We seem to have been continuing our ‘purple patch’ almost to rather embarrassing levels in some respects. I have shared before how ‘you’ can go through all-good or all-bad patches – just coincidences sometimes too and not a reflection of ‘style’ but when we have ad hoc investments at the bottom of the list on some strategies and saw them at 20p last March and they are still ‘cheap’ at £1.40 less than a year later…
I have also said before it is as if the coin reminds us it only has two sides – positive or negative and little between. What we have found however is that many investors elsewhere have seen their values stagnate or fall these last five months whereas we have enjoyed one of our best periods in the Firm’s thirty-five year history – not from speculative positions but because undervalued, unloved assets in sectors too many avoided (like banks for example) have begun to regain their fairer values again (more than doubling in the year) whilst the speculative froth has been blown-off the top of things like ‘tech’.
It’s not about ‘winning’ versus ‘losing’ either or the occasional speculative position which comes good. Here is a little lesson for investors aside from the usual of spreading your eggs across different asset classes and also then within the asset classes themselves (ie shares and funds covering the world’s opportunities and different styles and company sizes, etc).
1. If you have the odd exemplary winner, it can make a tremendous difference to the whole pot’s result, such as paying all the management fees on your whole account for a year just because that ‘one thing came good’. We’ve had many of these this last year.
2. If you avoid having too many ‘bad ones’ – so the over-priced falling a great distance. We have been blessed here too – a few small casualties from the unexpected pandemic of course but no-one will ever secure perfection.
3. In terms of your overall investments, if you don’t have some losers, you are not investing properly. Remember then that so often your portfolio’s good overall results are also from those which had fallen recovering lost ground – this, when added to other exemplary gains which you have banked previously, creating an overall better result than ‘apathy’ (doing nothing, sitting on your hands, or panicking to the bank at the worst time) does.
4. If you invest £100 in a speculative investment, the maximum you can lose is £100. We don’t want to lose anything and don’t invest in things which we think will go belly-up – but it can happen and even to really big entities and the best ‘funds’. However, what is the maximum upside potential on this £100? It is unlimited. Yes, that £100 could become £1,000 and again, becoming a significant part of the total return you enjoy, even on a collective ‘pot’ of say £50,000 (that £900 gain is 1.8% of the whole value)! If you say you can’t afford to risk £100 like that and you have £50,000 invested in market assets, then you are not taking the best advice. Do you remember we noted about Amigos Loans? It was and is very speculative so not many clients have it (sorry) but since it hit 5.16p on 1 July last year, it has since been 19.88p – so a ‘mere’ profit of 285%, turning that £100 into £385. If you are not with us and simply have a basket of unitised, somewhat banal investments with the big fund managers where you are more worried about ‘total expense ratios’ and don’t understand the difference between ‘the price of everything and the value of nothing’, you won’t ever have anything like that at all.
One of our bigger Trusts has seen the top taken from its recent impressive performance – not unexpected and we were unable to sell too many shares to the quacking ducks at the top but it will come back. It is in the renewables’ energy sector, where too many people are paying too much for the ‘green/esg’ concept at the moment. We’d like to sell-out totally and I expect we’d be back in a few years, buying the same shares at a deep discount to the underlying asset value as the themes will have moved-on… We’ll even be buying ‘tech Trusts’ I expect at similar discounts… yes, things go in cycles. We’ve also been trimming our natural resource Investment Trusts – again bought at deep discounts so a technical trading opportunity for us too and one we’ve been selling at a premium instead! Did you notice too, gold has recently been to an eight-month low… we sold all ours last year but are happy adding it back as an uncorrelated, safe alternative but only when it is cheaper…
We don’t change what we do in knee-jerk fashion. However, we do keep looking for special value and we have found quite a bit in the commercial property sector in one way or another, or loan funds which are selling-up but where the shares are still at chunky discounts to the underlying asset values (as many just decide to exit rather than wait for the inconvenience of bitty payments). Indeed, as a defensive asset, non-residential, property related Trusts trading at deep discounts to their underlying (already depressed) values are a solid buy and with great incomes in many cases from the rents their tenants are still paying. We’ve just added one where the shares are around 30p – the Company only raised money at £1 just before the Pandemic hit and no, it is not all retail and hospitality properties in the portfolio but investors have fled. It’s quite small however and we may struggle to buy enough… Some of our other property REITs are still throwing-off income of 5-6% or more too, so a comfortable pot of spending money whilst we wait for capital values to recover – and we’re buying at chunky discounts to the underling freehold values of their portfolios too.
