Investing in the UK stock market in a post Brexit, post Covid-19 world (m)
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
Watching Brief – September 2020
Monday mashup – crystal ball gazing? Or forecasting?
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).
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
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.
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!
Monday mashup – 50 years of Friedman
On September 13th 1970 an essay was published in The New York Times Magazine that was to serve as the ‘permission’ for a generation of executives and politicians like Margaret Thatcher and Ronald Reagan to encourage the free market to operate solely for the benefit of the people that theoretically funded it – shareholders.
Half a century of Friedman
The essay is summarised by the current chief executive of Salesforce, who read it when he was in business school a few years later, in these words – ‘the only business of business in business’.
Training in the late 1970s to be a Chartered Secretary – the company officer charged with keeping a business legal in the UK and many former British colonies – I was taught a different line: that companies were part of the fabric of the economy and therefore of society, so ought to be accountable to other stakeholders, like employees, the government and the consumers.
What I was taught was not, as some still argue, some leftist permission for lazy managers to avoid focusing on profit generation, but an understanding that the profits of a company were generated by the utilisation of other resources apart from capital. That is really just traditional basic economics.
I would argue that to suggest that out of the contributors to profits in a democratic world, only the capitalist should be rewarded is in fact very specifically American and indeed represents right wing liberal philosophy.
The role of companies in society
Much more recently, in his books about humanity (Sapiens etc,), Yuval Noah Harari suggest that some corporations are now so large that they have become a new form of maybe everlasting life, whose influence will forever impact on humanity as a whole.
It is reasonable easy to demonstrate the governments are now at times the servants, not the controllers, of business. The allocation of tax payers’ money to bail out banks, the printing of money (the cost of which will be serviced by the population as a whole, not corporations) and the control of political process (which only the most naïve could deny happens in the US and probably in Europe) by industry paid lobbyists are all examples.
Even in dictatorships and communist countries, the corporation is the favoured entity for corruption. The state assets stolen from the population at the end of te USSR generally went into corporations owned by a few shareholders who used to be party officials.
I would suggest that because ultra large companies offer the opportunity for a few people to acquire almost unlimited power and they will probably use that to their own advantage (not surprisingly), some checks and balances are appropriate in a democracy. This has been recognised by anti-trust law in the US and competition law in Europe, but that only addresses part of the issue and not that effectively when it comes to the ultra large businesses.
If you don’t agree with the last sentence, you must be running your PC on Linux and viewing this page in Firefox – good on you!
I was also not at all surprised to see that Daniel Loeb (an ultra capitalist) defends Friedman by suggesting that the law requires companies to focus on profits only: since the 1960s, US corporations have had the ability to influence the law to their satisfaction, most notably to eliminate foreign competitors. Did I you just think Huawei and Tic Toc?
In fairness, Mr Loeb’s main claim for shareholders is that they should eliminate poor management. Managers (I mean directors and executives) are a sub-class of the employee stakeholder group who might well be accused of acquiring too big a slice of the pie.
As investors, perhaps we should be happy to see profit maximisation as the sole focus of company boards?
That would miss one important point – those who support the Friedman argument often want to create the maximum amount of wealth for themselves, not shareholders in general. In fact, if a takeover or merger that was in their interest would wipe out our investments in a good profitable company, it would not worry them at all!
In their world, the few are supposed to win and the many lose and we, sorry to tell you, are amongst the many.
Sharks or dolphins?
It is obvious that at a basic level, indeed it is a human right, we all need to eat good food. The most efficient and ruthless eaters are maybe sharks, or wolves, or locusts. Should the world seek to adopt their feeding process? I think not.
Most people, because of what humanity is, understand that companies should be run with ethical governance, in a way that sustains the human race and shares wealth with those who are less powerful contributors to its creation, like employees.
The rise of ESG investing and the evidence that well governed companies actually make more profits from normal business operations – quite a different idea from making money for those who are rampant market manipulators and speculators – suggests to me that 50 years down the road Friedman’s proposition is at last being consigned to history. I really hope so.