I took a couple of days’ break to attend our Daughter Esme’s graduation and the markets were good to us and there’s now one more NHS Doctor. Perhaps I need to take more time away if it helps so many of our investments rise in value…!
It is interesting however – we try our hardest for our clients always and that includes sharing our latest market judgment when they may need to raise funds. Not to dissuade them or creating barriers to them accessing their money but if we truly believe that it is a bad time to sell assets, we say so and encourage a deferral or other possible routes to meet their needs. Of course they must choose, as we cannot guarantee better outcomes but the main point is that we communicate – how many other organisations and advisers do not? Yes, we have regulatory responsibilities on ‘due execution’ as well and that is why our terms always seek very clear instructions so there is clarity on that instruction and its timings, etc beforehand, to avoid an after the event mismatch of expectations and values.
I should not be so surprised when looking back these last few years which have had such big doses of volatility interspersed (opportunity, more like?) but it is amazing how often it can only be a matter of weeks or months before a totally different backdrop can be seen and the odd several percentage points’ difference in an asset’s price add-up to make a much more meaningful sum for the client. Indeed, then there are extreme events – like the Pandemic, Financial Crisis, recent hyperinflation and dramatically altered interest rates or the Russian war, when markets of all forms enter bouts of deepest uncertainty – the worst times to sell. However, the opposite is also very true – if it is not time to sell it is probably time to buy (however uncomfortable it may be short-term) but conversely, good news (which does appear ultimately) can have a significantly disproportionate but positive impact on asset valuations – such as the vaccination roll-out in the autumn of 2020. We are overdue one or two of these so watch-out for some big gains in lowly valued assets!
It is at these times (and we have been in one for a while now) when we can say that yes, values on so many assets are really so deeply mispriced that yes, a couple of good news’ stories could see a 20-25% overall gain in these selected assets and in a very short space of time. No, this is not a prediction, nor an expectation for short-term change but when prices are so out of kilter, it happens. No, it is not necessarily ‘everything’ (as even today there are many asset prices are seriously over-inflated too, especially the US tech majors yet again) but do I kick myself say, for not adding Seraphim Space Fund to strategies when it drifted to 26p with its net assets still north of 90p and since, a buy-back programme has been announced so the best chance for a big uplift may have been missed (up almost half…)? These are the individual sorts of opportunities which can also happen and you have to be in there before the news, not scrabbling-in afterwards.
The ‘whole’ of the UK market is like that opportunity now and also with a phenomenal value mismatch against other big markets. That also provides greater safety in the fundamental valuation of the assets you can buy and own and the income they pay you, course.
Consumer Duty
Occasionally we receive requests from investors to transfer their account away – often these are small and inherited cases where we never had much of an initial relationship with them and despite our offer to engage and guide, with our compliments. However, we also note the market conditions at the time to them, if they are adverse but it is amazing that very few other advisers seem to consider whether actually implementing the transfer ‘then’ is the best thing for their client, or how best to orchestrate that, if it is. Often in fact they use a depressed market value as a sales’ reason to frighten the investor to sell-up and do something else (and which can then certainly be the ‘wrong thing’ for them if the reasoning is yet more ‘fear’ rather than reassurance.
For example, if things have been very depressed, then there is a big likelihood that good news could arise and give an exponential boost to market prices. So, if a blanket ‘sell all’ instruction is issued to the liquidating manager and then it takes six weeks (say) for all the protocols with the new manager, etc to be satisfied before the money is received and then reinvested, what might have happened to that poor investor’s cash caught between the stools? Does the new adviser not care, other than banking the sale and thus their fee? Is it not better deferring the transfer decision till things have stabilised to avoid that risk?
Of course these things are not ‘clear’ and they never can be but you can look-back over the last few years’ investment charts and see when it was a good or a bad time to transfer and thus to reduce the risks of being caught short. Indeed, even as I write this note, the markets have jumped markedly in just a few days – and what if you had sold everything ‘last week’? It is not a finite science but ‘any adviser worth his salt would at least give the market conditions consideration, when recommending that you sell everything and move it elsewhere’. Even when we are taking-on new clients/funds, we always take account of the backdrop and if that means staggering transfers over a period or taking some assets as the actual holdings even if we don’t want to keep them permanently, that ensures we have looked to do our best to manage the risks from the conditions. When we have new cash for a client, we also consider the market backdrop in terms of how quickly we spend it too, staggering our commitment rather than all thrown-in on the day of receipt – another rare trait it seems when most ‘sell a product’ immediately and then move-on.
If you are moving from one investment place to another, please do consider whether your best interests are being taken to heart by your new adviser. Their approach to these things is a reflection of the new service into which you are buying and it is easy to say ‘they would have performed better’ when reality proves differently so much of the time. Of course, that’s a salesman speaking and not an ethical investment manager for you perhaps!
Inflation & The Economy
So the UK’s inflation figures are falling as rapidly as elsewhere across the Globe, though we are lagging behind for some unique reasons which will catch-up. The blunt interest rate medicine is working and inflation will continue falling as input costs are dropping (though oil has turned upwards again recently and high wage costs push-up inflation too). Check-out the prices of base commodities on world markets to confirm that – metals and agricultural products for example.
