Midweek Musings – 6–8–9, time to get in line!
Introduction
This week’s post is shortish because I will publish a fuller subscriber only Watching Brief over the weekend or early next week.
The title refers to the categorisation of funds in Sustainability terms under the EU’s recently in force SFDR sustainable finance directive. Although the UK is not of course in the EU, all fund managers wanting to market funds in Europe (which includes all the large UK fund managers) will comply with the rules.
The categories
As usual with EU policy documents, the rules run to many pages, but for our purposes, we only really need to get used to the 3 ‘articles’ or categories of fund referenced in the title.
- Category 6 is general retail funds such as we might purchase
- Category 8 is funds that promote environmental or social characteristics (light green)
- Category 9 is funds that have a specific sustainable investment objective (darker green, but not necessarily ethical)
How are funds lining up so far?

Morningstar have published some early data from about half the funds with domicile in Luxembourg, the favourite base for non-European fund managers to use for selling into Europe, on how funds are coming out as the process gets under way.
It is probably a good idea to keep in mind that when any new rules are published, they are subject to varying intepretations, especially when talking about categorisations (think of Covid-19 death rates). So I would assume that some fund groups are going to be more liberal with the rules and others more literal, or pedantic.
It is no surprise that European groups as opposed to UK or US fund businesses are in the main showing a higher proportion of category 8 and 9 funds because it is well known that European investors have been more in favour of ESG filters for a while and one might also speculate that the European fund managers are a little cuter at tuning their documentation to fit in with EU rules – just my idea!
On this early data funds classified as Article 8 or 9 represent 21% of European funds by number and 25% of European assets. This data is extrapolated by Morningstar, rather prematurely in my opinion, to suggest that the ESG funds market in Europe is worth EUR 2,5 trillion. Not a trifling sum even in these days of money sloshing around everwhere.
In case you are interested the French firms Amundi and BNP Paribas have the highest number of funds in 8 or 9, well into the hundreds. The UK’s top player was Legal & General with around 50 funds and even the mighty Fidelity International only has just above 50.
When it comes to actual money invested, unsurprisingly, Nordic and Dutch asset managers fill all the top spaces. SEB, a Swedish bank that operates in my region classified 95% of its assets in categories 8 and 9. The bank I personally use, also Swedish, too small as a fund manager to make this survey, has 100% of its funds ESG assessed as far as I can tell – the facts sheets always include a significant ESG commentary.
Does this matter to us?
I think it does. I have been pretty sure for some time that the global enthusiasm for sticking a ‘sustainable’ label on investments and booing loudly everything that superficially is not sustainable will be the biggest driver of investment fund flows for years to come. So even if you are more sceptical than me about the quality of the labelling on ESG funds, it makes sense to to at least keep up with this bandwagon, even if you don’t want to jump on.
Midweek Musings – Is Bigger Better?
I was asked recently if one could speed up investment fund or ETF selection by picking a reliable fund group and then just getting one’s asset allocation by picking the right variants from their range. Some fund groups are so large, offering hundreds of funds, that this would certainly be feasible.
A quick observation
In truth the size of a financial services business offering investment products will impact on the style of the investment manager given the job of running the fund. With passive ETFs, there is no manager, so one is looking for reliable systems, good index selection and low fees. In this latter case, bigger will usually be better.
A fund manager in a huge organisation (often a bank) with multiple service offerings, like J P Morgan, BlackRock or HSBC, will be just a small cog amongst larger cogs in a huge machine and may have to work with a lot of policy and complaince constraints, which in some ways is a good thing. At the other end of the scale, the ‘one man and a dog’ fund managers with an external ACD (like FP,LF,TM, VT and so on – the people who provide the regulatory services) have immense discretion but not much supervision, which adds risk, as was seen recenty with the Woodford fiasco.
In between those extremes are a variety of firm sizes with narrower and broader fund offerings and with managers having more or less discretion. Knowing something about the culture of the firm within which a fund manger works is useful and in fact one of Morningstar’s ‘pillars’ in assessing funds focuses on this issue.
A bit of fun
I tend to like analogies using motor cars, so I am tempted to match some well known fund managers with car makers, just to give you an approximation of scale and style (if you know anything about cars – most of my readers do!). The names are a sample of firms offering funds to UK investors that are mainly widely owned with a sprinkling of interesting niche players.
The car maker’s national origins are only partially relevant – I am thinking about the range and sort of cars (including general reliability) that they sell and how they make them and finally I estimated the share of the market that they take!

