Its Not Harry

Comment and opinion for retail investors in the UK

Funds

Monday mashup – parking your money

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Gloom for epidemiologists but booming stock markets

I know some people don’t pay too much attention to the global Covid-19 case numbers but I suspect everyone is aware that the total number of daily new cases continues to rise and the rate has been accelerating for some weeks. I suppose my readers will be aware of the ongoing lack of progress in holding back case numbers because of the news over the weekend about trips to Spain.

I am sorry to be negative, but the facts cannot be ignored

I start with this gloomy comment because it is the main context against which we have to judge stock market valuations which have recovered back to and even ahead of pre-Covid levels in some sectors.

Whilst there is some good news on vaccines and therapeutic medicine with Professor Holgate (and colleagues) in Southampton, whose work on hay-fever and allergies was gospel to me in the 1980s having been in the news with his later work on beta-interferon, such science will not bring results in the next few weeks, perhaps not even this year.

Now as the medical news, being very bad in the short term, is disconnected with the recent stock market trends, one can have a short term tactical approach. As I have said before, one can ‘make hay while the sun shines’ even if you can see the tornado in the distance.

But if you see a decent return, say 10% to 15% over a few weeks or months on a well chosen fund and you decide to take the gain, where do you put the money? This is the question that I have been thinking about recently.

Where to park gains?

One has various choices of defensive assets: cash (no return worth talking about), fixed income (incredibly expensive at the moment and credit risk rising), absolute return and macro or market neutral funds (most of which appear not to have worked in the recent past) and gold (already up in value with a good tailwind of investor support). That is a good short list but there is no stand out ‘best’ option.

What is a cautious investment these days?

I have been happy to invest in physical gold for some months for multiple reasons that I have explained in other posts (call or mail me if you are a subscriber and want clarification).

Although the majority of defensive funds, like absolute return, macro strategy and simple cautious multi asset, don’t offer that much protection in a systemic crash, some managers do seem to have developed the right timing skills.

I have invested in the JP Morgan Global Macro Opportunities fund for some years and it has done what it promised, although a little erratically.

I recently identified during research with a subscriber the BlackRock European Absolute Alpha fund. This seems to have benefited from some great timing decisions in the fixed income market by the managers at the start of the year.

These are examples of funds that would have protected you well in March this year, but that is not of course any guarantee that they will work next time! If you use them as examples, you can no doubt find alternatives that might meet your needs.

Investors need to form their own view of what suits their needs best when reserving money from gains. Some may spend it! Others may just hold funds on deposit and accept the trivial rates of interest. For those who like to get a return whatever and can afford some risk, gold and the best defensive funds are worth considering. Actually, I will be doing all of the above!

Wirecard – a fund manager’s angle

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Since writing my piece this morning, I have read a long explanation from Barry Norris of Argonaut Fund Managers as to why he has been shorting Wirecard stock, having spotted the potential fraud 2 years ago. I can’t offer a link to the article in the trade newspaper as you would need a registration as a finance professional, but the main elements will make their way into the public domain.

Here is a short extract:

“We have been amazed how the Wirecard share price has been so impervious for so long to cumulative substantiated accusations of wrongdoing which waved more red flags than you might witness at a communist rally. “

I have never met Barry Norris, although I once went to London with that intention. He skipped the meeting and sent his deputy who was great. I would have been offended but as the excuse was that he was going to his son’s birthday party, I took a liking to his attitude – clearly an honest man not afraid of his stating his priorities.

I have read his market output and seen his teleconferences on many occasions and he is one of those managers whose stock analysis is forensic.

I recommended his European Growth fund in my IFA days but it underperformed after he misjudged the Brexit vote outcome. After that we have had periods where momentum has been king and the Jupiter European fund, a long term large holder of Wirecard (in fact so large I looked up the company myself when reviewing the Jupiter fund), did far better, amongst others. Apparently the well known ex-Jupiter manager, Alexander Darwell has kept holding the stock in the investment trust he runs until this week, which slightly tarnishes his reputation.

The main Argonaut fund has fallen down the performance tables because you can select stocks for all the right analytical reasons and still find everyone else is not buying them.

It is perhaps a just boost for Mr Norris’ credibility and a reward to investors in his other, absolute return fund that he had been shorting Wirecard to the maximum, making him very unpopular with some colleagues. But proved right.

Some comfort to me too, as I really don’t like the current market when fantasy profit expectations (eg Nikola) are rewarded by incredible (that is exactly the right word) share price valuations.

Tech, pharma, innovations or what? (m)

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I guess many readers will be wondering what they are going to buy when they venture back into markets. I have been spending time researching ‘obvious’ options.

My long standing belief in having some a portfolio exposed to what I call themes takes on board the modern alternatives to what is called ‘modern portfolio theory’ which is not modern at all, being an idea that become popular about the time I was born! The more recent academic thinking has focused on behavioural finance and ‘factor’ investing. As some of the factors that go into the models of the academics who favour the latter approach are things like momentum, there is an overlap.

The basic idea is that one invests in companies whose share price will likely rise because either (a) the business of the company is in something that is newly necessary or desirable (eg electric cars, streaming video), or (b) those sort of companies are likely to do better than another sort of companies (eg small companies grow faster than big companies) or (c) the majority of investors believe (a) or (b) or both!

That is an over simplification of what is in any case a pretty broad idea with different variants promoted by assorted academics with their own wealth management side-lines.

If we accept the general idea, at the moment we ought to be looking at technology and pharmaceutical/biotech funds and maybe some funds that focus on innovation in general, as the latter may invest in both of the former. So that is what I have been doing with a view to getting my subscribers headed off in an interesting direction! And of course finding funds to buy myself!

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Diversification works

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In my training sessions for people who want to understand or even manage their portfolios, I generally get to deal with the fairly widespread failure of many so called absolute return funds to deliver on their objectives.

I usually talk through the facts about different funds having different strategies and mention that not all funds that are good diversifiers will be easily recognisable by their name, nor will they necessarily be ranked in a homogenous (the same sort of funds) peer group, so they may have what look to be weak quartile rankings over some measurement periods. Of course, my subscribers know that past performance is informative, but not on its own a useful criterion for selecting funds.

One fund that I often use to make my point is the JP Morgan Global Macro Opportunities fund. This fund uses a themed approach and draws on JP Morgan’s long term application of behavioural finance theory. To understand it better, you need to do a little reading of the supporting documentation.

I used the fund in the advisory Tactical Cautious Portfolio which I often recommended as a portfolio element when I was an IFA and which I still maintain personally.

Take a look at its performance over recent weeks. You will see that one can invest in ways that take the worst shock out of market corrections.

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.