Its Not Harry

Comment and opinion for retail investors in the UK

Education

Multi asset funds are fashionable but are they any use?

by Leave a Comment

A former client of mine from my time working as an investment adviser recently asked me what I thought about multi asset funds. By multi asset she meant funds that hold a range of asset types (often as low cost ETFs which can be traded almost instantly at low cost) and mix them up according to a stated objective which is usually specified in terms of risk and expected return.

They had been presented to her as a better option than a selection of specific individual asset allocated funds in market sectors, on the basis that the manager of a multi asset fund can change the asset mix much faster than an IFA can because the IFA has to go through all the hoops of making recommendations and getting client approval. Even an investor who runs their own asset mix and looks at their portfolio every day can’t trade as fast as a city institution, and probably has less information. The advice this investor had received even suggested that IFA’s are not really capable of advising clients what to do when there are sudden changes in markets. That comment came from the client’s own IFA!

The investment industry primarily invents products to sell like all other businesses

It is undeniable that a multi asset fund manager could quickly take money out of a market really quickly and move to cash or another type of asset if the fund prospectus and objectives allow that: investors need to know exactly what multi asset means for the fund they have in mind as it is not a narrow term and is open to interpretation. But even assuming a fund is recommended with absolute flexibility and manager discretion, some questions arise about the alleged advantages.

The suggestion that trading in and out of the market on the basis of short term news flow or analyst predictions would make you more money is largely discredited. Even if it does work, how do you know that the manager of your multi asset fund is any good at it? The evidence of returns from multi asset funds that seek to lower risk (absolute return funds) is that the managers in the main are in fact not at all good at it – I have written about that previously.

Furthermore, a single multi asset fund will have an objective that is decided by the people who want to market it – not your needs as an investor. A portfolio you build yourself or which is set up by a competent investment adviser will be designed to meet your risk requirements, cash flow needs and interest in the subject and typically won’t need to be quickly re-organised because of ups and downs in the stock market cycle – the existence of the cycle will be assumed and built into the portfolio design.

It is often true that the fees for multi asset funds are higher than for sector specific funds. OK, you may say, because they are managing the assets actively. If that is true, why are you paying an adviser if they have “out sourced’ this task because they don’t have the relevant expertise? You are paying twice. Would you go to the hairdresser and pay once to be told what style you need and then pay again in full for the actual haircut? Maybe some people would but at least they would appreciate what they are doing.

There is arguably a role, in my opinion, for ‘funds of funds’ which are slightly different. Here a manager picks funds or shares/ETFs with a specific focus where perhaps you or an IFA can’t access the whole market because it is too specialist or esoteric . I have invested in ethical multi manager funds myself, accepting the slightly higher fees. To date, as I maybe should have expected, the multi holding selections of the specialist have not really done any better than my own narrower researched funds mix.

Ethical, green, sustainable, ESG or what?

by Leave a Comment

It has always been difficult to select investments that meet an investor’s desire to be ‘ethical’. This is often because ethics are essentially part of a belief system so highly personal. But it is also because investing in a company that does something you personally think is ‘good’ (for example making cosmetics that are not tested on animals and which uses ingredients sourced with due regard for the environment) does not mean that the company is not avoiding taxes using complex offshore trusts, paying fair wages and so on. A business has to be checked out in several ways before we can feel comfortable with it, if we want to invest in line with our conscience.

This issue has been on the agenda of fund managers and investment advisers for quite a while and various methods have been used to label and filter companies as suitable for investors who have reservations about investing on grounds of their religious or ethical beliefs. Much of the early work was driven by religious investors and indeed the now taken over and vanished Friends Provident business was set up by Quakers and ran one of the first ever set of ethically filtered investment funds under the Stewardship brand.

Over the years labels such as Green (in various shades), ethical, SRI (socially responsible investing) and more recently ESG (environment, social and governance) have been applied, A variation of ESG could also be Ethical Sustainable and Governance but the Americans have formalised the former usage. Governance refers to corporate governance meaning the way the board of directors decides to interact with stakeholders, like shareholders, employees, governments and even the environment.

The research organisation Morningstar added an ESG rating to its fund research process a couple of years ago and that has its own particular assessment criteria. It is useful for advisers and as a starting point for research but it will not tell you if the fund meets your personal requirements.

The only way you can build a portfolio that gets close to meeting your personal ethical or religious requirements is to work out exactly what you won’t like your money to be supporting (like cigarette manufacturing or armaments production, for example). If you have an adviser, you need to have a long discussion with them on the subject so they get to understand your views.

It is then possible to filter out most of the investment funds in the market, because most will invest in major dividend paying businesses like tobacco, gambling and the production of weapons that the majority of people with strict ethical concerns won’t like . Of those that are left, you need to get some understanding of what they do allow as holdings and how they carry out their research. Remember even august bodies like the Church of England got caught out investing in companies like Wonga.com!

The personal track record and attitude of the fund managers which will be known to a competent adviser will be highly relevant data as will the specific objectives set by the fund management group.

Flying with RyanAir?

A final word in this introduction to a complex issue is that investors must be realistic: investment in shares via collective funds means being a small scale capitalist so your objectives (making a return from the profits of the company whose shares you own) will be in tension with the interests of the employees and customers of that company who want to have better wages and lower prices for better quality products – which reduces profits. It amuses me to hear people I know roundly condemning RyanAir whilst enjoying the returns coming through to their European investment fund from RyanAir’s excellent profit generation!

Brexit – implications for investors now

by Leave a Comment

The stock market reaction to last night’s drama in the House of Commons is muted so far, both locally and globally (I write this at around midday on January 16th). Sterling has strengthened which has been explained by no less than Mark Carney as evidence that the markets believe that a Hard Brexit is less likely and a delayed Brexit is on the cards, allowing a more sensible deal to be done.

