Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

Monday mashup – stupidity or dishonesty?

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No, this is not about the US President’s recent remake of Driving Miss Daisy because if it was the word ‘or’ would be inappropriate.

I am referring to the way in which many governments of the developed world are dealing with the pandemic. Any one who has spoken with me over the last few months will know that I believe the phrase “second wave’ is unhelpful and probably a mispreprestation of the facts.

Ignoring the obvious facts that happen to be inconvenient is a speciality of the human race.

It implies, I think, that the course of the pandemic is predictable based on what has been observed in the past with other viruses. That is possible, maybe even a reasonable way of preparing, but should not be an excuse for failing to observe what is actually happening and acting decisively.

Some facts

Here are what I think are the facts as we know them now and which are not being bluntly (honestly?) put in front of the public of many of he world’s most developed nations. Especially those where politicians raise a lot of money from vested interest groups on all sides of the political spectrum.

  • The virus spreads virulently between people in enclosed spaces who are not widely separated. Like workplaces, nursing homes, police stations, party function rooms, packed baseball stadiums and I guess hermetically sealed presidential cars.
  • Full lockdowns slow the virus spread to a very low level. These are psychologically difficult for many people and severely restrict normal life for part of the population.
  • When the virus is spreading at a low level, contact tracing is easier and helps keep the lid on things.
  • A relaxed attitude to containment is possible in rich countries with well resourced health services and an educated, socially responsible population, but at a cost of more deaths, especially of older people.
  • At this stage the long term impact on those who have recovered from the virus is not well understood, nor is the transmission rate amongst children.

Economic consequences

Those are some of the established facts about the virus. Other facts that are pretty obvious relate to the economic consequences:

  • Complete lockdowns will quite quickly (in a matter of months) wipe out whole sectors of the business community. A few businesses will benefit.
  • Government money pumped out to keep businesses solvent is putting future generations into ‘hock’ by gigantic amounts.
  • Government bail out money is going to sometimes be fraudulently used, will in many cases be only a sticking plaster and will eventually drain into the ‘pots’ of investment speculators.

What is an honest assessment?

A sensible person would conclude:

Governments must admit that there is no feasible balancing act in which the maximum number of lives are preserved and an economic shock is avoided.

There are really 2 options only:

  1. No lockdowns (the Sweden option and apparently what is happening in some US states and maybe the default in large less developed countries in Asia). That will result in more deaths, especially of the elderly, but limited economic damage locally. In many countries, this may see extreme stress applied to health services and that may have unpredictable consequences in itself.
  2. Full lockdowns and tight control of the population (the New Zealand and China examples are obvious ones). This will have economic effects that will be painful in the short term, but which richer countries may be able to tolerate in the hope of a much faster return to normal.

Any other approach is a fudge, a pretence that some sort of half baked lockdown, switched on and off, revised, dropped, localised and so on after a crisis has arisen will save the most lives and keep businesses open. Anything that is not option 2 is option 1 with a misguided attempt to fit some airbags and crash impact zones.

Those countries that opted for option 2 for just long enough to see their numbers improve and then relaxed have really just wasted all the advantages they built up and reverted to option 1 without telling anyone. During that time, the populations of those countries have become disillusioned and are less likely to do what they are asked.

OK, it’s only my point of view….

Double rant warning

Maybe you disagree, or maybe you would say you know all that already.

My point would remain that the politicians in the Western world that I hear from via the (now broadcast and electronic) news media are not displaying leadership, are pretending that all will soon go away magically (especially Trump but also many others) and in the meantime policy making is shambolic, confused and ineffective, frequently reacting to events.

That is like crashing a car in the rain because all four tyres were bald and just replacing the airbags and driving off again.

This matters firstly because more people will get ill and die without any obvious gain. It is tough to suggest that there is any gain in more people dying, but wars have taught us that the process of human existence means that at times some people die because humanity is fighting for a civilised future. What adds to the pain is if they die because of totally incompetent leadership, rather than in the pursuit of the general good by the most effective means.

For us as investors, this matters a great deal as well.

The feeble, half-witted, misdirected and plain dishonest management of the pandemic response in countries accountable for a very large proportion of global economic activity will in due course feed through to a recession that will compare with the one between the Wars.

I started by saying this was not about the US President, but he features!

As then, the very rich will come through in pretty good shape, but I doubt if the rest of us will avoid some severe pain if we are not prepared.

Rant over!

Investing in the UK stock market in a post Brexit, post Covid-19 world (m)

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Will there ever be such a world? I hope so!

I have already written that I would do some research into what funds might look attractive to investors looking to bolster their portfolio UK exposure ahead of the world as a whole changing its mind about the UK being rather risky as an investment destination

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Monday mashup – crystal ball gazing? Or forecasting?

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It is easy enough to work out what investors have to worry about at the moment and to give those risks a rating on probability of causing problems – even to guess when the problems will emerge. For example:

  • The US elections – happening very soon and a risk if there is not a clear win for Trump or Biden and Trump refuses to depart even though the polls say he has lost. I don’t think which candidate wins will make much difference on its own to US stock markets, but a constitutional crisis would.
  • Covid 19 – a risk that stock markets are in effect ignoring because many players like the consequent pouring out of nearly free money that is either in effect being invented, or which will be a burden on future tax-payers (which won’t include them, of course!). This Nelson like way of viewing global economics will maybe win a battle, but like Nelson, the corporate warriors won’t be able to avoid a bullet for ever. When it will come is unclear, but I suggest this is a medium term risk.
  • Related to the above is over valuation of shares – the detachment of many companies’ valuations from a logical base and therefore the undermining of many established rules for making sound investments. This looks to me like a repeat of various past periods in recent history. Such bubbles of investment naivety usually burst without much warning. That could be any time soon.
  • And finally for Brits only (and maybe with lesser consequences for Europe) – Brexit. This one has a very easy to observe time scale. We will probably know in less than a month whether or not a deal is really going to happen and even if that is strung out as some suspect. we are going to know by Christmas. The emails I have been getting from the Foreign Office as an EU resident Brit suggest that a least that bit of government is certainly expecting no deal.

