Buckingham Gate Portfolio Review – December 2019

Lindsell Train UK Equity : The importance of liquidity

The demise of the Woodford Equity Income fund has shown just how important it is for a fund to be able to manage it’s outflows. For those who need reminding, the fund had suffered from a run of redemption’s over a period of time and was suspended in early June when it was unable to meet the request from Kent County Council to withdraw its investment of circa £250 million in the fund.

The reputational damage incurred has since led to the decision to remove Neil Woodford as manager of the fund in October and an announcement that the process of winding up the fund would begin in January 2020. This leaves the reputation of Neil Woodford, once considered as one of the most successful fund managers during his tenure with Invesco Perpetual, in tatters and seems very unlikely that he will ever recover from this and return to a position where he is trusted to manage other people’s money.

The fallout from the implosion of this fund has seen analysts much more focused on liquidity risk than ever before, and one of the casualties of this enhanced inspection has been the Lindsell Train UK Equity fund. Following our latest portfolio review in early November, Square Mile have taken the decision to downgrade the fund over liquidity concerns and it was removed from all of the Buckingham Gate portfolios on the 18th November 2019 and replaced with the Liontrust Special Situations fund.

The Lindell Train UK Equity fund has long been considered one of the most successful UK Equity funds, and under the management of Nick Train since it’s inception in July 2006, has generated a return of 377% compared to 119% from the FTSE All Share over the same period. However, performance over the last six months has been poor, and the fund has seen significant withdrawals over recent months with September seeing its largest ever monthly outflow of £374 million. While these withdrawals can be explained by a lack of appetite of investors for UK equity markets as a whole due to Brexit etc, the level of withdrawals and the structure of the Lindsell Train fund are causes of concern.

While there are a great deal of differences in the investment approaches adopted by Neil Woodford and Nick Train, there are similarities in that they both have the courage of their convictions in choosing the companies that they invest in. Nick Train’s investment process has been characterised by a low turnover approach and the ability to invest heavily in companies that he believes in. This highly concentrated portfolio approach has been one of the main reasons for his success, but also has the potential to be his downfall.

Square Mile’s analysts are very concerned that the large concentration of assets in the fund’s top 10 holdings could see the fund struggle to sell these at a cost effective price should significant outflows persist.

It is important to reiterate that Square Mile have no immediate concerns about the ongoing viability of the fund, and it has consistently met its performance objectives and redemption requests. However, the fall from grace of the Woodford Equity Income fund has made analysts very mindful of history repeating itself and are keen to look at other investment strategies that may work better in current market conditions.

There is absolutely no way of telling if this will be a good or bad decision for the portfolios in the future, but it is clear that Square Mile are very conscious of avoiding the trap that what has worked in the past will continue to work in the future.

If you have any questions on the above, please do not hesitate to get in touch with us by calling 020 3478 2160 or emailing portfolios@buckinghamgate.co.uk.

Quick Market Review – November 2019

October seems to have been a month of mixed messages. After four interest rate rises in 2018, the US Federal Reserve announced an interest rate cut to 1.50% (the third cut this year) citing a slowdown in the US economy, and concerns over trade wars and a global recession.

However, markets have generally been positive last month with risk assets generally outperforming perceived safe havens. The S&P 500 posted another all time high last month, and emerging market equities posted a return of 4.20% during October. Much of this was due to market confidence that trade war concerns were receding with the announcement of a Phase One trade deal between the US and China.

Political uncertainty in the UK has reduced as well with the prospect of a non deal Brexit now looking unlikely, and sterling has rallied against the dollar and euro, but as 70% of revenue from FTSE 100 companies is earned overseas, the improvement in the value of sterling has coincided with a fall in the FTSE 100 last month.

Boris Johnson finally got his wish of another General Election, and the prospect in 2020 of maybe a stable government and perhaps an orderly Brexit would go a long way to establish market confidence after years of political turmoil.

