Its Not Harry

Comment and opinion for retail investors in the UK

Education

New Real World article now live (m)

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I have today finished and uploaded my thoughts on the subject of benchmarking for funds and portfolios, something that has popped up a couple of times in training sessions.

The subscriber only article is under the Real World menu https://www.itsnotharry.com/benchmarks-a-thorny-subject/

My experience is that investors think they ought to be looking at benchmarks but find the subject confusing and give up. That may not be a bad thing! I jest a little! Hopefully the article will throw some light on the subject. As always I am happy to give technical support to any subscriber who needs it.

Monday Mashup – runaway train?

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My reading of assorted public and specialist media over the last week or two has revealed that many commentators see the current valuation of many US shares in particular as too high on normal valuation bases. I read an article saying a new valuation basis may be needed. The last time I heard an American fund manager talk about a ‘new paradigm’ in stock market pricing was ahead of a market crash so that sort of viewpoint rings warning bells.

But as my readers will recall, I was saying this sort of thing a year ago and yet 2019 was a really good year for equity investors. So maybe this time things are really different?

The end of any bull market is different to previous ones, that much I would concede!

What other actual facts are worthy of examination to help explain what is happening? Markets are going up when really they should not. Here are a few for you to ponder on:

Markets will always be cyclical – but inversion points are only obvious after the event

The US Government is about to issue 20 year Treasury stock for the first time since the mid 1980s. This reflects the fact that the US debt is astronomic and tax cuts are being paid for not by GDP growth or public sector savings but by borrowing. That is like you and me maxing our credit cards to give the money to our rich uncle. We know where that would end up.

In a world where populism is rampant, central banks are so afraid of recessions that they will use every tool in their nearly empty box to keep money circulating. This means that they are beginning to own more and more debt securities. This is good for bond prices as there are forced buyers in the market.

In a very simplistic analysis, we can say that Governments are issuing bonds (borrowing) and their own central banks are immediately buying them up. This could be argued to be money printing with no interest cost! Like you borrowing money from your grand-kids piggy bank.

As was proposed by eminent economists when the idea of quantitive easing was first proposed, the eventual consequence of this sort of policy has proved to be inflation in asset prices, so those with assets have become richer. The weakness of labour forces, even in a full employment market plus the application of technology (the real new paradigm) and the globalisation of manufacturing has for now kept the lid on inflation. This is good for equities.

When is the storm coming?

For investors, who own assets (both bonds and equities), this would appear to be very good news – policy is feeding the asset price machine with lots of money and the pipes directing it to benefit the bulk of the population are all closed.

True, if there are hints of the banks wanted to start taking money back out of the system, people get scared pretty quickly, as in mid 2018. But banks trashed their reputations 15 or so years back and no-one objects when they concede to populist government pressure to bump up global credit limits.

It is even possible that some world leaders, fearing elections or even revolutions, are doing what the people that keep them in power (in the media and at the top of the wealth range, or in charge of/supplying their armies) would like them to do, irrespective of the long term consequences – no need to name names.

As long as this continues, investing in equities and bonds will be a nice earner. But I fear that much as happens to the person who pays off one credit card by drawing on another, something that works for many years, the end consequences are bankruptcy and the selling off of assets.

In the global scenario that could actually accelerate the transfer of political power from West to East. It is interesting to note which countries are running surpluses and quietly buying up the assets of debtor nations. If you have grand children, encourage them to learn Chinese.

I have to concede that we probably should stay in the markets for the ride, but if there are any signs of it becoming a train wreck, bailing out sooner rather than later would be essential. Excuse the mixed metaphor!

Of course, asset diversification and hedging risk with adequate cash reserves would be as useful a defence as ever. Personally, I am still retaining a very heavy cash element in my asset base.

Translation service

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I wrote some time back that I would occasionally explain in ordinary English the industry specific jargon and clichés that you may see in newspapers or other media reports. Here are a couple that are doing the rounds at the moment:

Markets are climbing the wall of worry – there are a great many reasons to expect markets to fall back from overly confident price levels, but momentum is keeping them climbing and that is how it will be. This one makes me think of Humpty Dumpty!

Bull markets don’t die of old age – there is no fixed period for the optimistic, raising prices (bull) stock market cycle. Although there is no doubt a cycle, it does not occur in neat sine waves with evenly spread peaks and troughs. The current bull market might be a longer one than usual – that is the hope. This one makes me think of The Who’s song My Generation (‘I want to die before I get old’) and the 75 year old Roger Daltrey!

My cynical observation is that when you see these phrases in regular use, people are looking for reasons not to be rational about obvious risks. Geo-political risk just got more serious.

Monday Mashup – vanishing assets?

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I am indebted to one of my readers for pointing out that the management of the Premier Defensive fund and its sister the Sentinel Defensive fund changed late in the Summer. I had not spotted that the long term manager Paul Smith had left ‘for personal reasons’.

The Premier fund has been handed over to his deputies but the cheaper Sentinel fund is being transferred to another external manager, Atlantic House.

