Funds

Midweek Musings – 6–8–9, time to get in line!

28th April 2021 by Mark Potter Leave a Comment

Introduction

This week’s post is shortish because I will publish a fuller subscriber only Watching Brief over the weekend or early next week.

The title refers to the categorisation of funds in Sustainability terms under the EU’s recently in force SFDR sustainable finance directive. Although the UK is not of course in the EU, all fund managers wanting to market funds in Europe (which includes all the large UK fund managers) will comply with the rules.

The categories

As usual with EU policy documents, the rules run to many pages, but for our purposes, we only really need to get used to the 3 ‘articles’ or categories of fund referenced in the title.

Category 6 is general retail funds such as we might purchase
Category 8 is funds that promote environmental or social characteristics (light green)
Category 9 is funds that have a specific sustainable investment objective (darker green, but not necessarily ethical)

How are funds lining up so far?

Actually, we are looking for numbers not letters!

Morningstar have published some early data from about half the funds with domicile in Luxembourg, the favourite base for non-European fund managers to use for selling into Europe, on how funds are coming out as the process gets under way.

It is probably a good idea to keep in mind that when any new rules are published, they are subject to varying intepretations, especially when talking about categorisations (think of Covid-19 death rates). So I would assume that some fund groups are going to be more liberal with the rules and others more literal, or pedantic.

It is no surprise that European groups as opposed to UK or US fund businesses are in the main showing a higher proportion of category 8 and 9 funds because it is well known that European investors have been more in favour of ESG filters for a while and one might also speculate that the European fund managers are a little cuter at tuning their documentation to fit in with EU rules – just my idea!

On this early data funds classified as Article 8 or 9 represent 21% of European funds by number and 25% of European assets. This data is extrapolated by Morningstar, rather prematurely in my opinion, to suggest that the ESG funds market in Europe is worth EUR 2,5 trillion. Not a trifling sum even in these days of money sloshing around everwhere.

In case you are interested the French firms Amundi and BNP Paribas have the highest number of funds in 8 or 9, well into the hundreds. The UK’s top player was Legal & General with around 50 funds and even the mighty Fidelity International only has just above 50.

When it comes to actual money invested, unsurprisingly, Nordic and Dutch asset managers fill all the top spaces. SEB, a Swedish bank that operates in my region classified 95% of its assets in categories 8 and 9. The bank I personally use, also Swedish, too small as a fund manager to make this survey, has 100% of its funds ESG assessed as far as I can tell – the facts sheets always include a significant ESG commentary.

Does this matter to us?

I think it does. I have been pretty sure for some time that the global enthusiasm for sticking a ‘sustainable’ label on investments and booing loudly everything that superficially is not sustainable will be the biggest driver of investment fund flows for years to come. So even if you are more sceptical than me about the quality of the labelling on ESG funds, it makes sense to to at least keep up with this bandwagon, even if you don’t want to jump on.

Midweek Musings – Spring Sunshine?

6th April 2021 by Mark Potter Leave a Comment

As I write this (April 6th), I see stock markets well up on the day across the globe and Sterling is down. Both these factors (if they prevail until markets close) will give our porfolios a little Springtime valuation lift. Of course, that is one day’s events and as such pretty useless information for someone pondering the future direction of markets. But maybe short term data is of some use? That is my theme this week.

YTD (year to date)

3 months data (YTD for 2021) is arguably more useful, not in terms of predicting future valuations, but because we know the global macro economic context and we can see how invesors in different places and types of assets have reacted to the sort of changes I highlighted in my Watching Brief last week.

If I had to pick only 3 relevant contextual factors, they would be these:

economic recovery driven by vaccination programmes (or low Covid 19 incidence as in China),
US government spending plans and the impact of those on inflation and interest rates,
finally, those who prefer real profits to speculative momentum gains raising their voices more audibly and maybe being listened to.

Here is some data (year to date, various sources and rounded slightly).

Note that data extracted over a short period is very sensitive to the start and end dates (in this case January 1st and April 5th), so the absolute numbers are of only curiosity value: it is the relative differences that are interesting!

Major Markets (in local currency terms)

S&P 500	+10.2%
FTSE 100	+4%
FTSE 250	+7%
NASDAQ	+8%
EuroStoxx 50	+11.8%
TOPIX (Japan)	+8.8%
MSCI World Growth (USD)	-0.6%
MSCI World Value (USD	+4%
*Sterling Index (relative to a basket of currencies)*	+2.2%

This suggests that we should all have made money so far this year but that some of our returns as UK investors in overseas assets will have been dented by the revaluation up of Sterling which makes investments in other currencies worth less.

