Its Not Harry

Comment and opinion for retail investors in the UK

Portfolios

‘Zombies’

by Leave a Comment

I understand that rather silly TV series with zombies featured are in vogue with a younger generation at the moment.

My readers may not know that this term can be applied to companies – those that continue to trade in spite of having steadily reducing profits (or even losses) and unsustainably high levels of debt. In other words, a simple adverse change like a change in interest rates, or even unusual weather conditions (for a retailer) could see them fold. They are surviving in spite of all the evidence suggesting they should not still be here, never mind being a good destination for investment.

However, incredible though it may seem, you will find shares in such companies being bought by fund managers – often managers who already own the shares. They seem to be so close to the company that they believe the directors over optimistic plans and on occasions disingenuous explanations about what is going wrong.

It is easy to see only what you need to see and ignore what is disappointing

They could of course be hoping for a ‘recovery’ play or a takeover. But if the company is in a real mess, only an idiot would take it over and then the combined entity will have trouble (remember Lloyds and HBOS?).

I like it when the fund manager I am researching is cynical about directors’ reports and shareholder presentations. I like it especially if the manager has accountancy qualifications or personal experience in other real world trading businesses as an owner. There are some great fund managers who are also farmers!

Even the most well known fund managers get fooled by a well dressed zombie. The test of their credibility is how quickly they find out and exit the position.

They will take a loss and perhaps a knock to their ego, but if they insist on defending a poor decision and the company eventually folds, the damage for their fund’s investors will be that much worse.

Investing with a conscience (ethically)

by Leave a Comment

I have now added a ‘How to’ article covering the key points on what is a subject where a very wide discussion is possible! I make a cross reference to one other useful resource for those who want to dig further, but as usual, I have tried to deal with the issue in such a way that you will get a general idea of the main considerations, but will not be instantly bamboozled!

As ever feedback is welcome. Subscribers can request more specific research, of course.

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!