Tuesday, 9 October 2018

Climate Change...Be The Change...

The report earlier this week from the IPCC provides yet another reminder of the threats in the not too distant future from the effects of global warming. I have been following this story closely since my interest was alerted in the mid 1980s so for me, and I am sure many others, it is an issue close to my heart.

The Special Report on Global Warming of 1.5ºC was approved by the IPCC on Saturday in Incheon, Republic of Korea. It will be a key scientific input into the Katowice Climate Change Conference in Poland in December, when governments review the Paris Agreement to tackle climate change.
"With more than 6,000 scientific references cited and the dedicated contribution of thousands of expert and government reviewers worldwide, this important report testifies to the breadth and policy relevance of the IPCC," said Hoesung Lee, Chair of the IPCC.

The report is a follow-up to the Paris Agreement of 2015 where the global community agreed on action to limit global warming to a maximum of 2 ºC. This latest report calls for a lower target of 1.5 ºC.

The report says that limiting warming to the lower target will require an industrial transition unprecedented in scale - but that it is possible, if the political will is there - and that the wider opportunities and benefits are huge. It will require large-scale changes from out governments as well as individuals. We will need to invest around $2.4trillion each year - around 2.5% of global GDP for at least the coming two decades.

The report is asking for the global community to agree on 5 major steps:

  1. A reduction in CO2 levels by 45% by 2030
  2. Renewables to provide 85% of global electricity by 2050
  3. Coal to be phased out completely
  4. An area the size of Australia for energy crops
  5. Global net zero emissions by 2050

Basically the report suggests if we fail to achieve these targets we are screwed.


Since the mid 1800s the world has warmed by around 1 ºC and unless there are some drastic changes, we are heading for 1.5 ºC increase by 2050. This may not sound like much but at the end of the last ice age, the UK was covered in around 2,000 ft of glacier and the average temperature was only 6 to 8 degrees cooler than today.

Global climate change has already had observable effects on the environment. Glaciers have shrunk, ice on rivers and lakes is breaking up earlier, plant and animal ranges have shifted and trees are flowering sooner.
Effects that scientists had predicted in the past would result from global climate change are now occurring: loss of sea ice, accelerated sea level rise and longer, more intense heat waves.
Global warming = more extreme weather...droughts, storms, hurricanes, wildfires. Glaciers and polar ice caps will continue to melt which results in a rise in global sea levels which will be a threat to islands and coastal communities.
Severe droughts and/or flooding over large areas will result in a mass migration of people in affected areas which will increase political and economic stability.
In short, global warming and climate change could have far-reaching and long-lasting consequences for millions, possibly billions of people depending on the degree and speed of warming.

What Can We Do?

Of course we have known about the probable effects of climate change for at least 30 years. The IPCC was set up in 1988 by the UN and the World Meteorological Organisation, bringing together the world’s leading climate scientists to assess knowledge of climate change and provide scientific advice to policymakers.

In 2006 the UK government published the Stern Report on Climate Change, led by the former World Bank chief economist Sir Nicholas Stern, showing for the first time that the catastrophic economic impacts of climate change far outstrip the relatively modest costs of reducing emissions.

I first became aware of the problem in the mid 1980s having read 'Seeing Green' by Jonathan Porritt who was then director of Friends of the Earth. I have tried to do my bit over the years and reduce my carbon footprint. Nothing dramatic but changes to lifestyle...basic insulation around the house, cut back on meat, avoid flights/cruises abroad and take holidays in the UK (that's why I do not need a passport), an extra layer of clothing rather than turn up the heating and planting a tree or two. During my stay in Devon we held an annual tree week event and over a period of 6 years collectively planted around 10,000 trees on Dartmoor in conjunction with the Moor Trees Charity. 

We probably do not have much influence on what our government does or does not do, on the phasing out of fossil fuel power stations and the introduction of all the infrastructure to support the switch to electric transport. President Trump may pull out of the Paris Climate Agreement and there's not much we can do to change his mind. However, we can all choose what we eat, how we move around, where we take holidays and weekend breaks and generally how we live our lives. It's easy to think what one person chooses to do or not do will not make any difference but the way we act will influence the people around us and will have a knock-on effect. Small lifestyle changes taken by millions of individuals will have a significant impact on the big picture.

