Comment and opinion for retail investors in the UK
The push me/pull you tug of war in stock market valuation judgements continues, with the pessimists seeing more central bank rate rises and recessions all over the place and the optimists predicting the end of the monetary tightening and the brakes coming off a little.
This post was prompted by a conversation I had with a subscriber this week, but I will have touched on the topic in discussion with quite a few readers in recent months.
I am referring to the concept of looking at your porfolio data through different data windows when conducting a review. This is something investors will find useful as they get more experienced at periodic reviews and in processing their data . For those who are not Excel aces, I can offer a template spreadsheet and some training in using it for a modest temporary subscription increase. In all cases, I am happy to help subscribers paying for personal support at no extra cost if you just want to better understand the idea.
There is already on the web site a series of articles in the ‘How To’ section on making sale decisions, reading Morninstar X-Rays (an essential part of any review) and a worked through example of a full rather over deferred porfolio review.
An announcement that Jupiter was closing the Luxembourg arm of its Asian Income fund, a fund that has had great relative performance since it was launched specifically for Jason Pidcock (who came to Jupiter with a solid personal reputation as a sector specialist at Newton) is at first mystifying, given that the UK share class of the same fund appears to be well supported.
The PR explanation given is that the European market had not taken to the fund and the sub fund had raised less than £20 million. I would have thought that the offshore share class carried very little extra expenses other than those relating to the Luxembourg listing and compliance, but maybe there is more to it than that. The press release commentary published in my trade newsfeed could have been more appreciative of Jason’s excellent work for investors and his great judgement in minimising China exposure in the fund, which was why I have owned it for a while recently, and had previously made good money with it from launch before banking a profit.
There is no news that the UK fund will close and Trustnet lists it as holding over £1 billion in assets, so that seems unlikely on purely commercial grounds. On the other hand, my intuition is stirring up worries about what may be happening at Jupiter. A whole block of ESG focused managers left not long ago, even though Jupiter had a long history of running ecologically focused funds.
I think the relevant context is that the company has had a recent change of MD, has had its shares shorted by several hedge funds and is apparantly (according to The Times) at this moment the subject of ‘activist investor pressure’.
We can easily forget that many small and medium sized fund management groups are ordinary UK listed firms with the founding shareholders now owning only small percentages of shares and in many cases most of the free float of shares being in the hands of other competitor fund managers, or as in the case of Lindsell Train, for example, a big block of shares being owned by an associated Investment Trust which at least keeps control more or less with the founders and their allies.
This means that fund management firms can become takeover targets, be subject to short seller pressure and have boardroom bustups just like any other business.
The relative underperformance of the UK stock market over most of the last few years until 2022 and a weaker Sterling plus the glut of gloomy predictions for the UK economy (not really a connected factor, in truth) means that there are already plenty of vultures circling, mainly US based, to acquire and strip out cheap UK assets. This may be to our advanatge if we own UK smaller companies or special situations funds, because the managers of those funds know how the game is played and will be holding blocks of shares in takeover targets.
However, I am less happy about the situation at Jupiter in terms of staff morale and motivation. All of the above is hardly going to feel positive if you are long standing employee who was used to working for a friendly British firm that respected its staff and now the cold wind of US capitalism is whistling around your desk! I would take a modest bet that some of the better managers will jump before they are pushed.
In terms of fund research, I would suggest that Jupiter must now warrant at least an Amber light.
It is rare that a completely new type of investment asset becomes available to retail investors, but after the FCA has come up with rules following its consultation launched in late 2022, we may be able to access, in a limited way, LTAFs, something that is a new concept in the UK
LTAF stands for Long Term Asset Fund and at the moment only one exists, which is available to institutional investors like pension funds and has been created by Schroders.
I have already posted that I see a lot of sense in the arguments of those market commentators who say that central banks’ determination to crash the economies of the developed world into recession, even suggesting that stock markets being positive is unhelpful, is the worng strategy because it is manifestly not working and in any case it is policy reaction appropriate to different causes. We have been getting supply side driven inflation and the reaction has been appropriate to demand led.
I saw UK inflation numbers after first publishing this post and that is more evidence of supply side issues (food costs) feeding into the numbers.
A common analogy for the inflationary risks and the chosen policy strategy is of a car accelerating too fast where a bit lighter foot on the throttle might be appropriate but a panic stricken novice driver jams on the brakes very hard. The ‘novice’ driver in this case is the boss of the US Federal Reserve who is after all a lawyer by training and an investment banker with a rather patchy career prior to getting public appointments. Indeed, he could himself be blamed for feeding asset price inflation (now much frowned on by some other central bankers) in the response to Covid-19.
Modern anti-lock braking systems mean that in most situations the car won’t slide across the road when you max out the brakes with your right foot (exactly what happened to me in my first driving test emergency stop) and you get feedback in the form of pedal judder and a flashing light. Very useful when driving down steep hills on snow and ice!
It is now obvious that the failure of SVB and Signature Bank was a combination of inadequate regulation (that being the consequence of over influential lobbying in the USA) and the extremely fast and steep rises in interest rates from a base of virtually zero. You can read many more detailed explanations all over the internet.
A ‘bank run’ always gives me a reassuring feeling that my base understanding of financial markets is essentially unchallengable: what happens in markets is the consequence of self-interested human behaviour and very little else.
In the case of a bank run, a hint that a bank may be in trouble (or even Robert Peston broadcasting the suggestion that it is, as with the Northern Rock – remember that?), will panic depositors in a race to be first in the queue to get THEIR money out. As no bank can make a profit by holding all its assets in cash or near cash, it will struggle to meet withdrawal requests when they amount to more than a small percentage of its assets, so it will have to immediately sell its first reserve assets, like government securities, and the fact that it is selling and why will quickly become known, meaning the panic will widen and it may only be able to sell at fire sale prices.
Of course, many assets of a bank, like loans, mortgages or investments cannot be realised quickly and the vultures, in the form of larger competitors, will start circling immediately, looking to scavenge some cheap assets and pick up blocks of customers for nothing.
These days most private depositors in banks or equivalent deposit takers like UK Building Societies will be protected to a large extent by state deposit insurance schemes, but the bank’s shareholders, bondholders and those with very large deposits will not be (eg corporations). In 2008, the shareholders and bondholders were largely bailed out by governments because the crisis was based on underlying failings in the system and inadequate regulation and the only option was a repeat of the Great Depression.
This time, they won’t be, although all depositors are getting protection in the USA (a Main Street, not Wall Street, solution). The cost of this extended cover will be born by the other banks – they have copied the UK Financial Services Compensation Scheme!