Midweek Musings – Let’s get started!

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.

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.

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!