Avoiding meat and dairy products is the single biggest way to reduce your environmental impact on the planet, according to the scientists behind the most comprehensive analysis to date of the damage farming does to the planet.
For starters, a cow on average release between 70 and 120 kg of methane each year. Methane is a greenhouse gas like carbon dioxide (CO2). But the negative effect on the climate of methane is 23 times higher than the effect of CO2. Therefore the release of about 100 kg methane per year for each cow is equivalent to about 2,300 kg CO2 per year.

Secondly land use - without meat and dairy consumption, global farmland use could be reduced by more than 75% – an area equivalent to the US, China, European Union and Australia combined – and still feed the world. For example, beef cattle raised on deforested land result in 12 times more greenhouse gases and use 50 times more land than those grazing rich natural pasture.

Another area of concern highlighted in the report is aviation which is growing at a rapid pace due to 'cheap' flights. It currently accounts for up to 5% of all global warming emissions. Air travel has a much greater impact per passenger mile travelled compared to road or rail. Studies show that high altitude emissions which also include water vapour as well as CO2, nitrous oxides and sooty particulates from the burning of kerosene. Aviation is the fastest growing area of all contributors to global warming. Most air travellers are blissfully unaware of how their flying behaviour contributes to global warming.

Aviation, along with shipping, was given special status and excluded from the Kyoto and Paris climate change agreements. Also, under the Chicago Convention, countries are not permitted to levy fuel duties or VAT on international flights. Not that our political parties are looking to restrict cheap flights!

Hopefully our governments will take these issues more seriously but judging by the progress of the Green Party over recent years I am not holding my breath.
In the absence of governments and business grasping the nettle, it will fall to individuals to instigate some changes.

So, a few suggestions:

  • think about reducing consumption of meat or going veggie
  • look into the option of electric cars or even car share
  • walk or cycle short distances (2 miles or less)
  • think about food miles and choose local produce
  • think about second-hand clothes from charity shops rather than new
  • think about UK holidays to avoid air travel/cruises
  • put on an extra layer of clothing rather than turn up heating
  • look out for opportunities to plant a tree in your community
  • support an environmental organisation

People talk about saving the planet...to be honest, the planet really doesn't care whether we 'save' it or not because it will carry on regardless. What matters is whether we can continue with a relatively benign environment much as we have become used to over the past 10,000 years, or whether we stubbornly stick out collective heads in the sand and create a very hostile planet for out children and grandchildren.

Mahatma Gandhi famously said, "You must be the change you want to see in the world." In other words, although life changes are inevitable, we can also initiate personal change so we can rise to the challenges that we all face. It is empowering and means we take some responsibility for the changes we want to see happen without relying on other people to make the changes. It's about bringing your beliefs and lifestyle into closer alignment.

Our politicians spend much of their time sqabbling over Brexit but our climate scientists remind us all that the existential threat of the hour is global warming. The window to make the changes required becomes smaller with each passing year.

Further Research

Are you worried by climate change? What do you think our government needs to do now? What changes have you made (or intend to make) in your personal lifestyle to reduce your carbon footprint? Maybe you think the scientists have got it wrong and it's all unnecessary scaremongering? Leave a comment below.

Thursday, 27 September 2018

Woodford Patient Capital - New Purchase

I am making a little more progress with the transition of my portfolio from income to growth. Today, I have added Woodford Patient Capital trust to my portfolio as a replacement for City Merchants High Yield trust.

WPCT provides financing for early-stage businesses that seek to turn innovative new products into a commercial success. It is a unique investment trust that, as the name suggests, requires a long-term outlook.

The trust raised £800m when launched in April 2015 however it has been a bit of a rollercoaster ride for investors. There have been some significant setbacks within the portfolio to date, notably investments in Allied Minds, Circassia and Northwest Biotherapeutics. Overcoming setbacks is part and parcel of investing in early stage companies and any portfolio, whether investing in large or higher-risk smaller companies, will have winners and losers.