Please take with a pinch of salt! If anyone is curious about how I picked the car makers, feel free to get in touch.
| Fund Group | Car maker that comes to mind |
| Black Rock, JP Morgan, Barclays, HSBC, Morgan Stanley | General Motors |
| Fidelity, Janus Henderson, Invesco, Schroder | Fiat Chrysler |
| Aberdeen Standard, Legal & General | Toyota, Honda |
| Jupiter, Artemis, Liontrust, Premier Miton | Jaguar Land Rover, Mazda, Volvo |
| Baillie Gifford, Ruffer | Tesla |
| BNY Mellon, BMO, M&G | Ford Motor Company |
| Guinness AM, Polar Capital, Montanaro | Lotus |
| Ninety One, Columbia Threadneedle, First Sentier, Aviva | Nissan, Subaru |
| Royal London, WHEB | Skoda |
| MAN GLG, AXA Framlington, Aegon | Peugeot, Citroen, Renault, KIA |
| Crux, Teviot, Somerset | Audi, Porsche, Mercedes |
| Fundsmith, Blue Whale, Slater | McLaren, Lamborgini, Ferrari |
| Vanguard | Volkswagen |
| Woodford | TVR! |
| St James Place | Rolls Royce :-)) |
| Virgin Money | Lada |
Full Circle?
If there are ‘gods’, I imagine they had a good laugh yesterday. Bernie Madoff died in prison on exactly the day that shares in Conbase began trading at a 50% increase over their guide price.

Whoops – one of my frequent typos – I meant Coinbase.
There is in logical terms very little difference between a so-called Ponzi scheme and use of blockchain to represent monetary value. The structure of blockchain is a technological advancement that will have plenty of applications, but its use does not turn electricity into money, contrary to widely held opinions, other than for those who ‘mine’ when the price is higher than the manufacturing cost (nothing new there).
What makes money for cryptocurrency traders is the arrival of more people wanting to buy and a very manageable low level of sales. That is the basis of every get rich quick scheme and indeed the valuation of works of art, classic cars, fine wines, stamp collections and so, although with the physical assets there may be some actual pleasure of ownership over and above boasting to your mates at the pub.
Many people made lots of money with Bernie Madoff. If events had not prompted rather too many to ask for their money back, Mr Madoff would likely have died a happy billionaire, not in prison.
Lets hope that there is never a flood of cryptocurrency investors asking for their money back all at once. Who would get sent to prison then?
Midweek Musings – Getting Personal
Introduction
People who work as professionals in investment management will be expected to have qualifications that allow them to apply accountancy based ‘rulers’ over prospective investments, understand at least some basic ideas of statistics and probability and even know the meanings of various Greek letters in the context of their work. In my (unscientific) opinion this seems to explain why fund managers with degrees in the arts or humanities are on average less succesful than those who trained as accountants or who better still have advanced science degrees. Past students of economics may claim to be scientists, but in my opinions they are usually far from that!
There is a similarity between predicting the future returns from investments and weather forecasting. A great deal of computing power can be applied to analysing the past and some human expertise can be added to interpret that data, but in reality, the best we can hope for in terms of reliability is an indication of the most likely outcome.

In the case of the weather it is the scale of the systems operating across the globe (the impact of nature, in short) that makes precise longer term predictions impossible. In the case of stock markets, it is another aspect of nature that can be fickle or not well undestood: human behaviour.
In this weeks post, I intend to explore some ways in which I think investors can apply some ‘art’ in selecting fund managers. You might find what I have observed to be obvious common sense, but I know that many people imagine the people who work in investmemt companies are some sort of elite with wondrous skills. In spite of the fact that many are paid very highly, they are often far from that.
I once wrote that an actuary is someone can reliably calculate the probability of a good salary. A fund manager is usually someone who likes testing out personal prejudices with other people’s money!
A fund manager’s career path
If you have researched funds in detail, you will have read many mini CVs of fund managers as published in fund fact sheets and maybe expanded on the fund group’s web site or in Morningstar analyst research. Of course, in real life, not everyone makes progress for simple reasons of merit or seniority!
Most of the people with responsibility for the final purchses of investments, maybe from lists provided by a process within their firm or maybe just anything they like, will have reached that pinnacle of authority after working as an analyst in the same firm or in a bank or stockbroker. A few might have worked in industry (say as a pension fund manager or accountant) or ocassionally come out of the military or agriculture. Once upon a time, there was a good chance they went to a public school, but the globalisation of UK fund managmenent groups has diluted that particular “chumocracy”.
Most will have added a formal investment qualification to a degree at Bachelors. Masters or even Doctorate level. I have noted a number of people who took physics doctorates as successful fund managers. Such extra qualifications will usually have been secured many years before a the person got to be ‘running money’, but such is the nature of education – our GPs may not have taken an exam for 20 or 30 years. There are of course compulsory Continued Professional Devolopment programs (usually lightweight in my experience).
So far I have outlined the sort of moulds from which our fund mangers are formed and in truth they are a reasonably homogeous bunch, but….

