Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

Monday mashup – it’s electrifying!

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(1978 song reference)

I am showing my age again – picking a phrase squealed by John Travolta’s character (not sure he actually did the singing) in the 1978 film Grease. I picked it because contrary to my expectations, the subject of electric cars and Tesla in particular has popped up in research I was doing today.

My plan has been to collect some data to see how the few global mid cap and small cap equity funds had done year to date relative to the well known and mainly large cap global equity funds (eg Fundsmith). By cap, I am referring to market capitalisation meaning the total value of the company’s listed shares. The range of companies quoted on markets is usually divided into large, mid, small and micro cap and there are different indices for these markets in many countries (eg the S&P 500 and The Russell 2000 in the USA – large and small cap indices).

When will they ever learn….? (1962 song reference)

I was however immediately diverted because I had started with North America as my research sector when my attention was drawn to the Baillie Gifford (BG) American funds whose recent performance has been incredible – and I use the word literally.

It is immediately obvious that this is largely because they have a very heavy weighting to Tesla shares. Now I don’t have enough data to know exactly when and at what price the BG manager bought the Tesla shares but it is possible he has made a profit of several 100 percent on his holding, contributing maybe 20-30% or even more to his year to date fund level return.

Now you probably know that Tesla is now valued as worth the same as Toyota, Volkswagen and Ford combined. Yet its much announced improved production of cars was in fact not much better than in 2018 and it only declared a small profit because it sold carbon credits to competitors.

The launch in the US of a single, narrow segment sports car from GM (the Corvette C8) is said to have generated more public interest than Tesla ever has (although there is no exact evidence, this is based on internet interactions) and yet I doubt if people who are not sports car fans like me have ever heard of the C8 Corvette.

It is indisputable that the value of the Tesla business in the stock market is absolutely nothing to do with its potential profitability from producing electric cars. I don’t know what it really is – I have yet to read a plausible explanation. So I just see it as a new tulip bulb (see Wikipedia – Tulip Mania 1637).

I mention this not because I want to warn you off buying Tesla stock – that is not within my area of expertise. I am using it as an example of why making fund comparisons on the basis of recent past performance is even more pointless than usual at this moment in time. In mid 2020, owning, or not owning just one or two stocks over the last few months would make a huge difference to relative performance.

I think my original objective will need to be modified and I will take a look at the longer term differences (if any) between funds defined by the market cap of their holdings. An update will follow!

Monday mashup – parking your money

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Gloom for epidemiologists but booming stock markets

I know some people don’t pay too much attention to the global Covid-19 case numbers but I suspect everyone is aware that the total number of daily new cases continues to rise and the rate has been accelerating for some weeks. I suppose my readers will be aware of the ongoing lack of progress in holding back case numbers because of the news over the weekend about trips to Spain.

I am sorry to be negative, but the facts cannot be ignored

I start with this gloomy comment because it is the main context against which we have to judge stock market valuations which have recovered back to and even ahead of pre-Covid levels in some sectors.

Whilst there is some good news on vaccines and therapeutic medicine with Professor Holgate (and colleagues) in Southampton, whose work on hay-fever and allergies was gospel to me in the 1980s having been in the news with his later work on beta-interferon, such science will not bring results in the next few weeks, perhaps not even this year.

Now as the medical news, being very bad in the short term, is disconnected with the recent stock market trends, one can have a short term tactical approach. As I have said before, one can ‘make hay while the sun shines’ even if you can see the tornado in the distance.

But if you see a decent return, say 10% to 15% over a few weeks or months on a well chosen fund and you decide to take the gain, where do you put the money? This is the question that I have been thinking about recently.

Where to park gains?

One has various choices of defensive assets: cash (no return worth talking about), fixed income (incredibly expensive at the moment and credit risk rising), absolute return and macro or market neutral funds (most of which appear not to have worked in the recent past) and gold (already up in value with a good tailwind of investor support). That is a good short list but there is no stand out ‘best’ option.

What is a cautious investment these days?

I have been happy to invest in physical gold for some months for multiple reasons that I have explained in other posts (call or mail me if you are a subscriber and want clarification).

Although the majority of defensive funds, like absolute return, macro strategy and simple cautious multi asset, don’t offer that much protection in a systemic crash, some managers do seem to have developed the right timing skills.

I have invested in the JP Morgan Global Macro Opportunities fund for some years and it has done what it promised, although a little erratically.

I recently identified during research with a subscriber the BlackRock European Absolute Alpha fund. This seems to have benefited from some great timing decisions in the fixed income market by the managers at the start of the year.

These are examples of funds that would have protected you well in March this year, but that is not of course any guarantee that they will work next time! If you use them as examples, you can no doubt find alternatives that might meet your needs.

Investors need to form their own view of what suits their needs best when reserving money from gains. Some may spend it! Others may just hold funds on deposit and accept the trivial rates of interest. For those who like to get a return whatever and can afford some risk, gold and the best defensive funds are worth considering. Actually, I will be doing all of the above!

Monday mashup – new How To article published!

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At the request of a subscriber, I have written a comprehensive guide to using the excellent Morningstar X-Ray analysis. It can be found here. It is for subscribers only. If you don’t subscribe, you can see this sort of content for GBP20 a month.

Those of you who are taking training sessions will already have some familiarity with this report but may not feel confident that you ‘get’ what it is telling you. I hope the guide helps.

In writing a document like this, I have to strike a balance between readability, length and detail. I don’t make compromises to allow for education or intelligence – I assume my readers are educated and bright people! If you think I have missed something or explained it badly, please offer feedback.

Most of the later permanent content of the site, now over 100 articles, was written ‘to order’, so if you want something added to the Glossary or explained in more detail, please let me know

Monday mashup – a half of two halves

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In other words, global stock markets have had two very different quarters in 2020 so far. Collapse to the end of quarter one, bounce back (in most markets) in quarter two. This in no way reflects what has happened to global economies, of course.

Here is a headline from Trustnet, last week:

Gold, growth and tech: The charts showing what you should have bought in 2020’s second quarter

The article underneath reported on returns from all sectors and geographies.

The market totally out of favour, both for equities and fixed income was the UK. I have been saying for ages that the world looking at the UK now thinks it is a lost cause economically. The risks of Brexit have been compounded by the perceived weak handling of Covid 19 in England (generally the American media thinks Scotland has done better).

Now some readers may think I have ‘gone native’ as I left the UK to live in Europe quite a while ago now. But I am not referring to European commentators in the main, but to US ones. Two analysts at Bank of America even suggested that the UK may have to be re-classified as an emerging market and they supplied data to back up that suggestion. The level of government debt is rising to levels not seen since WW2, for example.

It is easy to report on where one should have invested and I hope my readers have noted my enthusiasm for technology and innovation funds and for gold, but picking the place to invest long term starting now is much harder.

When the media wrote that the Asia Pacific region was a ‘basket case’ in 1996, I started recommending it to investors and they made very good money for over 20 years. I am wondering if the UK is the ‘basket case’ now and therefore offering great value to investors?

What do you think?