Comment and opinion for retail investors in the UK
Many people will know that the month of January is named after the Roman god who is portrayed as looking both backwards and forwards. Let’s at least do the looking back bit to start with!
The well-known regulatory caveat that past
performance is no guide to the future is always worth remembering but we can
nonetheless learn a good deal from what happened, especially if we look at the
context. Of course, we all hope to learn
from past mistakes as well.
This is nothing to do with the potential policies of a new Home Secretary! I am not planning to comment on what could be a different environment for investors for a few days yet.
As others have pointed out, there are at least 2 versions of Boris Johnson; the lying, casually racist egotist and the diffident ‘one nation’ Conservative. The latter might be a concept being acted out on the advice of Dominic Cummings and co. but it could also be the driver of Government policy. We need to be a little more certain about that and we will be better informed over the next few days.
There are many issues that will be troublesome in months to come, aside from the actual delivery of Brexit, which will not be wholly positive in my judgement. The split of the UK into nationalist groups, especially in Scotland, will create some new issues for investors, especially as many top fund managers are located North of Hadrian’s Wall!
This piece is a seasonal one, drawing your attention to the fact that the investment industry does not find the urgent message being so ably promoted by an autistic teenager as being either trivial or troublesome. There has been for a very long time an enthusiasm for sustainability as an investment criterion. In a world were ‘factor’ investing is becoming the norm, sustainability (in global terms, not internally) of business operations is certainly one factor investment managers take into account.
Global climate change is perhaps the most significant threat to environmental sustainability. I think very few people doubt it is happening, although some well qualified and well informed people argue that the cause may not be so simple as C02 emissions. We do not need to take sides in that debate as investors, but we do need to know how investment managers are tailoring their plans to allow for the CO2 emission reduction targets that are going to be imposed on businesses either by regulation, or by investor activism.
Even if CO2 emissions are NOT the cause of global warming, we are in a ‘Millennium Bug’ situation where vast sums of money will be re-directed as a result of a perceived risk. Investor behaviour has been gradually changing to an ‘anti-carbon’ stance for some time now.
It is well know that even most managers of funds badged as Sustainable or having a high ESG score (environmental, social, governance) do not really have the structure in place to challenge company boards on issues as specific as carbon emission targets. WHEB are a creditable exception to the generally rather wishy washy fund manager approach to getting to grips with issues of corporate governance, which is one reason why I invest in their Sustainability fund.
Seb Beloe, one of the WHEB fund co-managers has joined with other managers for Liontrust, Montanaro and Janus Henderson in supporting an initiative called NZC10 (or Net-Zero Carbon 10). This is a demanding target which requires 10% or more of portfolio assets to be invested in firms that are carbon neutral or have strategies that will achieve net-zero carbon emissions by 2030. The standard is expected to tighten over time.
Most readers of my musings will be of an age where a global climate crisis is worrying more in the context of later generations, like children and grandchildren. But you may be surprised how quickly climate change impacts your life.
Personally, I have along with a large number of people across the world not supplied by municipal water (and some who are) been obliged to spend out this year on drilling for deeper ground water to supply my everyday life. That was a direct result of record warm dry weather in North Eastern Europe. Extreme weather is not so unusual, it seems to me.
I will write more in depth on this subject in the future, It is a theme that cannot be ignored by investors.
Most subscribers will know that while commercial property is a major asset class that offers something different for portfolios with a high income yield from rent and long term inflation proofing of capital values, I have not been keen on it as a portfolio component for several years.
I wrote about my concerns in July 2018 (in fact I even suggested fund suspensions were on the way) and again in July this year when explaining the asset class in a bit more detail.
The ‘gating’ or suspension of the M&G Property fund, one of the biggest, after heavy flows of withdrawals will have been reported in most newspapers over the weekend.
Such funds have had two problems.
Firstly, they are owners of shopping centres and other sites impacted by the downturn in personal shopping as opposed to internet purchasing. Even if a particular fund does not own assets that have had to concede rent reduction, the valuation of property is always on a comparative basis, so all retail assets will have been seeing valuation issues.
Secondly, after the financial crisis when a number of funds closed in this way for quite a while, the regulator has insisted that they hold plenty of cash to meet withdrawals (although M&G still almost ran out), and cash earns no returns, so the overall prerormance of the asset class suffers.
A question now arises as to whether or not the increased use of model portfolios and multi-asset funds by advisers has exacerbated the issue. If they make allocations to a given ‘best buy’ property fund, en masse, it accumulates money that it can be hard for the manager to allocate to sensible purchases. If that fund underperforms because it has then made poor decsions (going into speculative development might be one such) advisers, again on masse, move large sums to another ‘in fashion’ fund. This imposes hard to manage cash flow demands on the funds.
For the time being, I am very happy that the only exposure I have to property investment is the house I live in!
This will be the last long commentary
before Christmas, so I am bound to mention the legendary ‘Santa Claus Rally’! This is the suggestion that the value of
shares goes up nicely in the last few trading days before Christmas and the two
trading days of the New Year.
I will not comment on markets and investment matter in general today for two reasons: I can’t think if anything to say that will not be covered in my December Watching Brief in a few days time and apart from the local election in Hong Kong having proceeded peacefully (good news), nothing much new has happened.
The publication of the manifestos of the main political parties is fanciful as ever, with ‘commitments’ that make for good headlines. At least this time there is out and out socialism from Labour and therefore a contrast with the gently shifted Tory ‘almost more of the same’ offering. The polling data is now so clearly indicating a Tory victory that the media punters are covering their backs with pieces worrying about sudden changes in the last fortnight of the campaign!
We will just have to wait and see..
Following publication of a Long Read piece introducing passive investment concepts, I am researching the multi asset fund market, focusing on the low cost passive options as this is where retail investors’ money if flowing now, often on the advice of IFAs who want to shift all the investment work somewhere else and still maintain their own fees for doing very little of use!
I can see merit in such funds, if only in certain situations, but if you put your whole portfolio in a good selection of properly reviewed low cost passives in a risk adjusted mix, you would certainly not need to pay an adviser thousands of pounds a year. Even the IFA trade press is admitting that much now.
The global economy, political scene and the business cycle are virtual, rather undefined entities that get measured and assessed by different people and organisations in different ways. We know that changes happen that will alter the value of our investments, but the process is continuous, not linear and often only accurately observed with hindsight.
When I comment on markets, I try to look forward, using my experience and knowledge of the underlying processes to take an educated guess at what is coming next. Before I commit to an opinion, the first thing I do is think about what I know now, right at this minute. In simple terms, I do an instrument check, like an airline pilot would before executing a take off, landing or major manoeuvre.
The readings change, of course, over time much as they would when a plane is climbing or descending, so my predictions vary.
That may seem contradictory, but remember that a well constructed portfolio. once in place, is designed to cope with the short term variations and will deliver in line with its objectives over the longer run even when the facts change in the shorter term. It may just need a bit of course correction.
The short term readings are more of immediate interest to those with new money to invest or who are carrying out a formal portfolio review, to see if a course correction is now appropriate.
I thought it would be useful to highlight in this short post the key instrument readings I can observe at this point in time:
These are the main facts. There are other readings in my peripheral vison, but apart from the last bullet point, these readings make me a little more optimistic than I was a few months back. The Hong Kong situation would prompt me to reduce my market exposure temporarily to the Asia Pacific region, just as one would throttle back cautiously if one saw a temperature gauge heading for the red over heat zone .