ever’ for ESG funds as British investors pull £304million from the ‘sector’, it is being renamed ‘Erg…’
The principle itself is not awry but when it simply becomes another sales’ gimmick (for profit) and ignores the fact that movement by all companies is towards these principles because their stakeholders require it (yet often with a big dose of common sense, like we might need ‘defence’ industries to protect ourselves and we can’t stop using fossil fuels overnight), then that is when it unravels. The investors who were sold the plain and simple story (to which they responded with good, honest intentions) realise they have been somewhat duped by a zealous (unethical?) marketing movement…
Added to that but some consumers’ ethics are ditched conveniently, when their budgets take precedence over consciences – prices driving consumers rather than niceties alone.
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