Funds

I checked out a few funds that I own, know well or which are representative to see if the above index data was reflected in performance, due to asset class selection (or asset mix for multi asset funds) or manager stock selection. This data is for the cheapest retail share class and in Sterling terms, so allows for the currency headwind where applicable.

MAN GLG UK Undervalued Assets	+7.4%
Artemis UK Smaller Companies	+13.5%
Baillie Gifford Global Discovery	-4.3%
Fundsmith Equity	+1.2%
Blue Whale Growth	-1.8%
Vanguard Lifestrategy 60	+1.5%
Vanguard Lifestrategy 100	+5.1%
Royal London Sustainable Managed	-2.5%
Wisdom Tree Gold ETF	-10%

What do you make of that?

I draw these conclusions:

The UK has been a good place to invest this year (and indeed at the end of last year), holding its own for the first time since the Brexit vote. There is no currency headwind as there is for most other assets listed, so the UK, especially away from big foreign currency earners in the FTSE100 is more or less top of the pile. Of course, this is not a comprehensive list, but one I arbitrarily decided was interesting, abusing my editorial authority!
There are hints that investors have fallen out of love with some of the leading growth stocks as owned by Baillie Gifford and to a lesser extent by Fundsmith and Blue Whale.
The fixed interest element in the Royal London Multi Asset Sustainable fund has seriously dented performance. Indeed, as I have been saying for a while, fixed income investments are more risky at the moment than their long term volatility averages would suggest. This can also be seen in the difference between the returns from the Vanguard Lifestratgy 60% equity and 100% equity funds.

Do I conclude that I should be piling loads more money into UK smaller company funds and dumping my global growth assets? Of course not in such a simplistic way – only a very naive investor chases recent past performance. In any case, this data tells us nothing about systemic risk and that is still at a high level.

When markets sell off in a crisis, virtually all stock market assets fall and those that went up the most recently will usually fall the most!

So, I am as careful now about the amount of equity risk I am carrying as I have been for the last 2 years or so. The data above does validate my decision to use cash as opposed to general fixed income assets as my insurance policy. My decision to also use gold to a degree is open to challenge on the basis of recent losses, but I am sticking with that as a long term defensive asset with inflation proofing thrown in.

Of course, one has to be invested in equities to make money long term and it is possible to diversify in lots of ways within any equity asset allocation. Working out where markets are going is therefore worth the effort and looking at data like that above is part of the process. Markets are traded and priced on the back of human behaviour in my strong opinion, so it can be instructive to see what our fellow investors are up to!

Past performance is not a guide to the future as the regulators expect us to be told but recent past performance does tell us what investors recently chose to buy in the market conditions that we know about and which may well still prevail.

The fact that a fast car was travelling at 150 mph on the autobahn 4 hours ago does not really help the driver if he is in a traffic jam in the city or broken down with an overheated engine! But the driver might have avoided either problem if he paid attention to current data: the traffic info on his Satnav or Google and his car’s temperature gauge or the electronic equivalent.

In a sense recent past performance is informative even if not predictive. Use such data carefully, applying it to what you already know about the context and you will become a better investor.

Midweek Musings – Let’s get started!

10th March 2021 by Mark Potter 2 Comments

It seems to be ‘de rigeur’ to use the phrase ‘Let’s get started’ or similar at the start of a YouTube video and who am I to fight fashion?

This new format will on occasions cover a little more ground than its predecessor but it is still my ambition that you can take it in over a leisurely cup of coffee. More detailed analysis will appear in the subscriber only monthly WAtching Brief, and if requested, by the addition of longer reads to the main permanent site content. There will be plenty of fund specific content to give you ideas to follow up if they are of interest.

I had decided to omit my usual graphics too, to use the minimum of screen real estate because I expect some people will read this on their smartphone, but if that disappoints anyone, please comment as usual. Feedback is welcome and acted upon. The initial reaction I got was that the graphics helped with readability, so I added some in! I will adapt as appropraite if there is more feedback.

This weeks theme – diversifying your equity holdings. How about Fintech?

Inflation reborn?

As I have already explained in recent posts, the yield on US Treasuries has been slowly climbing, such that the long end of the yield curve is around 1.5%. This has been happening for about 6 months but a whole swathe of data on inflation has made market participants begin to accept that higher interest rates are coming in the medium term. Central bankers are doing their best to suggest that they are in no hurry to raise rates, but some of the inflation numbers are striking.