So just how is the UK economy performing? We hear that retail sales were up 0.7% last month and that the Government borrowed less, as tax receipts were better than expected. That is one benefit of full employment – lots of taxpayers and of course, as Tax Allowances were not really increased, more people pay more tax and more are dragged into the higher tax bands. On top of that, last month’s Inheritance Tax receipts were a record too. It might be controversial but I don’t agree in the abolition of that tax… the allowances are generous already and you can make provisions to reduce the impact if it is a concern to your family (as it doesn’t affect ‘you’ as you have gone!).
Investment opportunity
Very little seems to have been written about companies which have big superannuation payment commitments and the fact that deficits on the schemes have plummeted. Most schemes are closed to new members but as long as the schemes have not sold their liabilities in full, the deficits could have disappeared and are now turning into surpluses!
I asked the board of one of our smaller companies what revisions they have considered and the retort was simply that they will revisit funding at the triennial review in 2024… this company struggles to make a profit presently but if the £3million annual contribution is no longer needed, that will transform its prospects and it is not alone. Will companies like BT, with one of the biggest schemes, benefit exponentially and where these ‘penalty’ pension contributions (or the cessation of them) are far more important to them than trading profits?
Pension Transfers from superannuation schemes
I believe we have now seen the ‘worst’ case of a fall in transfer values from a salary-related pension scheme. We tried to encourage this client to review his benefits from a local employer (a national company) in 2022 after he received a transfer value then of £28,726. Certainly he satisfied all the criteria for a ‘review’. His revised transfer value has just arrived and reflects the fact that interest rates have risen. The new figure is only £12,792, a drop of 55%.
People with deferred benefits do not understand how transfer values are calculated. We try our hardest to explain to people (and a high transfer value is not necessarily a reason to transfer but it will feature). You DON’T have an investment pot. You are simply a financial liability to the Scheme – end. They have to calculate a figure which the scheme has to say it is holding to your account to meet the ‘fixed’ liabilities due when your pension becomes payable. In simple terms, let’s say the scheme owes you £5,000pa. including the fact that the liability ceases with death (of an eligible spouse too). If interest rates (ie safe bonds) were say 10%, the Scheme would say it held perhaps £48,000 to ‘your account’. If rates were 5%, that sum may be £96,000. If the rate was 1%, the figure may be £480,000 the Scheme has to earmark for your liability. Yes, of course there are other factors at play but this is the primary driver for scheme liabilities.
What they also did not realise either is that as a single person, if they die before retirement, the scheme only repays their own contributions made, not a penny from the employer! That would be mere hundreds of pounds! This awful rule could be tightened if someone had the appetite to push for that (and at little cost to schemes) but no-one cares – ‘they’ simply say that ‘to transfer from a salary-related scheme is typically the wrong advice’. It certainly is not, for the right cases.
Investment mistake
Yes, we all make them – if that means buying something which falls in value. However, that doesn’t mean that the initial judgement was a mistake at all – not in the short-term. However, what ‘makes’ an investment manager is what they then do afterwards. We made a ‘mistake’, buying Abrdn Plc (though we have enjoyed some great dividends since, to keep us happy). They took-over Standard Life too you may remember. However, as the price fell, we bought more and we did that all the way down to £1.33 last September, ‘catching that falling knife’. (The lowest price we paid was £1.40). We increased their prioritisation on client strategies too as it became an even better bargain. They were cheap in our view at £3 a share, let alone £2 and then even lower.
So where have they been since? Back to levels seen before the Russian War, as I speak heading to double the low last autumn. So what zest did we need to demonstrate? Not superstition of where they had been previously but confidence in a valuation and simple patience, that’s all, but investors tend to not have much all too often – they sell the losers and chase the winners as the excitement gives them a bigger buzz. We don’t do that just ‘because’. However, I am not going to say what our stance is now on Abrdn Plc so this is not a regulatory recommendation needing relevant substantiation but rest assured, for clients we shall be reflecting our views over this tiny overall holding (around £2million’s worth)… of course, should we have bought more last autumn.. but did you send us some cash to invest for you then, so we could…!
Private Equity
Many pundits have noted their concerns that there are some nasty tail-winds affecting this colossal ‘industry’. They suggest that values of the underlying businesses have all been inflated, that the incestuous nature of transactions inflates values artificially and that investors are tiring of their enthusiasm, explaining why some great quoted Funds are at such deep discounts to the values of the assets they hold. It’s also why several of the big ones are using their cash to buy-in and cancel their own shares, pretty much every day, as they are so cheap so probably the best investment their cash can find (who is selling you may well ask!)!
Well, just to confound the pessimists, CVC Capital Partners has just raised E26billion for a new fund, the biggest ever and beating Blackstone’s 2019 fund-raising of $26billion in 2019. Maybe it should use lots of this to buy-in shares of the quoted Private Equity managers at such deep discounts instead… and indeed that is exactly what some Private Equity funds do (so funds of funds). We have several within our strategies and if cash allowed, we’d be happy to add more. Of course, to the ignorant this doubling-up then makes them look ‘expensive’ in management fees but really – look at the big picture which say a 40% discount affords.
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
