Mark Potter

Midweek Musings – Let’s get started!

10th March 2021 by Mark Potter 2 Comments

It seems to be ‘de rigeur’ to use the phrase ‘Let’s get started’ or similar at the start of a YouTube video and who am I to fight fashion?

This new format will on occasions cover a little more ground than its predecessor but it is still my ambition that you can take it in over a leisurely cup of coffee. More detailed analysis will appear in the subscriber only monthly WAtching Brief, and if requested, by the addition of longer reads to the main permanent site content. There will be plenty of fund specific content to give you ideas to follow up if they are of interest.

I had decided to omit my usual graphics too, to use the minimum of screen real estate because I expect some people will read this on their smartphone, but if that disappoints anyone, please comment as usual. Feedback is welcome and acted upon. The initial reaction I got was that the graphics helped with readability, so I added some in! I will adapt as appropraite if there is more feedback.

This weeks theme – diversifying your equity holdings. How about Fintech?

Inflation reborn?

As I have already explained in recent posts, the yield on US Treasuries has been slowly climbing, such that the long end of the yield curve is around 1.5%. This has been happening for about 6 months but a whole swathe of data on inflation has made market participants begin to accept that higher interest rates are coming in the medium term. Central bankers are doing their best to suggest that they are in no hurry to raise rates, but some of the inflation numbers are striking.

I saw a presentation earlier this week, a European focused one, where data was presented showing raw material prices increasing annually now at over 3.5% and for some minerals, much faster than that. Food prices are also moving up sharply and most readers will already know about the huge jump in the cost of renting shipping containers. Add to that a big jump in crude oil pices and a massive overhang of consumer savings on deposit at banks, likely waiting to be spent as soon as the world opens up to travel and shopping, and predictions of significant price inflation seem logical.

Asset class selection

As most of my readers will know, rising interest rates are bad news for fixed income investors, because the value of securities already issued moves in the opposite direction to interest rates. Precious metals, if not in demand in industry or for retail consumption, will also lose value because they have no yield. Deposits of cash will earn better returns but initially that is almost bound to be below the rate of inflation.

This classic model of a lower risk diversified portfolio from around 3 years back now looks seriously in need of revision, although many components will have done well enough

Of the major asset classes. one is left with equities and physical property. The latter is an asset that could do well if the actual properties are carefully selected but most mature funds will own too many retail shops and conventional office blocks and not enough logistics warehouses and server farms.

I am sure that everyone reading this owns a good range of equity based funds, probably with core holdings in the major markets of the world and some tactical sattelite picks. Looking to add further diversity to this asset block is worth your attention, given that the alternatives are not attractive and the track record of complex derivatives driven absolute return funds is in the main absolute in the sense of being absolutely awful!

Is now the time right for Fintech?

Funds investing in financial businesses have been around for years, mainly owning banking, insurance company and wealth management company shares. That makes sense because financial services is a huge part of some economies like the UK and those sort of busineses are subject to very high levels of regulation, so must surely be less risky (post 2008).

But the application of technology to financial services is making as much difference as the application of steam power did to agriculture a couple of centuries back or the invention of mass production did to the availability of motor cars. Can we invest in that process of change? Of course we can and the overall shorthand is Fintech.

There are not so many financial funds on offer to retail investors but I found a few (not all will be on your favoured trading platform – that is another thing to check).

Below is a downloadable link to a Trustnet fund comparion I prepared, using the well known Fundsmith global equity fund as the benchmark, which I think is realistic. The funds I chose are really quite different in character and the correlations not too strong, bearing in mind that these are all equity funds with a global stock universe.

Example-Financial-Funds-vs-Fundsmith-1 Download

As always, I am not recommending any fund and I would suggest that you take a look at the top 10 holdings, recent volatility and the typical market capitalisation of the holdings (using the Morningstar Equity Style box) because they will demonstrate quite a difference between the funds.

Jupiter actually offer 2 funds with the same manager. One is a very old fund – Financial Opportunities, the other (Financial Innovations) much newer. The innovations funds fits my idea of Fintech, but is much more risky, with the usual potential extra return and risk of heavier losses.

Im addition to the 3 in the chart, I also found these funds:

Jupiter Financial Opportunities – widely available UK listed, diverse large cap growth fund
Fidelity Global Financial Services – Luxembourg listed, mega cap bank and insurance led value fund
Black Rock World Financials – Luxembourg listed, similar to Fidelity with more bias to insurance companies
ASI Financial Equity – small UK listed fund, looks quite diverse , no named manager

There are of course Fintech ETFs (there are ETF’s for just about anything imaginable as a legitimate investment!), but I could find none offered with a UK domicile and only one with an Irish domicile, trading in US dollars and tracking the KBW NASDAQ Financial Technology Index.