I saw a presentation earlier this week, a European focused one, where data was presented showing raw material prices increasing annually now at over 3.5% and for some minerals, much faster than that. Food prices are also moving up sharply and most readers will already know about the huge jump in the cost of renting shipping containers. Add to that a big jump in crude oil pices and a massive overhang of consumer savings on deposit at banks, likely waiting to be spent as soon as the world opens up to travel and shopping, and predictions of significant price inflation seem logical.

Asset class selection

As most of my readers will know, rising interest rates are bad news for fixed income investors, because the value of securities already issued moves in the opposite direction to interest rates. Precious metals, if not in demand in industry or for retail consumption, will also lose value because they have no yield. Deposits of cash will earn better returns but initially that is almost bound to be below the rate of inflation.

This classic model of a lower risk diversified portfolio from around 3 years back now looks seriously in need of revision, although many components will have done well enough

Of the major asset classes. one is left with equities and physical property. The latter is an asset that could do well if the actual properties are carefully selected but most mature funds will own too many retail shops and conventional office blocks and not enough logistics warehouses and server farms.

I am sure that everyone reading this owns a good range of equity based funds, probably with core holdings in the major markets of the world and some tactical sattelite picks. Looking to add further diversity to this asset block is worth your attention, given that the alternatives are not attractive and the track record of complex derivatives driven absolute return funds is in the main absolute in the sense of being absolutely awful!

Is now the time right for Fintech?

Funds investing in financial businesses have been around for years, mainly owning banking, insurance company and wealth management company shares. That makes sense because financial services is a huge part of some economies like the UK and those sort of busineses are subject to very high levels of regulation, so must surely be less risky (post 2008).

But the application of technology to financial services is making as much difference as the application of steam power did to agriculture a couple of centuries back or the invention of mass production did to the availability of motor cars. Can we invest in that process of change? Of course we can and the overall shorthand is Fintech.

There are not so many financial funds on offer to retail investors but I found a few (not all will be on your favoured trading platform – that is another thing to check).

Below is a downloadable link to a Trustnet fund comparion I prepared, using the well known Fundsmith global equity fund as the benchmark, which I think is realistic. The funds I chose are really quite different in character and the correlations not too strong, bearing in mind that these are all equity funds with a global stock universe.

Example-Financial-Funds-vs-Fundsmith-1 Download

As always, I am not recommending any fund and I would suggest that you take a look at the top 10 holdings, recent volatility and the typical market capitalisation of the holdings (using the Morningstar Equity Style box) because they will demonstrate quite a difference between the funds.

Jupiter actually offer 2 funds with the same manager. One is a very old fund – Financial Opportunities, the other (Financial Innovations) much newer. The innovations funds fits my idea of Fintech, but is much more risky, with the usual potential extra return and risk of heavier losses.

Im addition to the 3 in the chart, I also found these funds:

Jupiter Financial Opportunities – widely available UK listed, diverse large cap growth fund
Fidelity Global Financial Services – Luxembourg listed, mega cap bank and insurance led value fund
Black Rock World Financials – Luxembourg listed, similar to Fidelity with more bias to insurance companies
ASI Financial Equity – small UK listed fund, looks quite diverse , no named manager

There are of course Fintech ETFs (there are ETF’s for just about anything imaginable as a legitimate investment!), but I could find none offered with a UK domicile and only one with an Irish domicile, trading in US dollars and tracking the KBW NASDAQ Financial Technology Index.

Many of the real Fintech businesses are not unlike other new generation technology companies in car sharing, food delivery, internet gaming and so on. In other words, they don’t yet make profits, may be run by very charismatic people who frequently come from countries well East of London and survive on endless funding rounds. So investing in the innovative end of the financial services sector would have to be classified as high risk. But some very mainstream funds from investment houses like Baillie Gifford have been backing businesses that look pretty similar, as have many individuals with their ‘free’ trading apps. The latter may be a permanent feature of stock market pricing, so some suggest and that will help support more adventurous businesses and their share prices.

Other companies, especially those in internet shopping and money transmission services are longer established and profitable.

I repeat that I am not recommending an investment in this area to anyone, that is not my function, but I am suggesting it is an interesting area for research.

I can say, only in the interest of transparency, that I have invested in the Jupiter Financial Innovations fund. It is not uncommon for me to dip my toe into the water after completing a research exercise. Some times I wish I had not!

