Its Not Harry

Comment and opinion for retail investors in the UK

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Midweek Musings – Let’s get started!

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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-1Download

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 – over and out

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Another change in my output!

Spring must be getting to your scribe – having changed the format of the monthly briefing, I now propose to change this regular blog slot to a new time.

It will become Midweek Musings, with posts most likely on Wednesday but not necesarily. In some weeks there will be more than one post.

The first new post will be this week.

A quick take on stock markets

One reason for the change is that I often want to comment on the state of stock markets and if I am writing early Monday, the news I have is from the week before, which occasionally is not ideal.

Last week saw a continuation of the pattern I identified in the Watching Brief . The markets are pricing assets on the basis of an inflationary economic recovery with rising central bank interest rates. This is because US bond yields are suggesting that is what is coming. That proposition does not fit in with all sorts of other facts, so possibly this will be a mini-tantrum.

If it is not, there will surely be more losses for fixed income investors and the price of gold may well head further down, although the latter would be an appropriate asset to own if there is runaway inflation. Equities will however turn around once a recovery is seen to be feeding through to profits.

It seems to me that there is nothing to lose by keeping calm and holding on to equities. I doubt if many of my readers own a heavy portfolio weighting in bonds (although be aware that if you own multi-asset funds, you will own more bonds in more cautious portfolios and they may not actually be lower risk at the moment).

Gold I have already commented on very recently and I think what an investor does with a physical gold holding will depend on whether it is a short term tactical holding (in which case it was a mistake with hindsight) or a long term asset mix diversifier.

Watching Brief – March 2021

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Pottering About

The end of February saw a distinctly nervous feel to global bond and equity markets, emanating from the USA.  The reason for this is for once obvious.

Stormy times ahead?

Markets have been taking account of rising long term yields on US Treasuries, a trend now around 6 months old.  This suggests a fear of over expansion from the multiple stimuli during the pandemic and a boom of sorts with inflation. 

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Monday mashup – too much cash in the system?

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I was prompted to read the explanation offered by NS&I (National Savings) on their web site after being alerted to it by my co-attorney who was trying to deal with a savings certificate maturity for my elderly father. In essence it says they are too busy to cope because everyone wants to put money with them.

I personally have long ago given up looking for the best interest rate on my deposit money, but I don’t have that much outside of my pension fund and trading portfolios. Some of my readers will have large sums on deposit and want to see some return on it. Would you be dealing with NS&I when their ISA savings rate (which seems to be their main promotion) is 0.1%?

I realise, of course, that most people will treat the 1% tax free return on the Premium Bond prize fund as enough to take a punt. The limits for Premium Bond investment are now generous enough to soak up quite a large chunk of reserves. I suspect it is sale of these bonds and the potentially accident prone (from an administration point of view) decision to switch prize payment to direct bank credits only that is behind NS&Is recruitment of an extra 260 staff.

With even august and secure institutions like Nationwide Building Society offering 0.5% (according to my quick scan of Moneyfacts) on their triple access account, then there would seem to be no reason to put money with NS&I other than in Premium Bonds. Or is there?

It can take a while to hunt down the best deposit accounts and check out how secure the bank is.

I suspect the large number of people who currently have much more money to hold on deposit than the FSCS protection of GBP85000 may get very tired of dividing their money up between multiple institutions.

I notice that many of the best interest rates on offer as shown on Moneyfacts are from some pretty new or specialist banks. One would need to know something about their security before making large deposits with them, I suggest.

One I checked out just because I knew of it from some years back – as a lender. That was Hampshire Trust plc. It appears to be totally sound as a business but it does specialise in development finance lending. Its reserves are well in excess of the statutory minima and it has a good chunk of liquidity on call with other banks. Having said that, in my personal judgement, a severe and sustained collapse of the property market might leave this bank with serious problems. You may take a different view after reading the company’s accounts.

My suspicion is that with interest rates being low and being likely to stay low, some people are valuing security and the certain ability to get their money back as more important than the odd fraction of a percent on the interest rate.

If you have the time and can do the research, and don’t mind dividing your money into GBP85k pockets, assuming you have more than that, you will get rewarded with a few quid in interest (after tax on larger sums, of course).

But I reckon that NS&I is sucking in plenty of funds from the public to help with the governments record borrowing, and in the main it is borrowing from citizens at virtually no cost. NS&I is the only absolutely secure home for a surfeit of cash.

Monday mashup – the (US) researchers view of 2021

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I commented in a member only blog post last week that I was little taken aback by the apparent optimism of Morningstar research professionals who presented a view of the US economy’s prospects for 2021. In fairness, they used plenty of supporting data, although of course, no-one has future data! Analysts will be using trend patterns and other statistical methods as well as economic and market theory to extrapolate the future.

Things are looking brighter – or are they?

Here are some extracts from their QI Market Outlook documents that I thought might be of interest. You may raise an eyebrow at one of two predictions!

  • US GDP will rebound by 4.7% in 2021.
  • Vaccine distribution (in the USA) will roll out in the first half of 2021 and be widely distributed by the third quarter.
  • Interest rates (again USA) will stay lower for longer with federal funds rates at 0% until 2024, but longer term rates may drift up this year – a relevant point for fixed income funds with long duration.
  • The huge amounts of corporate debt issued in the USA will slow down as the pandemic ends.

Morningstar’s market valuation standard has the US Equity market 8% over-value, driven by the mega-caps like Apple and Tesla. Tesla and Netflix are unsurprisingly reported to be hugely over-valued (around 150%). Value shares are on the other hand looking to be under-priced, especially at the smaller cap end of the market.

It is anticipated that 2021 will set new records in private equity fund raising.

SPACs (see my separate comments on these funding vehicles in the Watching Brief for January) have raised a large amount of capital which can be geared up to fund plenty of acquisitions (at high prices?).

Oil and energy stocks are the most ‘still’ sold off with the sector down more than 20% over 2020. The analysts expect the global glut of oil to get soaked up and the sector (in the USA) to recover.

All the above suggests a ‘back to normal’ US stock market with reasons to buy into oil and energy companies. That is something you may have noticed in the top 10 holdings of UK recovery and opportunity funds.

The pessimists’ camp – much reported in the UK news media that I see – takes the view that there are many red flags and other behavioural indicators that a market meltdown is more than likely, so making subtle calls on asset classes, stock sectors and so in is a bit irrelevant. This point of view ‘feels’ right to me, but that may be a result of my UK (and thus Brexit influenced) point of view.

Personally, I am 60% or more in the pessimists camp, but less so than I was 6 months ago. I suggest that no-one can know for sure what will happen in 2021 so a carefully balanced mix of good value assets, with diversification across the main classes and prudent use of cash reserves remains appropriate in the near term. If the optimists are right, there will be time to get more money to work in the right assets later in the year.

One theme that is rather more relevant to European than US stocks is ESG. The sustainability theme will be the most important for some years now, in my judgement. So if you want to buy funds, look for value, small cap and sustainability! Europe may well be a better place to start than North America or Asia Pacific. Not quite a needle in a haystack, but a challenge.