Do You Have An Old ‘Final Salary’ Pension Scheme
We have just seen another ludicrous final salary (defined benefit) pension scheme transfer value. So, the member contributed £1,987.33 to a scheme he left in 1992. The pension at the date of leaving was £1,125pa. Guess what the transfer value is now – £147,864. Of course I am not making any judgement on the guidance he should receive but is it any wonder companies have gone bust having to fund these ludicrous ‘liabilities’? What is also bad is that so often, the early death position for a member can be as meagre as ‘return of contributions’ but no-one (nor the scheme trustees) will have told him that, so that he might want to insure against that just in case. If him and his wife walk under a bus tomorrow, guess how much the children will inherit if he doesn’t transfer…
That said, trying to tell people that they don’t have an ‘investment fund’ with these schemes but that they are a simple financial ‘liability’ to the trustees is sometimes very, very hard (impossible!) work (‘but I trust my employer, they’re big, the scheme is so safe and solid’ – all almost irrelevant!). People often don’t realise that if, interest rates for ‘investment grade bonds’ went from say the present 0.75% to 3% the transfer value then could be half whilst investment returns on a balanced portfolio could have doubled at the same time? And if you don’t believe that could happen (or perhaps it is beginning to happen as inflation might just be ticking-up a tad…). These figures had rocketed as the schemes have to own bucket-loads of very dear government bonds, so the lower the returns available to them, the more of it they must have to match the ‘fixed’ income you are entitled to receive at retirement. Read on!
https://www.ft.com/content/5e7ce06e-c237-4265-a149-cd0d854b07f5
Just Where’s All The Money Going To Be Found?
The figures central governments have spent and are spending reacting to the Pandemic are eye-watering and at some point will have an impact in the ‘future’. Rishi’s budget hopes to ‘grow our way out’ of the problem but that cannot address everything and if the rate of interest which governments have to pay for their debt keep notching-up then that will be a bigger drain on the budget every year. The theory is that a growing economy generates more jobs, more tax, more wealth and investment and less unemployment and less welfare. Last summer this interest rate for ten year Gilts was effectively zero and today it is 0.8%pa. Of course that is still ludicrously low but that is a colossal increase in the cost in percentage terms. If you owe £2trillion, at 1% the cost is a mere £20billion a year. At 5% the cost is £100billion. Is their plan and hope that inflation will rise so the real value of the debt diminishes? If inflation hits 10% then each year the debt drops in real spending term equivalents – a mere £200billion a year (but so too does the money you have in cash at the bank and building society) but real assets invested in ‘business’ (shares, the economy etc) should keep pace with the increases as the underlying businesses charge more to their customers etc, to keep level.
Just think, Mr Biden has just agreed another Pandemic package – a mere $1.9trillion – wow. And then what about controllable State costs? The NHS pay rise – not trying to be political at all but it is hard. No, it isn’t ‘just nurses’ but it’s the whole NHS including the many administrative staff and the tens of thousands who have not been working because of self-isolation, etc. There are over 1.5million on the payroll in England alone and an average salary of £43,500pa based on the £65billion annual wage spend. The public sector elsewhere has a pay freeze, at the same time that millions in the private sector have lost jobs or been on furlough with very uncertain futures ahead of them. Because of guaranteed banding and incremental increases enjoyed, the increases all NHS staff have enjoyed already average at 2.7%pa between 2012-17 and 6.2% in 2018 and also 2019 according to the Centre For Policy Studies. It’s hard isn’t it, because the unions and media love to only represent the information they want us to see! Of course we all want hardworking frontline NHS staff to be paid more – but it’s not easy is it! Someone somewhere has to pay for it. If my maths are right, that means the NHS staff bill alone is over £1,200 every year per man, woman and child in the whole of England! (The total UK NHS bill is nigh £200billion so roughly £3,700 per person.)
Squirrels And Nuts
I read an interesting article on some of the cut-price investment product offerings recently (often the most advertised ones!). I fear that for many of them, something is lost in translation as they are not covering their costs and there is only so much capital you can justify throwing at something and if it doesn’t secure enough trade to begin to pay… you have to call it a day.