Investment Portfolio Update – October 2019

I am writing today to keep you up to date on how we are positioning portfolios in the run up to the potential Brexit deadline of 31st October (although keeping in mind this is not the first Brexit deadline we have seen, and may not be the last) and in light of some weakening economic data.

The slowdown in the global economy continues and the chances of a recession developing are increasing. Some countries such as Germany are probably already in recession, that is have a shrinking economy. However, even if recessionary conditions spread to other nations, we expect the extent of the economic contraction to be shallow and well short of what occurred in 2008/9. Nonetheless, the knock to companies’ profits would be felt by the stock market and equity prices would fall. 

Against this backdrop, equity yields are generous when compared to virtually every other financial asset. We are by no means certain that a recession will develop in the US and if that pivotal economy can continue to grow, equity markets have the potential to make further modest gains over the next couple of years. Therefore, rather than reducing equity exposure, we are making changes to the portfolio to limit the damage that a recession might bring.

Yields on government bonds around the world are at tiny levels. UK gilt yields are now virtually non-existent and the government is able to borrow at long term interest rates of well below 1%. 

On such yields, any capital gain potential if a recession does strike will be small. US bonds yields are more generous at a little below 2%. This means that if the US falls into recession, US Treasury bonds can potentially deliver a worthwhile capital gain. Thus, US government bonds appear to be a better option for the portfolio. 

As we have no wish to take any currency risk on this position, we are buying the sterling hedged Vanguard US Government Bond Index fund. If global growth rebounds, the price of this fund is likely to fall, however, the equity positions held in the portfolio should gain to a far greater extent.

We will of course be watching events closely over the coming weeks and I shall write again if we feel that any further changes are required in the portfolios.

If you have any questions on the above, please do not hesitate to get in touch with us.

Kind regards
The Buckingham Gate Investment Committee

Investment Update – August 2019

Matthew Smith, Director of Buckingham Gate Chartered Financial Planners, provides his clients with an investment update for August 2019.

Headlines:

UK GDP Numbers

US/China Trade War

Possibility of a No-Deal Brexit

Markets Posting Impressive Gains Year-To-Date

The value of investments can rise as well as fall and you may not get back the full amount you invested. Income from investment is variable and not guaranteed. The statements in this video are for information only and are not designed to constitute personal advice. If you are unsure, you should seek advice from a qualified financial adviser.

The Only Constant Is Change

If you are anything like me, you will have been fascinated by the seemingly never-ending political surprises over the past few days, not least Boris Johnson’s decision to prorogue parliament.
All of this would make for fantastic watching if it were a political TV drama, but unfortunately it is real life.
In some people’s minds, Mr Johnson’s actions have made a general election more likely and by extension the prospect of a labour government more likely as well.
Many will use these potential changes on the horizon as an excuse not to take action on something. Not to invest. Not to get that updated will drawn up. No to [insert any other thing you might want to do here].
Although potential changes are always unsettling, it is important not to use them as an excuse for inaction. Because, the thing is, once one change has happened, there will always be another one on the horizon.
If we have a general election this year, who’s to say that there wont be one next year? (and in the current political climate, I wouldn’t bet against it). Once we have had this years budget, there will be the Spring statement and then next years budget.
There will always be changes on the horizon, but at some point we must act if we want to achieve anything.
I always say to clients that we must plan based on what we know today and then adapt and change the plan in the future when the inevitable changes happen!

A Fallen Star: Neil Woodford

It’s with a heavy heart this week that we learned the news of the suspension of the Woodford Equity Income Fund.

Only a few years ago, Neil Woodford was the shining star of the fund management world. If there ever has been a household name in the fund management world, Neil Woodford surely has to be that name.

To give you some background on what’s happened, the Woodford Equity Income Fund has always had a relatively small proportion of its investments in unlisted or smaller companies. Neil Woodford has always maintained that these companies have incredible growth potential.

The problem with unlisted or small companies is that they are hard to value, illiquid and sometimes hard to sell (especially when under duress as is the case now).