The bulk of the trust remains invested in ‘early-stage’ and ‘early-growth’ companies many of which are not listed on a stock market. These tend to be highly innovative companies developing new products and services that have the potential to change entire industries, many of which feature in the healthcare sector. Obviously not all of them will succeed.

However, Neil Woodford is reported as saying, in the teeth of such disappointments, that the trust has stakes in several companies that could be worth billions of dollars each in the next five years. On the basis of that potential, and assuming that the trust sticks with its original investments without taking any more punts on jam-tomorrow stocks, I think the lower share price currently makes it more attractive.
(click to enlarge)

Last week the shares received a boost from a reassessment of the value of cold fusion specialist Industrial Heat. Woodford says it funded this company 'to engage credible world-leading institutions rigorously to assess the claims of research groups in the field'. Growing interest in the business has enabled it to raise money from other investors prompting a substantial increase in its value.
Industrial Heat is now worth US$112.9mln according to Woodford's alternative fund manager Link, or a 357% rise compared to its previous valuation. That translated into an 8p uplift in the net asset value of Woodford Patient Capital Trust.
Earlier this year the trust received a valuation boost from the US stock market flotation of Autolus Therapeutics, which is currently its largest holding.
The value of its stake in Autolus jumped by 51% as a result of the IPO (initial public offering) being priced at a higher level than the current book value of its investment. In turn, that provides 3.8% uplift to the net asset value of WPCT.
This is the type of outcome which vindicates Woodford’s approach of finding businesses with ‘outstanding intellectual property’, helping them grow with financial support, and then reaping the rewards with exceptional long-term returns.
Top Holdings
The Company is invested in five companies that are valued at more than $1 bn Autolus, Purplebricks, Oxford Nanopore, Benevolent AI and Immunocore. Some of the largest holdings are related to healthcare.
The largest is Autolus which listed on Nasdaq in June and accounts for 11% of the portfolio. It has developed a therapy which extracts white blood cells, modifies them to target cancer and reinjects them. Its related therapies are currently going through stage one and two trials, but similar methods have already passed phase three trials in competitor companies, which gives Neil a high degree of confidence the treatments will be validated. The trust is retaining its holding despite the gains on flotation, hoping there is much more is to come from the stock.
Benevolent AI, a 9.5% position, uses artificial intelligence techniques to generate ideas for treatments for disease. The technology finds associations and similarities across research papers, potentially generating ideas for new drugs which human researchers might lack the perspective to find. It is also developing further uses for its technology outside of healthcare. Earlier this year the company raised $115m from new investors which valued the company at £2bn.
Oxford Nanopore, 8% of the trust, produces handheld gene sequencers. Its main customers at the moment are in the University, but it is keen to develop new markets and uses for its tech. It is not the only player in the field, but it does have advantages over its largest rival Illumina, both in the handheld nature of its product and in the more efficient way it builds a genome up from larger building blocks.


The trust also does not levy an annual management fee. However they will levy a hefty 15% performance fee when the trust can deliver on its promise of 10% annual NAV return. Woodford Investment Management has not yet taken any performance fees from the trust, and has some way to go before it does. The management’s incentives are therefore well aligned with the interests of shareholders.

The trust has around 90 holdings - split two-thirds unlisted and one-third listed. It recently reported half-year results to end June 2018 (link via Investegate)

At the time of this post, the net assets of the trust are estimated close to 100p however the share price lags behind at 85p which gives me a discount of 15% .

The purchase is speculative and no more than a punt on the talent and judgment of Neil Woodford to deliver the goods he has set out to achieve. The initial purchase is quite modest and represents less than 2% of my portfolio.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Tuesday, 25 September 2018

City of London - Final Results

I first purchased CTY for my personal equity plan (PEP) in 1995 - it has served me well enough over the past two decades and it represents the largest weighting in my remaining IT income portfolio (ISA and SIPP drawdown).

City have just announced 
full year results for the year to 30th June 2018 (link via Investegate). Share price total return has increased by 6.2% over the year. Once again however the performance was less than the FTSE All Share benchmark of 9.0%. The trust took a big hit from the collapse of Provident Financial. The manager however is quick to point out the outperformance over the longer period!