I used the Sentinel fund myself and indeed still own it in my cautious portfolio element. I liked it because Paul Smith was an expert manager of a specific sort of investment trust share class, zeros, or zero dividend preference shares to give them their full name. These assets were very suitable for stable short term returns if managed by an expert like Paul.

Recently less and less ‘zeros’ have been issued so that very narrow asset class has virtually disappeared. I don’t think Paul ever claimed to be an expert in short dated corporate bonds, which is the job Premier seem to have given him as an alternative, so perhaps his departure was inevitable. I would not want to own the Premier fund now. There are cheaper alternatives for getting access to short dated corporate bonds.

The Sentinel fund may have an alternative future because as far a I can tell Atlantic House have a good record in using derivatives to control volatility and volatility control is what defensive funds are all about. I will follow with interest what they do with the fund.

What? No shares to buy?

I read that even ordinary shares on the main UK markets are being ‘disappeared’ at record levels, some 21 billion Pounds worth in 2019. The buyers responsible are mostly private equity firms, many from overseas.

Having less shares in issue is a reduction is supply, so a useful counterweight to new issues like the huge block of Saudi Arabian oil shares recently made available. So this ‘shrinkage’ may be a good thing.

Monday mashup – zero tolerance

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This is nothing to do with the potential policies of a new Home Secretary! I am not planning to comment on what could be a different environment for investors for a few days yet.

As others have pointed out, there are at least 2 versions of Boris Johnson; the lying, casually racist egotist and the diffident ‘one nation’ Conservative. The latter might be a concept being acted out on the advice of Dominic Cummings and co. but it could also be the driver of Government policy. We need to be a little more certain about that and we will be better informed over the next few days.

There are many issues that will be troublesome in months to come, aside from the actual delivery of Brexit, which will not be wholly positive in my judgement. The split of the UK into nationalist groups, especially in Scotland, will create some new issues for investors, especially as many top fund managers are located North of Hadrian’s Wall!

Will the real Boris Johnson step forward?

This piece is a seasonal one, drawing your attention to the fact that the investment industry does not find the urgent message being so ably promoted by an autistic teenager as being either trivial or troublesome. There has been for a very long time an enthusiasm for sustainability as an investment criterion. In a world were ‘factor’ investing is becoming the norm, sustainability (in global terms, not internally) of business operations is certainly one factor investment managers take into account.

Global climate change is perhaps the most significant threat to environmental sustainability. I think very few people doubt it is happening, although some well qualified and well informed people argue that the cause may not be so simple as C02 emissions. We do not need to take sides in that debate as investors, but we do need to know how investment managers are tailoring their plans to allow for the CO2 emission reduction targets that are going to be imposed on businesses either by regulation, or by investor activism.

Even if CO2 emissions are NOT the cause of global warming, we are in a ‘Millennium Bug’ situation where vast sums of money will be re-directed as a result of a perceived risk. Investor behaviour has been gradually changing to an ‘anti-carbon’ stance for some time now.

It is well know that even most managers of funds badged as Sustainable or having a high ESG score (environmental, social, governance) do not really have the structure in place to challenge company boards on issues as specific as carbon emission targets. WHEB are a creditable exception to the generally rather wishy washy fund manager approach to getting to grips with issues of corporate governance, which is one reason why I invest in their Sustainability fund.

Seb Beloe, one of the WHEB fund co-managers has joined with other managers for Liontrust, Montanaro and Janus Henderson in supporting an initiative called NZC10 (or Net-Zero Carbon 10). This is a demanding target which requires 10% or more of portfolio assets to be invested in firms that are carbon neutral or have strategies that will achieve net-zero carbon emissions by 2030. The standard is expected to tighten over time.

Most readers of my musings will be of an age where a global climate crisis is worrying more in the context of later generations, like children and grandchildren. But you may be surprised how quickly climate change impacts your life.

Personally, I have along with a large number of people across the world not supplied by municipal water (and some who are) been obliged to spend out this year on drilling for deeper ground water to supply my everyday life. That was a direct result of record warm dry weather in North Eastern Europe. Extreme weather is not so unusual, it seems to me.

I will write more in depth on this subject in the future, It is a theme that cannot be ignored by investors.

As anticipated…

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Britain Backs Boris (except is was actually England). More likely Can’t Countenance Corbyn.

I personally don’t like surprises, being a planner, but was never going to get NotHarry drawn as Scrooge!

It matters not very much why the Tories have their majority for investors, because the key consequence is the probability of getting an actual Brexit is now that much greater. What that means in the long run is for us to ponder.

The Pound has climbed in value, which will devalue those parts of our portfolios in other currencies, as least for a short while. Fortunately there is good news on the US/China trade talks to compensate. European markets also seem pleased with the prospects of clarity on Brexit.

To balance that, the real UK domestic stock market (ie outside of the FTSE 100) has shot up early today, again as I expected, benefiting holding in UK smaller companies funds and probably value funds too.

We now need to think about what happens over the next 12 months. The first step in breaking the deadlock in British politics and what was oppressing the British economy is now past. What comes next could be quite different to what the electorate is expecting. I will put on my thinking hat.