In recent years, the performance of the fund has been very disappointing, to the extent where the Woodford Equity Income Fund has been at the bottom of most league tables for at least two years now.

As a result, investors have been withdrawing money at a fairly rapid rate. This all came to a head last week, when Kent County Council requested 250 million pounds back out of the fund.

When a fund manager gets withdrawal requests of this size, they generally have to sell assets in order to meet the redemption. Given the illiquid nature of some of the assets at the bottom of the portfolio, Neil Woodford has been selling the larger and more liquid companies that sit within the fund in order to meet these redemption’s. As a result, the percentage of smaller and unlisted companies within the portfolio has grown over the past 12 months to the point where it’s exceeded the 10% limit imposed by the regulator.

Neil Woodford then listed some of the smaller holdings within the fund on the Guernsey Stock Exchange and has also exchanged some of the smaller assets within the fund for his own Patient Capital Trust shares (this is an investment trust, also run by Neil Woodford, which specialises in smaller company investments). Many commentators have expressed concern over these actions and how legitimate they are.

Even if they do comply with the letter of the law, I am almost certain they don’t comply with the spirit and indeed the regulator is now investigating these Guernsey Stock market listings.

There are lots of lessons to be learned from this debacle.

First of all, I think it highlights the risks involved in self-investing. Most self-investors use the research and recommendation tools from the broker or the platform that they use to purchase investments.

In this particular case, the Woodford Equity Income Fund was heavily, heavily marketed by some of the biggest names in the self-investing (and advisory for that matter) world. Self-investors bought the fund in their droves and while they may have been aware of the poor performance, I would be surprised if many of them had been aware of the developing liquidity problem within the fund.

Although clearly, I have an element of self interest in promoting the value of professional financial advice. I think it is probably fair to say that the vast majority of self-investors do not have access to the level of information required to make an informed judgment on how suitable the Woodford Equity Income Fund was for their needs, especially as time went on.

What started as a traditional large cap UK equity Income Fund, ended up becoming arguably quite a risky small cap speculative investment. Unless you had your eye on the ball, this shift in style and strategy may not have been obvious.

The vast majority of well-run advisory firms I know (ours included) pulled the fund out of most client portfolios a couple of years back. I recall the Buckingham Gate Investment Committee agonising over what, at the time, felt like quite a controversial decision. “Pulling Neil Woodford out of the portfolio just because of 12 months of under-performance, you must be mad” was uttered to me by one interesting individual at an investment seminar!

2 years later that decision looks incredibly sensible, although I don’t profess to have foreseen the liquidity issues ahead of time. Basically, the data was telling us that there were better options out there, so we followed the data. It is as simple as that.

It seems the only organisations that continued to promote the fund, despite what has now been a very extended period of significant under-performance were those who had too much skin in the game or who had some sort of commercial arrangement with the now embattled fund manager.

I think another issue, which becomes clear here is people getting carried away.

I think it’s fair to say that Neil Woodford probably got a bit over excited when it came to re-positioning the portfolio in line with his once-famous conviction. What started as a slight transition towards some of the smaller and more domestically focused stocks (in the belief that they would out-perform after the Brexit uncertainty fades away – a point on which he could still be proved right, if we can ever break the Brexit impasse), turned into a wholesale shift away from the large-cap income stock on which Woodford made his name into medium and smaller companies, many of which the average investor has probably never heard of.

Finally, there is an air of desperation about the actions taken within the fund. As the performance got worse and worse and the losses got deeper and deeper, it seems that more and more risk was taken within the fund in order to try and recover some of those losses. A strategy which has now failed spectacularly.

What happens next is unclear. The fund is now suspended for 28 days and this may be extended. Given the severe outflows from the Woodford funds over the past week (by my count, he has lost in excess of £4bn this week alone) I wouldn’t be surprised if the fund gets merged into a larger UK equity fund or it could even be wound down.

With all of this said though, things might not be quite as bad as they seem!

