Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

Markets get real

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The sharp sell off in global stock markets is no surprise to me.  I have been pessimistic for some time and especially so in recent weeks.  My October Watching Brief anticipated the problems that would come from rising US interest rates and better returns from medium dated US treasury stocks.  Morningstar published a video yesterday saying almost exactly what I wrote at the start of he week.  There is some consensus that the sell off is for genuine logical reasons, an actual change in the underlying facts, not just the need for a ‘correction’ to bank profits and so on.

October is often a month when markets get jittery and I have said to many clients when I was an adviser that I always see October and January as the two most risky months for investors.  

So, is this just volatility that can be safely sat out?  It depends of course on your investment time horizon and cash flow needs.  As I explain in articles elsewhere on the site, all investment planning objectives need to be assessed in terms of the need for cash flows.  So, if you have not prepared for a sell off and you are going to need cash in the near term, your adviser ought to telling you to get on with selling investments that are rich with decent gains as soon as possible.  If you have an adviser, give them a ring now.  If you are running your own portfolio, it is time to assess the risks carefully.

Of course, I don’t believe that you should sell your whole portfolio in the hope of buying back into markets at a lower price.  That sort of ‘timing’ speculation  only ever works if you get lucky.  Not even the best investment managers in the world can consistently sell near the top of markets and buy at the bottom.  But if you do raise some cash now and don’t need to extract it for spending later, you will have some liquidity to pick up any bargains that come along if there is a real rout.

The market pendulum always swings too far at the end of the cycle, both up and down.  So a swing down into a bear market will be overdone, at some future date.  Then we can all look to new money making opportunities – there are not many to be found at the moment.

Profit taking (skimming/slicing) – is there a trick to it?

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One of my readers has suggested an article giving general advice on when to take profits and in what sort of proportion would be useful.

This is a subject with several aspects.  How do you know when you are near the top of a market?  Is that even possible?  What about tax?  If you sell out of a good fund, where would you re-invest?  Should you re-invest at all?  Is the old quotation “time in the markets is better than timing the markets” (Anthony Bolton, ex Fidelity) the simple answer?

I can seek to answer these questions or at least propose  a logical way of taking decisions but the topic justifies an article as opposed to just a blog post.  I will add one to the “How to” area as soon as I can.  It will be unrestricted.

Radio Silence!

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There have been no new posts on the site for a couple of weeks because I have been on holiday!  I was in the UK, France and Italy and could claim I was doing important on location research on  Brexit, the potential troubles with the Euro and so on.  But mainly I was enjoying the food and drink (at least on the South of the Channel)!

I did in fact get some anecdotal evidence of what people in France and Italy worry about in terms of economics and politics and that is definitely not Brexit.

The October news and comment will be published very shortly when I will address the current investment climate and the prospects for investors.

The coming war with China

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The above is the title of a 2015 film by the journalist and author John Pilger.  It concentrates on US military ambitions in the Asia Pacific region.  As a record of the arms industry looking for an enemy, it makes for disturbing viewing.

A different sort of war is already under way.  This is the trade war of tariffs, of course.  This has escalated to the point where the first set of options has run out – there is in effect no more trade left to tax.

I read a comment that the Chinese might soon get fed up with being the only adult in the game.  They do have powerful options as heavy buyers and owners of US Treasuries (US government loan stock). They could stop buying new issues or even dump bulk holdings in the market.

Such actions could have very serious repercussions for the global economy.  Let us hope they don’t get provoked beyond that legendary inscrutability.

It is worth remembering that the US president and his party have to play to please an electorate.  No such inconvenience will worry the Chinese leadership.

Alas (no) Smith and …

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One that got away….

The title references a Western TV series or more specifically a comedy starring the late Mel Smith and Griff Rhys-Jones and I hope my readers are of an age to get the pun!

I thought I would need to write about Fundsmith at some time.  Now seems sensible because the founder, Terry Smith is launching a new closed end fund (Investment Trust) that will invest in UK smaller companies (not very small, just smaller than the mega sized ones his main Equity fund holds).

I have been suggesting that now is a good time to invest in this specific sector (UK Smaller Companies) for a couple of months, so it is nice to know someone so well regarded agrees – Mr Smith is said to be putting GBP25 million into the new fund!

I have never recommended his main ‘Equity’ international OEIC fund, one he once said was the only fund you would ever need (he has since offered other funds, so he obviously reacted to commercial reality).  That looks like my error with hindsight as the fund has done exceptionally well.

I was at a conference before he launched his business where Terry Smith expounded his philosophy bluntly – essentially that all fund managers ripped you off by charging you money and not making better returns than their benchmarks.  Although he had got rich in the fund management business and I believe acquired a reputation as a difficult customer, he was going to come to the public’s salvation and launch an all purpose equity growth fund.  As it happens his timing was good as not long after the launch, the market as a whole started to favour growth stocks over so called ‘value stocks’. 

As you might appreciate, I was not overly impressed by his evangelical style, but hindsight suggests he is a fund management genius.  The annualised return over 5 years from his Fundsmith Equity OEIC is quoted at 21.09% to the end of August by Morningstar.  The 3 year figure is even better at 25.87%.  The total fund size (all share classes) is I believe over GBP18 billion which means that it owns over $600 million in Microsoft shares alone for example, based on the disclosed top 10 holdings at the end of August.  It is a very large fund indeed which maybe explains the launch of the new investment trust.

Have I and anyone I have advised lost out by not buying this fund?  It depends what we owned instead and the fund is not really an all purpose global equity fund, so we can’t compare it with such.  It has a heavy US and a heavy tech exposure.  So do I in part of my portfolio, but secured by buying actual technology funds.  As  a matter of interest a fund I own called the Polar Capital Global Technology fund has better 5 and 3 year annualised returns than Fundsmith and is much less unwieldy at about $3 billion.   But it is more focused and in one sense more risky.

Nonetheless, I admit that if I had not been scared off by the ‘one man show’ nature of Fundsmith and its strong minded founder, I would have been pleased with the money I would have made.  I will count my negative assessment of the risks as mistaken.

Should investors who have not held the fund buy it now?  I would suggest not.  There is quality research by serious academics that suggests all such outperformance attributable to an individual rather than the market, is in effect the result of some variant of luck and will ‘revert to mean’ over time.  That means that although the Fundsmith Equity fund might keep averaging 20% plus returns every year because we are looking into the future and no-one knows, the probability is that it will underperform significantly for a longish period at some future date.

Investing in the new closed end fund if you fully understand why it will be different to an OEIC might well be an interesting option.

I would add that I have nothing to say against Mr Smith personally and having myself understood some years ago the hugely valuable role that the New Zealander Keith Park had in winning the Battle of Britain, I am very pleased that Terry Smith used his ‘clout’ to get more recognition for a Kiwi who most undoubtedly played a major role in defeating the Nazis.