Monday mashup – more work on sniffing out opportunities

26th October 2020 by Mark Potter Leave a Comment

Next week will see the US Presidential election come to a climax and no doubt there will be volatility in stock markets both before and after that date as traders take positions on the most likely outcome, then the consequences. I have no predictions as to the winners, but will happily admit I hope it is not Trump. If you think the US market will fly on a Biden win, buying a low cost S&P 500 tracker fund or better still an ETF would be the way to place your bet.

I have devoted recent research time to my quest to identify funds in the out of fashion value segment of the out of fashion UK stock market. This is all part of my current focus on contrarian investing which I hope will be educational.

Here is a chart:

UK-Value-funds-in-2020 Download

This shows performance data for 3 funds and a benchmark. One of the funds (Man GLG) popped up from the research process that I explain in the recently published article offering an example of research into out of favour funds Pick a fund for the future or how to be a contrarian (m) The other 2 I have invested in myself in the recent past.

The Premier Miton fund I identified many years ago when I spotted an unusual combination of managers, but they promptly upped sticks and left after I started following it! Fortunately, the hastily brought in replacement manager also knows his way around the darker corners of the UK market.

The TM Crux offering (note that Crux are the management group, not Thesis, who are just supplying corporate director services) comes from a group founded by managers who made their name elsewhere and wanted a higher degree of personal involvement – a common pattern that often does not work so well. In the case of Crux, I think they have not been overly ambitious and the founders are probably wealthy enough to cope with a gentle build up of funds. The Special Situations fund manager Richard Penney ran a very focused fund at Legal & General and is one of te most contrarian investors I have come across. He only moved across to Crux recently.

Which of these funds would you buy? I imagine you might want me to answer that question rather than ask it!

I personally would look at the top 10 holdings of the funds to assist in making that decision.

It looks to me like the Crux fund manager has taken the view that he can make good money on relatively large defensive stocks being in fashion in the light of a pending recession. The Man GLG fund seems to have taken bets that expectations of a recession are overdone and is holding stocks that would do very well if the recovery is quick and dramatic. The Premier Miton fund seems to me to be what is always was – a fund where the stock picking is careful, agnostic of style and sector and in spite of the fund name, not an out and out value fund.

This is a very broad assessment, but when we are predicting the future (or at least betting on it) I think we would be wasting our time being too pedantic – more detail will not necessarily improve results!

My assessment (never a recommendation for any reader in particular) is:

the Crux fund is being run by a manager who needs decent results now, because he is in a new job and so it is only mildly contrarian at this time
the Premier Miton fund is what it always was, a great way of getting exposure to UK shares away from the mega caps focus of the FTSE100
the Man GLG fund is one for those who want to bet against the mainstream and so most useful as a medium term satellite ‘returns booster’ but one that could go badly wrong. It is the true contrarian in this list.

I can tell you that I have bought the Man GLG fund already, but only to acquire a very modest weighting in my portfolio. If you believe in contrarian investing, you have to at times take on the associated risk!

The other 2 funds might well feature in my portfolio again, having done so in the past.

I will still do more research in this segment. If readers have their own ideas, I would love to discuss them!

Researching UK funds – an example

21st October 2020 by Mark Potter Leave a Comment

I recently published a new permanent page on the site about the process of being contrarian in selecting funds and used an example of researching UK funds (which I think are cheap at the moment) to explain the process.

I have continued that research process and one curiosity popped up that I thought might be educational.

If you list UK funds in your preferred research tool, you will find the Blackrock UK Equity fund showing a year to date return of around 3% which is pretty good relative to the average large cap fund or even the benchmark index, say the FT All Share. This is a 5 star fund in Morningstar’s ratings.

It so happens that listed right next to it in the ranking order I selected was the Royal London UK Equity Class M fund which year to date has lost about 19%. Note that this is different to the Royal London UK Growth fund which did a little better and is classified as a mid-cap blend fund.

Now that is a whopping 22% gap from Blackrock. How come?

You have to put in time doing your research if you want to find real bargains in the funds market

This is a blog post, so I will keep the answers short, but I am happy to discuss the research in more detail with subscribers.