The UK regulatory system ring-fences client assets and within an open-ended fund, the value investors receive is simply the value of the underlying assets within the fund. Neil Woodford’s demise doesn’t really do much to change that value, to the extent that share prices come under pressure because he is a forced seller.

When it all boils down though, those who will be most impacted by the suspension and the resulting fallout will be those who did not follow the basic rules of investing in the first place.

Have your money in a range of different funds, from different fund managers.

Diversify across sectors, geographies, assets classes and strategies.

Don’t take more risk than you need to.

Continually monitor and review your investments.

These rules have worked for the past couple of hundred years and I suspect they will continue to do so. It is those who don’t follow the rules who get hurt!

Just When You Thought It Was Safe…

Just when you thought it was safe to go back into the water. Donald Trump happened. Again!

The events of the past week or so just go to show how unpredictable markets and investing can be. Up until late last week, things were looking very rosy indeed. The US markets were just within touching distance of their all-time highs, the UK was performing well and most other major stock markets had posted some impressive numbers also.

Economic fundamentals were looking good. 3/4 or so of the S&P 500 companies had posted results exceeding expectations, the US and UK had some record breaking jobs numbers and the US/China trade deal was about to be signed. What could possibly go wrong?

Well… Our good friend Mr Trump is what can and did go wrong, with his surprise increase in tariffs on many Chinese imports.

There is a consensus that the last round of tariffs, broadly set at 10%, were just about manageable for US importers and that they have absorbed this cost rather than pass it on to their customers. A 25% tariff is a very different matter and this could well lead to higher prices for US consumers, which will do nothing to help future economic growth in the worlds largest economy.

What has been especially surprising is the reaction of both the US and Chinese markets to these developments. When Trump tweeted that he was considering increasing tariffs on Chinese imports, both the US and Chinese markets fell sharply. On the day the tariffs actually took effect however the Chinese market went up by 3%.

How does that work? The threat of the action caused a widespread selloff in stock markets across the world, but the action itself seems to have triggered a rally.

I wish I could come up with some logical and intelligent explanation, but sometimes there simply isn’t one. We just have to admit that over the short term markets are totally unpredictable.

The fact of the matter is that although you may have been thinking that it was safe to go back into the water, you never should have got out in the first place!

Reflections on 2018

As 2018 draws to a close, there is a lot to reflect on and consider.

First of all we have the seemingly never ending Brexit discussions and negotiations with the final date for the vote now set for the week of January 11th.

If the vote is ‘no’ as seems to be widely expected, then this opens up another can of worms about the possible options. The BBC produced a very useful decision tree highlighting the possible paths that could be followed after a ‘no’ vote and I think I counted over 20 different combinations when I looked.

On the other hand, if Theresa May is to pull out a surprise ‘yes’ vote, then at least we will have some clarity over the future direction of travel, regardless of your views on the ‘deal’ itself.

It is important to bear in mind that Brexit is very much a UK issue. Markets elsewhere in the world do not seem phased by Brexit or the surrounding game of politics. They have other things on their minds. Talking to an Austrian chap at a recent business coaching event, it was interesting to hear how they see Brexit. Most Austrians, he informed me, simply think we are mad for having initiated the whole process in the first place. Given the resulting chaos – perhaps they are right!

Elsewhere there have been plenty of goings on to keep people occupied and despite the fact that we can’t get away from it here in the UK, Brexit is barely mentioned (nor does it need to be) in some of the other global markets such as the US and China.

Although we have seen some market volatility in the latter part of 2018, this is simply a return to ‘normal’ levels which are in contrast to the unusually calm 2017.

We have started to see some minor interest rate hikes across the major western economies. As I have written about before, although this could be a bit painful for markets in the short term, it is a very necessary part of our recovery from the decade-old financial crisis and is (at last) a small sign that things are returning to ‘normal’.

Although I will never try to predict what the following year holds (the last 2 or 3 years have taught us to expect surprises, both political and financial if nothing else) it can often be helpful to review the fundamentals of the global economy. I would encourage you to read this article from 7IM which provides some useful insight on the state of play and a calm, rational analysis of things potentially to come in the future.

