Am not sure if I should be feeling old or not… am just passing the 38th anniversary of when for the first time I was sitting at my desk in the small office in my parents’ home in Georgeham, the first day of my business after I had given-up a promising career in mainstream banking and wondering… ‘what had I done’!
It has been an exciting time – mainly very pleasurable and rewarding for all of us (and I include clients there!) and through very challenging market conditions and a regulatory backdrop that has transformed from those early days – mostly positively but negatives too. The last several months have also been gruelling in regard to processes and protocol revisions too and we look forward to being through the other side with those soon.
On the national news, I expect you are confused. The economy doesn’t grow or not as much as hoped and the market falls. The economy rises by more than expected and the market falls. Let me try to explain. First of all, let’s ignore all the textbooks but I shall rely upon my rather lengthy experience.
Markets tend to go through periods of ‘all news is good news’ or ‘all news is bad news’ regardless of what the pundits say. We have been enduring one of the latter for a long time now (they tend to be more exaggerated both ways now, as information flows and reactions to it are so rapid and widespread). It will change. Then what? Remember that economics itself is ‘financial interactions with human beings’. That’s pretty much it – not some big machine, nor governments, banks, financial institutions nor commodities or assets, simply what the collective beings are doing. They are an erratic and over-reactive bunch at the best of times, with short-term horizons, living more for today than tomorrow as they see more things accessible for them to have now and so it goes on. And yes sadly there is an even greater lack of satisfaction with one’s lot, a bigger ‘entitlement’ culture without the effort and work to progress oneself and greater envy for the perception that someone else has things better than they do, fuelled by media. Yes, this empowers ‘movements’ to excess too, frightening the very same people, from the world ending in ten years, universal financial implosion or nuclear holocaust wiping-out mankind. So ‘we’ have to ‘get a grip’ and try to rationalise things better – but for an investment manager, the new extreme ups and downs present opportunities (and constraints) but we still need patience!
So why did the market react badly to good economics? Because we must kill inflation and if it seems there is more economic confidence than we ‘want’ at the moment, inflation will remain high and so the Bank of England will hit us all again with another interest rate increase. That impacts companies’ borrowing costs and loan access and of course consumer confidence and spending ability.
Frankly I think that rates are high enough. We can hit the headline inflation rate in more honed ways but no one’s listening… The oil price has risen again and commodity prices are firming but there are enough cuts still working their way through the system to reduce core commodity costs and also energy prices too. So, inflation is going-down regardless – look globally.
Pleasuredome Theatre
We were delighted to support the Theatre this years for its outdoor performance at Valley of Rocks in Lynton. Sadly on our night the inclement conditions had returned us all to the Valley of Rocks Hotel but what an energetic performance of ‘Treasure Island’ from all the actresses! Well done all!
It was lovely to engage with them and they and their lead, Helena Payne, were embarrassingly appreciative of our assistance with publicity and small financial support to help kick-start things this year. There is some great talent amongst the troupe and I am sure we shall see several of them in bigger productions into the future. Well done all, it was a delight to be able to assist you!
UK market rates
A very interesting report in Blackrock’s Throgmorton’s annual report noted the vast value difference in the UK market. It looked specifically at the under-performance of FTSE250 companies (so in size order, companies from 101-250) against their bigger brethren, the FTSE100. Periods back to the 1987 crash were compared, as well as times since the outbreak of Covid, Brexit and the global financial crisis.
Larger companies tend to be more protected in calamities (as long as they are not so over-priced, like in the States). The comparisons start from the first day of underperformance and finish when the trend changes. The present descent is the longest of these, at 463 days for that report. The under-performance which started in 2021 has been over 30% and the ‘largest underperformance on record’.
This will change as the fundamentals make little sense and the value is so compelling. What may change these trends? We can ‘guess’ but as sure as eggs is eggs, this situation will not continue for ever and when it reverses, the adjustment is likely to be very significant and rapid. In the meantime, we are paid well in dividends to bide our time.
Investment Trust value
One of our mainstream Investment Trust holdings has just announced its latest quarter’s results and commentary. Shares are available on a 43.5% discount to the underlying asset value (meaning that for £1 today we buy £1.77’s worth of underlying assets and enjoy 177% of the income). However, I liked what the manager has said and it epitomises our own views presently:- “Investing in undervalued companies requires patience and conviction. Short-term market fluctuations and sentiment-driven price swings can cause temporary divergence from intrinsic value, and we may not see the true fruits of our investment until money flows out of the popular stocks.”