Dividends have increased by 6.0% from 16.7p to currently 17.7p giving a yield of 4.1%. This represents over 50 years of rising dividends - quite an achievement.

Earnings per share rose by 5.0% to 18.7p, mainly reflecting the underlying dividend growth from investments.

Ongoing charges are 0.41% and remain the lowest in the sector.

I have been reducing my exposure to UK equity over the past year or two and I have recently reviewed my strategy as I no longer require income and will focus more towards global growth.

3 Yr Performance v FGT & TMPL

I will therefore be looking to offload my CTY holdings when circumstances look favourable. I feel the time is right to put the faithful old carthorse out to grass in retirement. The fact that the trust has lagged the all share index over the past couple of years makes the decision easier!

As ever, please DYOR

Friday, 21 September 2018

Turn Back the Clock

There have been several articles about the collapse of Lehmans in September 2008 and over the past few days I have been casting my mind back to the very different life I was leading a decade ago.

Back then I was living and working as member of a community partnership based on the edge of Dartmoor in Devon. We owned a large 12 bed manor house set in its own extensive grounds - 18 acres of pasture and woodland overlooking the surrounding villages. It felt like I was living the dream life, far from the madding crowd.

Work involved hosting groups of between 10 and 20 people who would stay for a long weekend or possibly a week. The courses were mainly centred around personal development and relaxation - so, things like tai chi, yoga, meditation, massage etc.

All of my partners had various responsibilities - ground maintenance, cooking, bookings co-ordinator, plumbing and general house maintenance etc. My main responsibilities were as accounts manager...what's not to like about counting money! In addition to this we would all muck in when needed, especially at busy times when there was a same day change over between one group finishing and another arriving.

The business turnover was quite healthy, I think we were getting toward £300,000 per year but of course this was not all profit and there were all the expenses of servicing the groups and what was left over was divided 10 ways..and then there was tax and insurance...and no company pension scheme...but we enjoyed 'free' food, and use of the indoor swimming pool and sauna when the groups had left.

When the larger groups were in residence, it could be very busy starting with breakfasts at 7am and usually finishing after the evening meal, maybe 8pm. There was plenty of time for relaxation however - walks on the wide expanse of Dartmoor, usually a trek up to Pew Tor and back, or along the banks of the nearby river Tavy. I enjoy tennis and spent quite a bit of time on the courts. Then there was just taking time out in the grounds which included a large Victorian walled garden, a wildflower meadow, orchard and lots of places to curl up for the afternoon with a good book.
Pew Tor, Devon

I had been doing this for the previous 6 years since giving up on financial services for a large insurer based in the North West...far too stressful!

Over a period of time however personality tensions inevitably grew, it became more difficult trying to work with 10 partners who all had differing opinions on how the business should be run as well as tensions arising from some people doing more of the work than others, feelings of insecurity and all the usual personal politics and game playing and even infidelities...idyllic surroundings provide no escape! 

I think by the end of 2007 it was becoming clear these tensions were not going to get resolved and in the end we decided to wind things down and sell the property. This was completed by mid 2008 when we all departed with our share of the proceeds to go our separate ways.
River Tavy, Devon

Post Devon

I had grown very attached to the good life and made a few close friendships and joined the local choir. I stayed on for a few months to give myself some time to think about my next move. My roots are however up North and in early 2009 it was time to return. As it turned out, fortuitous as the grandchildren came along shortly afterwards and I am lucky now to be a mile down the road rather than 300!

I had also made a decision to not seek alternative employment and it was therefore in June 2008 that I 'retired'. Whilst the money would not stretch far in Devon, I had sufficient for a house up North and although I could never get by on cash savings due to the dire interest rates, I could get along fine with income from my investments and SIPP which was duly converted to drawdown.

