Its Not Harry

Comment and opinion for retail investors in the UK

Rants

Padding out profits (rant warning)

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I read today the comments for shareholders from the Quilter asset management business (pun in the title intended).

A summary of one section would be that profits have gone up even though inflows fell and assets under management slipped a little due to the decline in market values. Margins have increased and selling off a single asset business (ie a service that offered different funds for different markets segments) will have helped, they say.

Fund managers love to maximise returns – for themselves!

In another post I have commented recently that the ‘push’ of multi-asset propositions to retail investors is all about increasing profits for fund managers and advisers. It will be argued that the end client gets a better offering, but the evidence of that is thin on the ground. After all, ‘better’ has to be compared with something and I don’t ever see such comparisons!

This is more evidence of the underlying reasons as to why investors are being told that they now need an adviser (IFA) to tell them to invest with another adviser (asset manager) who will pick yet other advisers (fund managers) to buy them investments. That is 3 levels of fees for one result!

Sounds like the football team with a Director of Sport, a manager and a coach! But quite likely no decent strikers.

Politics – let’s do the splits

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Political risk is always something investors have to take into account. In the UK it was traditionally an easy call for newspaper columnists – Tory governments are pro business and aligned with the interest of investors; Labour are socialist and so bad news for investors.

Actually, markets are not sensitive as to who is in government, even in the UK, in any direct sense. Markets in the long run reflect economic conditions and in the short run human psychology (which may be influenced by news and published opinion, so is correspondingly susceptible to political events).

Furthermore, a Labour party of the Blairite style was undoubtedly good for many business because it adopted an expansive public spending programme but gave nearly all the work to the private sector. Also, if there are more workers employed and spending money, it really does not matter if they are in the private or public sector: national income will grow.

Why am I delivering this little homile? Because the UK is engaged in a process (Brexit) that has descended into chaos because of the entrenched positions at the edges of the two main parties – the Right of the Tory party and the Left of the Labour party. This descent into chaos is manifestly going to be bad for the country and probably bad for investors in the UK and Europe.

So the emergence of a small group of people who suggest that something more centrist is intelligent could just be good news for investors. In France a change to centrist pro business policies is causing unrest, but they started from a different point. Where your blogger lives a major change to a centrist, mildly green pro technology party has seen solid economic growth and inwards investment.

Of course, we remember the SDP and one of our psychological biases says nothing will come of this independent breakaway group. As an investor, I rather hope it does trigger some modernisation in British politics. We could do with a few less dinosaurs, whether they be from Eton or CND.

Multi asset funds are fashionable but are they any use?

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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.

The investor who observes closely loses less money – an ancient NotHarry proverb.

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I read that Uber lost a billion dollars in the last 3 months (as usual) but is going to be valued at 76 billion dollars when (if?) it floats on a major stock market.  Those two pieces of data do not equate under any system of logic or financial analysis and anyone who invests in the shares on the basis of Uber’s financial performance ought to be having some tests for dementia.  The fact that the business had a period without a chief financial officer running to 3 years is also pretty frightening.

It brings to mind the security company Baltimore Technologies (from Ireland) that listed on the UK stock market during the ‘dot.com’ boom and went into the FTSE 100 at a valuation of GBP13 billion almost 20 years ago, even though it made a minute profit and had in reality only one product that naïve investors thought was an essential to the future of the internet.  The product was good but not that hard for others to improve on.

The shares went from GBP15 to 37p in no time at all.  Small shareholders were then further stitched up (in my opinion) in a corporate raider’s re-organisation.

If ever there was an event that told me not to invest in technology businesses at the end of the last Millennium, it was that ridiculous market listing.  I didn’t and my well-advised clients didn’t either, unless it was on their own whim.  Sometimes a small road sign saying you are about to drive over a cliff is best spotted and acted upon.  It is no good driving too fast and not taking time to look around just because everyone else is and you feel a need to keep up.  The collapse of that part of the market had a domino impact on wider Western stock markets too.  Many people lost very large amounts of money.

Excessive stock market valuations of business that aren’t making a profit but are supposed to be offering something ‘new’ or ‘essential’ is common at the moment.  I would say that is the old road sign being dusted off and put out to warn the observant of major hazards to come.  I recommend at least checking the brakes.