Many of the real Fintech businesses are not unlike other new generation technology companies in car sharing, food delivery, internet gaming and so on. In other words, they don’t yet make profits, may be run by very charismatic people who frequently come from countries well East of London and survive on endless funding rounds. So investing in the innovative end of the financial services sector would have to be classified as high risk. But some very mainstream funds from investment houses like Baillie Gifford have been backing businesses that look pretty similar, as have many individuals with their ‘free’ trading apps. The latter may be a permanent feature of stock market pricing, so some suggest and that will help support more adventurous businesses and their share prices.

Other companies, especially those in internet shopping and money transmission services are longer established and profitable.

I repeat that I am not recommending an investment in this area to anyone, that is not my function, but I am suggesting it is an interesting area for research.

I can say, only in the interest of transparency, that I have invested in the Jupiter Financial Innovations fund. It is not uncommon for me to dip my toe into the water after completing a research exercise. Some times I wish I had not!

Monday mashup – over and out

8th March 2021 by Mark Potter Leave a Comment

Another change in my output!

Spring must be getting to your scribe – having changed the format of the monthly briefing, I now propose to change this regular blog slot to a new time.

It will become Midweek Musings, with posts most likely on Wednesday but not necesarily. In some weeks there will be more than one post.

The first new post will be this week.

A quick take on stock markets

One reason for the change is that I often want to comment on the state of stock markets and if I am writing early Monday, the news I have is from the week before, which occasionally is not ideal.

Last week saw a continuation of the pattern I identified in the Watching Brief . The markets are pricing assets on the basis of an inflationary economic recovery with rising central bank interest rates. This is because US bond yields are suggesting that is what is coming. That proposition does not fit in with all sorts of other facts, so possibly this will be a mini-tantrum.

If it is not, there will surely be more losses for fixed income investors and the price of gold may well head further down, although the latter would be an appropriate asset to own if there is runaway inflation. Equities will however turn around once a recovery is seen to be feeding through to profits.

It seems to me that there is nothing to lose by keeping calm and holding on to equities. I doubt if many of my readers own a heavy portfolio weighting in bonds (although be aware that if you own multi-asset funds, you will own more bonds in more cautious portfolios and they may not actually be lower risk at the moment).

Gold I have already commented on very recently and I think what an investor does with a physical gold holding will depend on whether it is a short term tactical holding (in which case it was a mistake with hindsight) or a long term asset mix diversifier.

Watching Brief – March 2021

1st March 2021 by Mark Potter Leave a Comment

Pottering About

The end of February saw a distinctly nervous feel to global bond and equity markets, emanating from the USA. The reason for this is for once obvious.

Markets have been taking account of rising long term yields on US Treasuries, a trend now around 6 months old. This suggests a fear of over expansion from the multiple stimuli during the pandemic and a boom of sorts with inflation.

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Monday Mashup – gold: hold or fold?

22nd February 2021 by Mark Potter Leave a Comment

The price of gold bullion has declined steadily in US dollar terms for some months since its peak last Summer. A decline in the value of the dollar relative to Sterling will have added an extra loss for investors reading this post, and that includes me!

Readers who own gold bullion may therefore be asking the question in the title.

Why own gold and what about Bitcoin?

I own gold bullion because some 9 months or so back, I wanted to have an asset that was not correlated with global equities and would retain value if the pandemic got totally out of control. Fixed income and physical property investments did not look like offering much value then (and they still don’t) and there was obvious demand for gold.

Gold is a commodity and generally commodities (which include cryptocurrencies like Bitcoin) don’t pay an income and won’t be worth more because an enterprise does well. The price is directly and only determined by supply and demand.

Because high value minerals like gold and high complexity assets like Bitcoin are hard to mine and bring to the market (for completely different reasons of course), the supply side is known to be limited. So in making an investment bet on such assets, one is always taking a view on the demand side of the equation.

Money ‘rotates’ around asset classes over time

What’s changed?

This is the key to working out the completely opposite path of returns for gold and Bitcoin over the last few months. We have less demand for gold (more on that later) and more demand for Bitcoin.

The latter has a new champion with a big fan base in the form of Tesla’s Elon Musk, who has invested shareholders’ cash into Bitcoin in a big way.

The other reasons for Bitcoin demand rising I can only guess, but I would suggest it is possibly our old friend ‘herd mentality’, plus a bit more of a reported positive attitude from blue chip investment houses, although not reserve banks!

The reduction in demand for gold can be attributed to several factors. The main one is that the pandemic risk is thought to be much reduced, so avoiding national ‘fiat’ currencies is less important. Another is that interest rates on US treasuries are slowly rising, implying a market expectation of inflation and/or a slowing of US government money printing in the mid-term – surely inevitable.

Although gold is an excellent inflation proof asset in the long run, it has no income yield. When risk free (as is the convention) assets like US treasuries also have no yield and could lose capital value on a rate rise, gold looks attractive.

When interest yields pick up, the short term investor would rather have the income now than the inflation proofing later, so money rotates away from gold to lower risk (now improved) yield assets.