Regardless of what is happening out there in the world, we remain long term investors. We don’t try to time the markets and we don’t panic when things seem tough.

As I wish you a very Merry Christmas and a happy 2019, I shall leave you with the words of Warren Buffet – a calming influence when the world seems to be going mad:

‘The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It is optimism that is the enemy of the rational investor.’

 

What Is The Money For?

I attended a seminar recently and a very interesting question was posed for suggested inclusion in client meetings and in questionnaires. It was simply “what is the money actually for?”

A simple enough question, but one which I suspect many people may not have a simple answer to.

Money is a strange thing and it makes us behave in very peculiar ways.

It is also a very emotional thing, despite the fact that human emotion (generally speaking) leads to poor financial decision making.

You see, we often meet people who have accumulated very significant wealth. I do wonder however if people really know what the money is for.

Very often we meet people who are still working in jobs they dislike because ‘they need to’.

When we look at the numbers however we often get a different story. On occasion we find people have actually worked for too long. This is fine if you love your job, but how would you feel if you worked for 3 years longer than you needed to in a job you hated?

When we ask what the money is for, many people will say financial security, despite the fact that they don’t really have any definition for what ‘financial security’ really means.

While I fully appreciate the benefit of the emotional comfort money can bring (in fact, I did my masters dissertation on this very subject), I fear that just saying ‘financial security’ is a very easy way to avoid doing some of the thinking to truly define what is required to achieve this fabled thing called ‘financial security’.

As with the vast majority of money related goals, it is usually possible to put a number on this. We just have to do the thinking work first. For some people, financial security means having enough money to live on for 6 months – pretty easy to define. Multiply monthly expenses by 6 and there you have it.

For others, financial security might be having enough money to live on for the rest of their lives. A much more complex calculation, but with the right maths, we can still get there. Granted, you would need to build in some assumptions and you would most likely wish to add a large contingency pot on top of the final number, but the point is you still arrive at a number.

When we run the numbers in this way, we often find that people have significantly more than they need for whatever goals that they wish to achieve (financial security included) and so at this point we come back to a slightly re-worded version of the question; ‘what is the excess money actually for?’

My conclusion, is that most people don’t know. They have worked very hard to accumulate a pool of assets, but perhaps not then thought about what to do with any excess funds over and above their own needs.

This is where the conversation often turns to lifetime gifting or philanthropy – two things which have been shown to deliver the very greatest levels of satisfaction, but which people often shy away from out of fear of running out of money.

With the right planning beforehand, this needn’t be a concern and this opens up possibly the greatest and most noble thing any of us can do with our money – help others!

 

A Case In Point

I wrote last week about the market volatility we had seen and the importance of keeping a level head during times like these.

In that post, written in the midst of large market falls, I encouraged investors to keep calm and carry on. I also mentioned the potentially damaging effects of missing just the best 10 days of market growth within a 15 year period.

Although last week ended at a low ebb for the markets, things quickly started to recover on Monday and have continued to do so this week.

For those people who think that they can time the market, they would have needed to correctly predict on Tuesday the circa 7% falls that would transpire on Wednesday and Thursday. I have seen no evidence anywhere online of anyone making those kinds of predictions.

They would have also had to be brave enough to go back in late on Friday, just in time to catch the gains that have been made this week.

Especially when looking at the US market, I suspect history will confirm that some of the days this week will feature in the ‘top 10’ days list in years to come. If you are out of the market even for just these few days, you risk cutting your total return in half.

Unless you have a crystal ball, I would contend that no one would have made the decisions required to prosper in the markets over the past 10 days.

This leave us with the only reliable option – to remaining invested throughout. This means we capture all of those best 10 days. Yes, we have to accept some temporary volatility along the way. But that is all that it is – temporary volatility.

Please don’t let something as normal and expected as a bit of market volatility throw your financial plans off course.