None of the above will be new to readers, I am sure, but I find it helps to keep the simple facts in mind when fighting one’s sub-coscious biases, like the Fear of Missing Out (FOMO).

When it stops raining, the sun will come out!

Of course, there are always risks, including ‘Black Swan’ events that might dent our invested wealth and blow our plans off course.

What perhaps is unusual at this time is that it is so easy to see so many risks and know that the market is not properly ‘discounting” them (ie allowing for them in valuations), except perhaps the last one, Brexit.

With the exception of some international mega cap businesses and selected mid and small cap firms, the UK stock market has performed very poorly for some time now. The relative performance of the main UK indices has been awful.

Because the Brexit risk is rapidly coming to a head, one might take the view that whatever happens, the removal of uncertainty and the ‘happening’ of the consequences of Brexit in full in 2021 will make investing in the UK a much more attractive proposition, because whenever there is major change, there are winners as well as losers. We can look for fund managers that we think know how to pick winners in a recovery situation.

I have thought for maybe 2 years that I wanted to participate in this opportunity. I bought UK value (ie out of fashion) and smaller company funds in late 2018 and 2019, thinking that the new Government was going to ‘get Brexit done’. In essence, although I did not wholly trust Boris Johnson, I though his election would unlock the Brexit process. For a while this seemed to have been a good call, but things went pear-shaped.

Even allowing for Covid 19 being a major spanner in the works this year, I was in any case misguided. I have only made money on the smaller companies fund, and given up and sold out of the value funds, because I expected to lose even more money in the near term. I would rather reserve the money in a defensive fund and buy at even cheaper prices. That sort of timing call has risks, of course, which is why I have titled this post as I have done!

I do not think any differently about the consequences of Brexit , only that my timing in buying into the most sensibly valued major stock market in the world was wrong (that happens to all investors sometimes, even the greatest). So I am once again looking for opportunities to buy UK shares at really cheap prices in the near future. I will publish some of my research soon!

Monday mashup – the everlasting active vs. passive debate

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A refresher

Readers will likely know that investment funds are usually managed, either to own stocks in a specific country or industrial sector, or to manage a mix of assets (multi-asset). Investors pay fees, often quite high fees, because they think managers will apply skills to improve total returns and control risks.

Are you up to speed?

Some years ago an American called John Bogle suggested that in the US fund managers actually delivered returns below that of their benchmark, say the S&P 500, most of the time. He then launched a business called Vanguard that offered investors a much cheaper way of investing by just buying an investment that more or less replicated the benchmark index.

There is more about this in detail in the article “Investing without management’ which can be found by searching using the key word “Passive”. This post is one for subscribers only.

There are other posts addressing the issue from different angles, including one of the first ones I ever wrote in March 2018, explaining how tracker funds tend to be more volatile

Recent Evidence

The research company Morningstar has reported on the relative performance of the average managed fund versus the average passive (tracker) for some years and recently released their European Active/Passive Barometer which looks at data over the last 10 years across all world markets. It is a 30 page document but one can pull some interesting data from the Executive Summary.

As might be expected, if investing in the main US markets, you might as well pick a low cost tracker because over 10 years only 5.6% of active Large Cap Blend funds survived (ie were available right through the period unchanged) and beat the average passive fund. 30% of small cap equity managed funds did better.

These sample extracts confirm something: fund managers can’t easily add value in markets that are extremely heavily researched and where any one can access all that they need to know about the market components. The more specialised and less researched a market is, the more chance there is for a manager to make money ahead of his benchmark.

It also follows that managers who are not benchmark aware might take very ‘active’ positions (ie go out on a limb) which will add ‘beta’, a separation from the market trend) for better or for worse. A good recent example of that was the Baillie Gifford group owning very large amounts of Tesla stock.

So it is no surprise that on a year to date basis the active funds that come out best are in areas like Korean Equity, Russian Equity, Austrian Equity and various others. One larger market segment where managers seem to do better is the UK mid cap classification.

The UK mid cap sector is interesting because the Brexit overhang means that some stocks in the index will be hugely out of favour and others will look like great value because they are Brexit ‘independent’. It would I suppose be a challenge to create a reliable ‘Brexit beneficiaries’ benchmark (although it may have been done – I have not checked), so well run managed funds have an advantage.

Interestingly, the UK mid cap sector is one where managers have done very well relative to the average passive fund over all period up to 10 years, so this is not just a Brexit related result. Having favoured the Standard Life (now ASI) UK Smaller Companies fund on and off over that period, I am not surprised.

So which to buy – active or passive?

I hope it will be obvious from my comments above and the more detailed articles on this site that I am open minded about these two investment options but would take the view that a passive fund is most likely to serve investors best when it tracks a well known large cap index.

For more focused asset weighting calls, a good manager will probably earn her or his keep.

A final thought is that in investing in funds with mainstream benchmarks, one is in effect taking a decision to go along with the crowd. That is fine and a way of playing the momentum factor, but recent experience suggests that benchmark independent fund managers like Terry Smith at FundSmith and Stephen Yiu at Blue Whale make the most money for their investors.

To balance that, one cannot forget one Mr Neil Woodford’s wandering away from his supposed benchmark and the consequences of that streak of independence!