If such investors exected a sharp rise in interest rates, they would hesitate to buy the fixed income assets, because of the anticipated capital loss, so the markets are telling us that they only expect gentle rate rises over a long period. There is some debate about that, but the collective psychology of the market is always right for the time being!

So, what to do?

One could take the view that gold is a useful core portfolio asset, offering security and diversity and over the long term is both a volatility damper because of the low or even inverse correlation with global equities, and it will serve as an inflation hedge. In that case, it makes sense to keep a modest asset weighting.

Should you invest in crypto currencies instead?

I am not qualified to add to the view of regulators and cental bankers who suggest that although these new assets are very similar in character to precious metals, the way they are traded is probably not unlike the trading of the shiny stuff back in the 19th century at the ‘gold rush’ sites. Some people made fortunes, some went on to control large parts of the market and most people were financially wiped out. In other words, retail investors ought to stay away for now.

Another point of view would be that the vaccine programmes are going well, Covid-19 infections are coming down, there will be no real double dip recession and instead a consumer boom will drive up prices and in time interest rates. That proposition would imply that owning equities, even though they are currently expensive in many markets, or even well selected property assets, is a better tactical (ie short term) option and both fixed income and conventional commodities are not likely to make money.

If you are of the latter more optimistic frame of mind, you ought to think about controlling volatility in other ways within an equity portfolio. Investing in infrastructure is something that comes to mind, given that we expect high levels of government spending, or adding heavier weightings to healthcare funds, perhaps? I am not sure I know the full answer at the moment.

As for me…..

You might expect me to tell you what I will be doing.

The answer is that I will not add to my physical gold holdings and as I have cash to put into the markets when I see opportunities, the relative weighting will go down.

Aside from that, I personally see no case for selling out, but my circumstances and portfolio will not be the same as yours, dear reader, so if you own gold, you need to make your own mind up!

I hope these comments help.

Monday Mashup – being an activist investor

15th February 2021 by Mark Potter Leave a Comment

I will next month post a longer piece in the Watching Brief summarising the very interesting data I picked up from a Morningstar webinar on sustainable investing a couple of weeks back, but one of the key takeaways was that ESG (Environment, Sustainability and Governance) is a theme that has not just become mainstream, but is now potentially the leading selection criterion for many investors in Europe.

When marketing people can see that money is flowing in a certain direction, they create and adapt products to capture some of it. That introduces a risk of ‘greenwashing’ – the labelling of investment funds as being ESG ‘approved’ when in fact there is only a token adjustment in the fund manager’s investment processes.

Article on fossil fuel disinvestment

This is not a rant week exactly, but a subject on which I do have strong opinions.

I know some of my readers are very seriously concerned about climate change risk. So am I. I recently wrote a piece for another blog on the subject of disinvestment from fossil fuel busineses – an approach that is being widely adopted by pension funds and other institutional investors.

I am not sure that disinvestment will actually help that much.

You can now read my thoughts in detail as I have added the article to this website – here.

ESG commitment level measuring

As the leaders in fund classification and filtering for ESG criteria, Morningstar are aware that their established Sustainability Globes system is a little limited and I would say that it does not use strict enough criteria to allow final fund selections for those of us that want to know in some detail what sort of companies our money will be invested in.

Morninstar have on their own web site various articles about how their assessments work, going back as far as 2016. These can be found with simple Google searches. But an article of particular interest published recently explains their more rigourous and newer ESG commitment level ratings, something I only recently became aware of. Here is a link to it. You may have to select the link twice to get past the audience filter landing page and you will need a Morningstar Basic (free) membership.

I also have available for anyone interested a long and detailed report (US based) that was the background to a webinar on Climate Aware funds that I tuned into last year. It will not give UK investors a fund picklist but it does offer some insights into how much analysis actualy goes into understanding the carbon footprint of investment funds.

All this I think is great news for those who want to personally do something to help improve the prospects of humanity still being alive on the globe in future centuries: we can direct our money away from negative business activities and in a small way play our part in mitigating climate change.

Monday mashup – short and sweet

8th February 2021 by Mark Potter Leave a Comment

What’s new? Not a lot this week.

The GameStop bubble duly deflated but the event brought to the regulators’ attention all sorts of issues about market manipulation. Some say the events of last week may be the death knoll for aggressive short selling hedge funds. If so, three cheers to that!

There are some slight hints that markets are seeing an economic recovery and maybe a little bit of inflation because yields on some fixed income stocks rose towards the end of last week. That fed through into a drop in the gold price, but I am doubtful that this is a developing trend.

Corporate results in the US seem in the main to be better than expectations, but the market is looking backwards only if it prices shares on that data alone.

Elon Musk appears to have acted even more bizarrely than usual in spending USD 1.5 billion on Bitcoin. As Tesla has only just become a cash flow generating business, I assume this is shareholder money. That raises an interesting question about companies doing what they are expected to in terms of business activity – perhaps he is taking the lead from Softbank?

Reasons to be cheerful, parts 1, 2, 3 and 4? I think not – more a case of reasons to observe rather than participate!