Christmas is coming soon – in my opinion

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What!  I hear that reaction as the UK weather simmers away at heat wave levels.

I am referring to the comment I posted on social media in the very early hours of the day when the Brexit referendum vote result was known – “The turkeys have voted for Christmas”.

In religious calendar terms, we are now in Advent and the first window on your calendar reveals the resignation of the entire Brexit department ministry.

What I meant by my comment was that the people who had the strongest grievance with the EU (for example, over open borders and immigration or the Common Agricultural Policy or social rights legislation), are not in fact the editor or owner of the Daily Mail nor Tory MPs who went to Eton, but actually ordinary working people who can’t get to see the doctor in East Anglia, or farmers in Wales or Dorset who don’t understand why the EU “dictates’ how they ought to farm, or Labour party members seeing wages suppressed by the employment of Eastern European workers.   These people would be worse off because of the certain economic consequences of breaking up the Single Market and also in my judgement at risk of being worse off because of the substitution of US style capitalism for the more socially balanced European version.

I think the fact that the ‘turkey farmers’, the big international employers,  are now telling bluntly how difficult it will be to operate out of the UK without a customs union is some evidence that my assessment was correct.  There are other proofs that are beyond the scope of this post.

As I have written before, the long term interests of the UK (or at least England) might just be best served by Brexit (although I would not bet on it).  As J M Keynes said – in the long run we are all dead.

To be clear (I could not resist using Mrs May’s word whisker), I do NOT believe that the EU does not need substantial reform, as do most of the members of the European parliament (except curiously the right wing parties who one assumes are all expecting it to disintegrate completely!).  The Commission is far too powerful, agricultural policy is at times bonkers and the bureaucracy needs trimming.  Unlimited immigration has undesirable social consequences: that is self evident (ask any Italian if you want another viewpoint). But equally the idea of the EU has huge merit in economic, social and peace keeping terms.  So I would personally have preferred a more Maggie Thatcher approach – use British clout to get genuine reform from within.

Since I posted my highly pessimistic reaction to the vote, things have got worse.  Many billions have been withdrawn from UK investment funds.  The Conservative party looks to be heading towards the disintegration that John Major staved off with difficulty (ultimately assisted by one A Blair!) and which David Cameron naively tried to fix with the referendum proposal.  Instead of UKIP, we now have the UKIP wing of the Tory party.

This represents political risk at the highest level for investors because this time the consequences of the politics are hard wired to the economics and the business effects.  Boris may want to abuse business, but big business runs the capitalist world – not him.   His ignoring business suggests to me he may be descended from King Knut.

I am not entirely pessimistic for investments in the UK in that what I am expecting is disruption, some specific negative consequences but then a rebalancing of the flows of business capital.  Jobs will leave the UK for Eastern Europe (I can already see that from where I sit now) and that will reduce immigration from the more developed places like Poland, Czech Republic, Hungary and the Baltic States as the better educated citizens of those countries get jobs at home.  Possibly some deals will be done with the US that might not have been done before, but I would expect that to be a matter of the UK buying more stuff from the US, not better jobs for UK workers – anyone who has worked on employee benefits for US owned businesses knows well that they screw every ounce of value from their employees.

Very close attention needs to be paid to portfolio composition and stock selection.  Places like Japan and India that have large internal markets and are not hugely impacted by UK and US politics might be safer investment havens than would commonly be the case!

I will no doubt return to this subject over the coming weeks.

Is the UK in Europe for investors? Depends where you are sitting!

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Rant time:

I read a short article from a respected (US based but strong in the UK) research firm this morning suggesting European stocks were cheap, relatively (to what? the US as it turned out).  This is the sort of new item that gets recycled into the finance sections of the national media without too much, if any, further research.

I was curious to check out a specific fund listed as a good way of exploiting this apparent opportunity.  The fund (which I will not name as I don’t see it as being in any way useful to my readers) is effectively US run, although based notionally in Dublin.  It has 30% of its holdings in the UK and incidentally a surprisingly big block of supermarket stocks.

You need to know the perspective of your analysts and fund managers:  to a US investor, the UK is just part of the European investment universe.  You don’t need telling why that might not be the viewpoint of a Brit!

Have no doubt:  geographically filtered funds are best managed by people who come from, or who have at least absorbed over many years the culture of the market they are investing in.