The ‘star manager’ or entreprenuerial fund manager
In his book ‘The Magic Mountain’ Noble prize winning author Thomas Mann introduces late on a striking character that he portrays as a ‘personality’. This individual is able to secure the attention and approval of his associates and friends without saying anything useful, structured or intelligent. This is shocking because earlier in the book, two other characters have been developed as highly educated and intelligent debaters with opposing viewpoints – one a humanist, the other a Jesuit. They just disappear into the background, outshone by the high wattage competition.
The author has in this book shone a bright light on a very important aspect of human behaviour.
We have had the opportunity to observe first hand in politics right now how an individual can rise to the highest level of influence simply by the force of an unusual (perhaps abnormal?) personality. I refer to Donald Trump of course, but one can probably say the same about Boris Johnson, Vladimir Putin and in the past the likes of Stalin, Tito and without doubt Hitler. The list in politics will be a long one.
Now what happens in politics is a mirror of most other aspects of human behaviour, albeit maybe a magnifying mirror. Someone who has the personality to push themselves forward, perhaps because they have ideas they want to try out on their fellow humans, maybe because they want great fame,wealth and luxury or simply because their brains works that way (as withh the classic personality disorders).
My research has shown me that the more extreme personality types (the most ‘pushy’, one could say) tend to get to the top in politics, the entertainment business and in business….
….and in investment management.
Because investing other people’s money is a highly regulated process in the developed world, there are systems that bear down on these most self opinionated of individuals so that their superfluity of confidence, which may through luck or skill see them having runs of success, is at least on a leash.
Those who are not happy with the constraints of others whom they regard as lower mortals will wait until they have a good repuation, have earned enough to fund a new business and talked some colleagues into the joys of escaping the bureaucracy and announce their new business – usually with their name on it.
The implications
Some of what I next propose is based on real events, actual examples and some is based on my own thinking about human behaviour.
There is in my mind no doubt that an intelligent mind is likely to bring an individual into conflict with the objectives and day to day operations of a large international business. Businesses are in effect organisms and their operations are designed to protect the whole in as efficient a way as possible. There is usually no room for mavericks. Who would want to be Elon Musk or James Dyson’s line manager?

The most skilled senior managers know how to manage the best and even the most indepenent thinking employees early in their careers but eventually the strong willed individual acquires enough status (the ‘star’ badge) such that they are almost unmanageable. I am not an innocent in all this – my accountant once said to me that he and I were alike in that we were unemployable, meaning we had got to the point in life where we wanted to test our ideas without a hint of supervision. Good fund managers reach that point sometimes.
Some will set up a business with insufficient parallel resources, such as in compliance or sales and marketing and will simply be unprofitable. This is very common and many managers move back into the fold of a fund group that is a little more respectful of them than their past employer and they then run funds in a semi authonomous way, but with appropraite controls. Jupiter, Liontrust. Premier Miton, MAN GLG and others all have managers working for them that have been through that loop and in my judgement that is a positive. They have pulled their horns in a bit but still have individual talent.
Others, and this is where we must take extreme care, in spite of having very few people working with them, see their businesses storm ahead and so they attract billions in funds. You will know some examples: the now disgraced Neil Woodford, the very rich Terry Smith (Fundsmith), Messrs Lindsell and Train, Alexander Darwall (Devon). Others may be less familar – Teviot, Crux and Chelverton, for example. It is perhaps significant that the last 3, although all founded by people ‘setting up on their own’, do not have the founder’s name out up front!
The wrap
In summary, it is no surprise that quite a few top fund managers have strong personalities. This may be what got them to the top, rather than any other special skill. If they find the restraints of corporate life frustrating, they sometimes go off and do their own thing, with or without associates strong enough to rein in their wilder ambitions, whims and personal biases.
Most will fail and return, chastened to the corporate fold. A very small few will succeed and get very rich, which probably means they cease to be actually running money anyway. A separate small number will take a wrong turn or two, refuse to reverse and end up losing an awful lot of other people’s money.
As investors, we need the art of assessing people in general and using that in a common sense way to assess the risks of trusting our money to ‘big personalities’. As a rule of thumb, I don’t trust the breakaway new funds!
Midweek Musings – Spring Sunshine?
As I write this (April 6th), I see stock markets well up on the day across the globe and Sterling is down. Both these factors (if they prevail until markets close) will give our porfolios a little Springtime valuation lift. Of course, that is one day’s events and as such pretty useless information for someone pondering the future direction of markets. But maybe short term data is of some use? That is my theme this week.
YTD (year to date)