Nutmeg started almost ten years ago and yet still loses money. So, what happens when the Company decides to fizzle and close-down or sell-out to someone else? It’s not a ‘Woodford’ debacle of course but investors thinking they have bought a ‘cheap’ option suddenly find the costs of moving ship as the new guys sell everything, buy something else, administrators assessing the processes and bureaucracy and stopping access for a time whilst all that happens and hey presto, noses-cut-off to spite faces.
Half the time anyway, the offering is pretty poor to be frank and there’s no adviser to talk-to when you might need a hand holding either (eg last spring). Nutmeg has 100,000 customers (not clients!) with nearly £3billion in their pots (oh what we could do with that for them!). The last year’s accounts showed a staggering £21million loss – wow! We’d have gone bust very early on if we weren’t paying our bills within months, let alone a decade! The thing is too, they are not unique, so loyalty is negligible but if the ship implodes… investors will rue the day they joined-up as the administrative processes of dealing with simple things are one of the first which suffers (and the costs…). It’s already bad enough to experience transfers from big investment institutions and insurance companies we find, let alone dealing with ‘administrators’ with few staff! No, I am not decrying the financial stability of any of them but just so you are aware…
So what about the other ‘platforms’? We dabble with some of them just to see what is happening and it’s not all good news at all. Even the two biggest, Hargreaves Lansdown and A J Bell don’t allow you to trade everything on the market so some of the best opportunities we see for our clients – and can buy, are just not available to investors on those media, either because you aren’t deemed ‘sophisticated enough’ or because trading is well, too difficult. Even the likes of IG Index has recently culled an arbitrary 900 share offerings from its platforms – no consultation or consideration to long-term clients’ business values. We also use the intermediary’s channel ‘Transact’ but it can’t match our own system through our bespoke administrator and can be infuriating when we want to deal and at prices we want and expect to secure, so it makes the whole process impossible and again, it is very restrictive in some regards as to what is ‘allowed’ according to what the underlying ‘product’ is – some of this is a ‘lack of understanding’. I suppose for us (a small, dynamic investment manager in this context) we shouldn’t complain – as it means the pricing anomalies are and will be even greater as fewer people can buy or hold the very things which offer the best outcomes and value. No, it’s not all about ‘GameStop Inc’ either, I can assure you (and no, we won’t touch that with a bargepole)! Sometimes we need more patience too but these sorts of special differences can easily be worth 2-3%pa in terms of the overall outcomes our clients can enjoy but how can that be quantified – very, very difficult of course and especially when inane ‘total cost schedules’ have to be provided pretending to help guide investors…. They don’t!
Philip J Milton & Company PLC Charitable Foundation
Thank you for the funds donated following our recent newsletter. We are very pleased to say that we have granted £1,000 to Belle’s Place Ltd in Ilfracombe, to expand what it does to convert further space into useful rooms.
Mrs Carole Parkin, the Chief Executive says:
“This will allow private and confidential meetings. I am very fortunate to have established strong links with various agencies and services. When we can open, we will have The Department for Work and Pensions on site offering support and information around benefits, job search, training etc. Together, our local drug/addiction services will also be operating from Belle’s Place. The NDDC homeless outreach team also work from Belle’s Place on a fortnightly basis. We also work closely with 361 Energy, Transform, Ilfracombe Town Council, One Ilfracombe and will offer this space for appointments.
The third space is an already existing space that is used by our clients for tea/coffee making during drop ins, one to one meetings and in the future for the emergency shelter users. The final area for restoration will be to add a shower within the existing disabled access facilities. Many of our users live in Multiple occupancy accommodation and do not always have access to appropriate cleaning facilities. This will also be essential provision for our proposed emergency shelter.”
If anyone wishes to subscribe funds, please send them to our Foundation (for which tax relief can be added under GiftAid for private donations) and we shall forward 100% to the cause.
We are also sponsoring a whole Bore Hole to bring fresh water to a community in Uganda, following the specific generosity of a donor as well. More details to follow! This is the very low-cost Charity, headquartered in Barnstaple and it shows the idea:- We also sponsor a student to study at Kira Farm.
https://www.amigos.org.uk/blog/why-i-fundraised-for-a-borehole
Risk Warning
Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.
To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!
If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website www.miltonpj.net. We celebrate our 35th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.
Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.
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