The other point I shall repeat is that buying value-based stocks at too cheap a price is lower risk than buying growth stocks expecting very optimistic projections and recent results to compound exponentially. If (no, when!) something goes wrong, the floor is a very long way down. However, if you buy a bag of 100 £1 coins then at the end of the day, there is a tangible floor which is more likely to hold, than a bag of very expensive, hypothetical or hopeful assets reliant upon an even bigger optimist than you to pay you more for them later. Yes again, will investors be patient in these cheaply-priced assets? That is what is required though in most instances, you are paid to wait – with generous flows of dividend income and higher than market averages (which are impacted by ‘growth’ stocks’ absence of generosity in that quarter!).
According to Investment Week’s interrogation of AIC statistics for the quarter to 30 June, three-quarters of all Trusts saw their discounts increase (so their value increase). Yes, the converse is that if you were invested, then your capital shrank not from underlying market movements but because of this technical change. Yes, we would have been affected but we have also had ten trusts where reviews or actual closures have resulted in discounts evaporating or diminishing as the Trusts review or decide to close-down. Interestingly but reflecting how trends and populism do change (yet at the time people often forget that!), the biggest loser in discount terms was Scottish Mortgage Investment Trust from ‘over-priced’ to slightly more attractively priced (but we are still not buyers).
More good news
Only slight but all such events are positive. Two of our Trusts, RM Infrastructure and GCP Asset-Backed Trust are proposing to merge with GCP Infrastructure to create a bigger, more liquid fund. This also cuts costs of course and makes a £1.45billion pot more accessible to more investors too.
The outcome for us so far is increases in the values of the shares of each Trust we own – coppers (well a 5% gain on the day for GCP and 2% for RM) but they all help and as I have said many times, nothing to do with underlying market movements – simply technical repricing of funds trading at deep discounts to their underlying asset values. Another of ours, ICG Longbow is also returning more cash to us in its wind-up process – more than the market expected so again, those shares jumped 10% (a handsome year’s worth of return from a loan fund…) on the day but the remaining assets are still to be realised.
Charity Bank
I was disturbed to see that the CAF Bank has lost £33.4million on its bond holdings according to its 30 April report. The Bank serves 14,000 charities and the ‘paper losses’ represent almost two-thirds of the Bank’s £52million total capital! CAF Bank is wholly owned by CAF itself which holds £1.5billion of deposits across 16,000 current accounts.
The Bank’s directors say that they intend to hold these bonds till maturity suggesting it won’t need to realise the losses. However, if it paid about par for any (so over £1 for £1’s worth) it won’t eliminate all the losses… I don’t share their ‘entirely comfortable’ stance, despite their internal liquidity stress test noting it could withstand a 77% outflow of deposits. They may imagine the position is ‘theoretical’ but no, it is actual and as with SVB in California, if it has to sell, it is at the present market value. 25% of its depositing charities have over £85,000 which is the present protected sum for deposits. What happens if those charities choose to withdraw the excess (I suggest these charities’ trustees should be reviewing that regardless). What if the Regulator notes its dissatisfaction with the position and demands action…?
I should also be interested to learn if the Regulator is reviewing the Bank’s policy which put it in such a precarious capital state of having so many bonds like these and which could lose so much – traditionally ‘bonds’ are safe but not when interest rates are so low or into negatives – diversification and risk spreading is what is necessary at all times…
However, universally how many directors, charity trustees, et al were complacent as they enjoyed only upwards price movements in their bonds as interest rates kept going down and not up… very dangerous and prospectively negligent behaviour… many individual investors, pension funds and long-term funds have all been in the same club. So far we have not seen any industry-wide surges in complaints by individual investors about what happened to those ‘rock solid’ funds they bought – promoted for the ‘low risk’…
Charitable help
Our Charitable Foundation was delighted to support the fervent fundraising activities of the local Community at Chittlehampton with a £750 donation to help refurbish the much-needed play area there.
Locals and North Devon businesses are invited to do likewise to help ensure this facility can be resurrected for the locals to use!
Villagers hope to bring Chittlehampton play area back to life after three years
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