3 months data (YTD for 2021) is arguably more useful, not in terms of predicting future valuations, but because we know the global macro economic context and we can see how invesors in different places and types of assets have reacted to the sort of changes I highlighted in my Watching Brief last week.
If I had to pick only 3 relevant contextual factors, they would be these:
- economic recovery driven by vaccination programmes (or low Covid 19 incidence as in China),
- US government spending plans and the impact of those on inflation and interest rates,
- finally, those who prefer real profits to speculative momentum gains raising their voices more audibly and maybe being listened to.
Here is some data (year to date, various sources and rounded slightly).
Note that data extracted over a short period is very sensitive to the start and end dates (in this case January 1st and April 5th), so the absolute numbers are of only curiosity value: it is the relative differences that are interesting!
Major Markets (in local currency terms)
| S&P 500 | +10.2% |
| FTSE 100 | +4% |
| FTSE 250 | +7% |
| NASDAQ | +8% |
| EuroStoxx 50 | +11.8% |
| TOPIX (Japan) | +8.8% |
| MSCI World Growth (USD) | -0.6% |
| MSCI World Value (USD | +4% |
| Sterling Index (relative to a basket of currencies) | +2.2% |
This suggests that we should all have made money so far this year but that some of our returns as UK investors in overseas assets will have been dented by the revaluation up of Sterling which makes investments in other currencies worth less.
Funds
I checked out a few funds that I own, know well or which are representative to see if the above index data was reflected in performance, due to asset class selection (or asset mix for multi asset funds) or manager stock selection. This data is for the cheapest retail share class and in Sterling terms, so allows for the currency headwind where applicable.
| MAN GLG UK Undervalued Assets | +7.4% |
| Artemis UK Smaller Companies | +13.5% |
| Baillie Gifford Global Discovery | -4.3% |
| Fundsmith Equity | +1.2% |
| Blue Whale Growth | -1.8% |
| Vanguard Lifestrategy 60 | +1.5% |
| Vanguard Lifestrategy 100 | +5.1% |
| Royal London Sustainable Managed | -2.5% |
| Wisdom Tree Gold ETF | -10% |
What do you make of that?

I draw these conclusions:
- The UK has been a good place to invest this year (and indeed at the end of last year), holding its own for the first time since the Brexit vote. There is no currency headwind as there is for most other assets listed, so the UK, especially away from big foreign currency earners in the FTSE100 is more or less top of the pile. Of course, this is not a comprehensive list, but one I arbitrarily decided was interesting, abusing my editorial authority!
- There are hints that investors have fallen out of love with some of the leading growth stocks as owned by Baillie Gifford and to a lesser extent by Fundsmith and Blue Whale.
- The fixed interest element in the Royal London Multi Asset Sustainable fund has seriously dented performance. Indeed, as I have been saying for a while, fixed income investments are more risky at the moment than their long term volatility averages would suggest. This can also be seen in the difference between the returns from the Vanguard Lifestratgy 60% equity and 100% equity funds.
Do I conclude that I should be piling loads more money into UK smaller company funds and dumping my global growth assets? Of course not in such a simplistic way – only a very naive investor chases recent past performance. In any case, this data tells us nothing about systemic risk and that is still at a high level.
When markets sell off in a crisis, virtually all stock market assets fall and those that went up the most recently will usually fall the most!
So, I am as careful now about the amount of equity risk I am carrying as I have been for the last 2 years or so. The data above does validate my decision to use cash as opposed to general fixed income assets as my insurance policy. My decision to also use gold to a degree is open to challenge on the basis of recent losses, but I am sticking with that as a long term defensive asset with inflation proofing thrown in.
Of course, one has to be invested in equities to make money long term and it is possible to diversify in lots of ways within any equity asset allocation. Working out where markets are going is therefore worth the effort and looking at data like that above is part of the process. Markets are traded and priced on the back of human behaviour in my strong opinion, so it can be instructive to see what our fellow investors are up to!
Past performance is not a guide to the future as the regulators expect us to be told but recent past performance does tell us what investors recently chose to buy in the market conditions that we know about and which may well still prevail.
The fact that a fast car was travelling at 150 mph on the autobahn 4 hours ago does not really help the driver if he is in a traffic jam in the city or broken down with an overheated engine! But the driver might have avoided either problem if he paid attention to current data: the traffic info on his Satnav or Google and his car’s temperature gauge or the electronic equivalent.
In a sense recent past performance is informative even if not predictive. Use such data carefully, applying it to what you already know about the context and you will become a better investor.