I was a Remainer and given that I have chosen to live in Europe as an EU citizen, I can only confess to blatant self interest. I also voted for the first time ever in 1975 to join the EEC and still believe in the post war idea of a stable Europe being more likely with formal economic and social unity. I know that is not an argument everyone likes but I see much good week in week out in the projects for young people that are made possible by the EU.

As a financial and investment expert (sorry Mr Gove), I did and still do genuinely believe that Brexit was always going to cause economic damage to the UK in the short term. If anyone ever wants to know why, I can explain in great detail! Over the longer term, I can see both sides of the argument. I would have preferred the threat of a Brexit referendum to have been used in collaboration with the other EU countries who don’t like the Brussels set up, to seek reforms. Also I would have preferred some honesty all round.

I do agree with something said by many – that the decision of the referendum ought to be carried through, unless there is a second referendum as a result of a genuine public desire for one. It is not for Parliament to simply stop the process because the Government has proved to be an utterly incompetent negotiator. I suggest it is better for Brexit to happen, the consequences be dealt with (and I think they will mostly not be happy) and perhaps a new relationship with the EU established after a period of reflection.

Here I point out roughly where I live and why I can see Europe and the UK a little differently.

I understand very well the arguments for and against EU immigration because my parents and sister live in Lincolnshire and I personally know people of all ages who have come to the UK from Eastern Europe (many have returned now but some hold very well paid jobs in major businesses and public bodies) and also seen first hand that working in the UK has been an economic choice for young people with English language skills. It is definitely not the first choice any more for the brighter kids and places like Germany, Norway and even the USA will be getting skilled young workers who would have come to the UK.

What can investors expect? The first point I need to repeat is that Mrs May’s deal and whatever replaces it, unless that is a Hard Brexit, represent the beginning of the exit process, not the process itself. There will be many hurdles to overcome, some bonuses and some unexpected complications. Change involves risk and cost – always! So I remain pessimistic about levels of volatility, especially as currency exchange rates are much more a part of the risk assessment that they used to be. I am not rushing to invest anywhere in the world.

On the plus side, Britain has a developed economy with strong control mechanisms and an enterprise culture so a sell off on grounds of uncertainty only will throw up bargains as excellent businesses will have their share prices marked down below the levels justified by their profit and dividend paying potential. That implies a case for investing in the UK in stock picking ‘special situations’ and smaller companies funds.

Personally, I have already dipped my toe in the water by buying a small weighting in a leading UK small companies fund and been rewarded by a sharp loss to date! That is often what happens when one tries to see through the fog and into the future. More often than not, an initial set back precedes several years of excellent returns!

Worse and worse, or opportunity knocks?

by Leave a Comment

I have to close the year with a blog post noting, after looking at my own portfolios, that the serious risks I have emphasised since the early Summer have wrought even more havoc than I expected. I am known as an optimistic, so when my comments had started to turn pessimistic I had been told that things must be really bad. Indeed they are.

Of course, I am pleased that some of the ‘insurance’ built into the portfolios is working well, notably the highest ever weighting to cash. The ‘works when you need it most’ holding in the Jupiter Absolute Return fund is also doing what it should. No one who reads my words of acclaimed wisdom should be needing to sell assets at the moment.

When will it get better? Not soon in my opinion because none of the major political risks have reached a hiatus. But if things get much worse, there will shortly be a great opportunity to start in to the next 10 years of making money – as long as you have cash and courage!

So, the optimist in me still lives on! There is always opportunity around the corner when there is a sell off and this time I hope we are all ready for it.

Happy New Year!

Spot the trend!

by Leave a Comment

If I told you I am using wood pellets from Russia to heat my house you might instantly think I am eco minded or getting a government subsidy or both.  The former is true but not the latter but neither are the actual reason:  the house I bought had a granular pellet boiler installed already because that is the most practical fuel option.  Russian wood pellets are the best quality and the price is sensible.

The reason why you might have guessed at the reasons I suggested is because you may be aware of a trend towards using bio-mass as a fuel on the basis of the (contested) argument that it is carbon neutral.  Trends reflect a general direction of change that has impacted enough people or processes or just data to suggest a long term impact.  The word trendy implies keeping up with changes in fashion that have become set in.

Knowing about trends in a mathematical or statistical sense is useful when looking to assess the likely direction of stock market asset prices.  In fact there is a whole industry built around the concept, called generally ‘charting’.  The number one blunt instrument of the chartist is something called the ‘moving average’ which seeks to strip out short term ups and downs in valuation and show how the direction of data is progressing in a nice smooth way.

There are different ways of adding such ‘trend’ lines to charts and the various methods of interpreting them.  The interpretation can sometimes  seem as improbable as astrology but as one might assume human behaviour across a very wide base of participants does not change much, patterns might exist, I concede.  I would however suggest that most charting methods are in fact naïve and useless because they do not account for the exact features prevailing in the financial climate of the time.

Graphs and charts are only any use if you know how they were constructed and how to interpret them

Where the trend is useful is in looking at turning points, which can never easily be detected at the time they happen.  Looking backwards and spotting quite soon the start of a new trend (an inflection point) can help one see what risk and opportunities are current. Investment fund managers often claim they are good at seeing inflection points in share prices.

An easy way to make some personal use of this concept without being a statistician is to get up a graph from a news service like the BBC of a major stock market like say the FTSE 250 (this is broader based than the 100) over a long period like 5 years.  Such charts are drawn with not too many data points so short term oscillations disappear. That can be very informative.  If you do it now, you will see we are well into a ‘bear’ market but could have some way yet to go down the slope!