It is not that Royal London are just useless – the team they acquired when they merged with the Co-op has a good reputation and has delivered excellent results with other funds, notably sustainability focused ones.
The fund manager at Royal London is relatively new (started 2016) – that might be a factor? The smaller companies fund which he runs is a poor performer.
The performance of the 2 funds was similar until 2020, so something very different happened recently. In fact the Royal London fund has a Morningstar 4 star rating.
A really big clue comes from the Morningstar 9 box equity style grid. The BlackRock fund is large cap growth and the Royal London one large cap value on Morningstar’s overall assessment.
The top 10 holdings have considerable overlap, so the variation must be further down the holdings list, which we can’t immediately see.
Although these are UK funds, the BlackRock fund has 25% of its stocks listed in the US, Royal London only 5%. An overseas listing is acceptable for a UK fund if the firm’s main business activity is in UK, or it is in truth UK based. Both funds own Experian plc, which is US listed, for example.
Blackrock’s fund has a significant weight to technology and sensitive stocks, Royal London does not.

More research (like looking at half yearly reports) may reveal some more about the strategy of each manager, but on recent evidence, BlackRock made the right calls for a limited recovery in the UK stock market, biasing the fund away from some parts of the market. Royal London would look to be a good contrarian pick for the brave, although there may be better alternatives. I have not completed my work on this subject yet!

If you are going to invest against the trend (the momentum factor), you need to be thorough with your research and to supress your psychological biases. I will try to keep posting examples to help out!

Monday mashup – crystal ball gazing? Or forecasting?

28th September 2020 by Mark Potter Leave a Comment

It is easy enough to work out what investors have to worry about at the moment and to give those risks a rating on probability of causing problems – even to guess when the problems will emerge. For example:

The US elections – happening very soon and a risk if there is not a clear win for Trump or Biden and Trump refuses to depart even though the polls say he has lost. I don’t think which candidate wins will make much difference on its own to US stock markets, but a constitutional crisis would.
Covid 19 – a risk that stock markets are in effect ignoring because many players like the consequent pouring out of nearly free money that is either in effect being invented, or which will be a burden on future tax-payers (which won’t include them, of course!). This Nelson like way of viewing global economics will maybe win a battle, but like Nelson, the corporate warriors won’t be able to avoid a bullet for ever. When it will come is unclear, but I suggest this is a medium term risk.
Related to the above is over valuation of shares – the detachment of many companies’ valuations from a logical base and therefore the undermining of many established rules for making sound investments. This looks to me like a repeat of various past periods in recent history. Such bubbles of investment naivety usually burst without much warning. That could be any time soon.
And finally for Brits only (and maybe with lesser consequences for Europe) – Brexit. This one has a very easy to observe time scale. We will probably know in less than a month whether or not a deal is really going to happen and even if that is strung out as some suspect. we are going to know by Christmas. The emails I have been getting from the Foreign Office as an EU resident Brit suggest that a least that bit of government is certainly expecting no deal.

None of the above will be new to readers, I am sure, but I find it helps to keep the simple facts in mind when fighting one’s sub-coscious biases, like the Fear of Missing Out (FOMO).

When it stops raining, the sun will come out!

Of course, there are always risks, including ‘Black Swan’ events that might dent our invested wealth and blow our plans off course.

What perhaps is unusual at this time is that it is so easy to see so many risks and know that the market is not properly ‘discounting” them (ie allowing for them in valuations), except perhaps the last one, Brexit.

With the exception of some international mega cap businesses and selected mid and small cap firms, the UK stock market has performed very poorly for some time now. The relative performance of the main UK indices has been awful.

Because the Brexit risk is rapidly coming to a head, one might take the view that whatever happens, the removal of uncertainty and the ‘happening’ of the consequences of Brexit in full in 2021 will make investing in the UK a much more attractive proposition, because whenever there is major change, there are winners as well as losers. We can look for fund managers that we think know how to pick winners in a recovery situation.

I have thought for maybe 2 years that I wanted to participate in this opportunity. I bought UK value (ie out of fashion) and smaller company funds in late 2018 and 2019, thinking that the new Government was going to ‘get Brexit done’. In essence, although I did not wholly trust Boris Johnson, I though his election would unlock the Brexit process. For a while this seemed to have been a good call, but things went pear-shaped.

Even allowing for Covid 19 being a major spanner in the works this year, I was in any case misguided. I have only made money on the smaller companies fund, and given up and sold out of the value funds, because I expected to lose even more money in the near term. I would rather reserve the money in a defensive fund and buy at even cheaper prices. That sort of timing call has risks, of course, which is why I have titled this post as I have done!

I do not think any differently about the consequences of Brexit , only that my timing in buying into the most sensibly valued major stock market in the world was wrong (that happens to all investors sometimes, even the greatest). So I am once again looking for opportunities to buy UK shares at really cheap prices in the near future. I will publish some of my research soon!