The markets hit a low in Feb 2009 and some of those most affected were financials. Whilst interest rates were falling quickly, it was possible to acquire building society PIBS and bank preference shares with an annual yield of 10%. I loaded up my portfolio with a good spread of income-generating securities... PIBS from the Coventry, Nationwide and Skipton as well as some Lloyds Bank prefs. I also picked up a few investment trusts such as Edinburgh, City of London and Murray Income as well as some higher yielding shares such as Shell Oil, BHP Billiton, Scottish & Southern all of which helped to generate the income I needed on a regular basis.

So, an interesting and colourful chapter in my life. If I had my time over, would I repeat the experience? Yes, I'd like to think so.

What were you doing a decade back? Feel free to share some memories in the comments below.

Wednesday, 19 September 2018

Edinburgh Worldwide - New Purchase

As part of a move from income to growth following a strategy review earlier this year, I have recently added this global managed investment trust to my SIPP portfolio. (NB not to be confused with the UK income trust Edinburgh IT managed by Mark Barnett)

The trusts is part of the Baillie Gifford stable which also includes Scottish Mortgage. It has been managed by Douglas Brodie since 2014.

The focus is very much on global smaller companies with an initial market cap. under $5 billion. The trust is widely diversified and at any point the typical portfolio will hold between 75 - 125 holdings in a minimum of 15 sectors and from at least 6 different global markets.

The current portfolio is weighted in favour of biotech, pharma and technology stocks which account for around 60% of the portfolio. No doubt the manager is influenced by the much larger Scottish Mortgage trust and will be looking to invest in similar types of stocks but at an earlier stage of their growth.

The strategy has paid off in recent years with returns exceeding the global smaller companies index and the share price moving from discount to a small premium. Over just the past 2 years the share price has increased by over 100% from 490p to 994p at the time of posting.

3 Yr Comparison v SMT (click image to enlarge)

As with my initial purchase of SMT in January 2017, it can be difficult to 'buy the dips' when a share price is rising quickly so I have taken the plunge and hope there will not be a significant pull back over the coming months. My Scottish Mortgage acquisition is currently up 60% since purchase so I can afford to be a little more relaxed with this one.

Full year results to end October should be available in early December.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Wednesday, 12 September 2018

Help to Save Scheme Launched

An area that has concerned me for some time is the proportion of people in the UK who have little or no savings. A large number of people borrow to make ends meet. According to The Money Charity, the average household currently pays over £1,800 p.a. interest each year on personal loans and outstanding consumer credit lending is £213 billion.

In an effort to address this culture, the Government have this week launched their new saving initiative which is aimed at workers in receipt of tax credits or universal credit.

People can save anything between £1 and £50 per month and will receive a bonus of 50% on the sum saved after two years. So someone saving the max. of £1,200 would receive an additional £600. If they continue for a further two years they would get a second tax-free bonus of 50%.

Withdrawals can be made at any time but bonus payments could be affected.

This should be a help to many thousands of families on low incomes and hopefully help them to build a useful cash reserve and importantly get them into the habit of saving regularly and taking responsibility for their finances.

The debt charity Step Change welcomed the launch of the scheme. Its chief executive, Phil Andrew, said: “We campaigned for help to save and it is a good scheme. Ninety-eight per cent of our clients have no savings at all at the point they turn to us, and only 1% have £1,000 or more. Yet we know that having £1,000 in rainy day savings virtually halves the risk of falling into problem debt, so helping lower income working households to build savings should be an important policy goal.”

It is estimated that over 3 million people would qualify for this savings scheme. The scheme will be available for the next 5 years.

Saturday, 8 September 2018

Mid Wynd - Full Year Results

Mid Wynd International is a theme-based global investment trust. The strategy is to hold around 60 - 70 holdings between 8 to 10 themes. 

Current themes include Automation/Robots 16%, Emerging Market Consumer 9%, Tourism 13%, Healthcare & Immunology 15%, Online Services 13%, Low Carbon World 2% and Scientific Equipment 11%.

The management team led by Simon Edelsten have built a portfolio of high-quality holdings which focus on a number of trends which offer the prospect of long term growth.

The shares were added to my portfolio in April at the price of 474p. In June the price received a boost when the company entered the All Share Index and therefore the shares were in demand from the growing number of index trackers.


Mid Wynd have recently announced results for the full year to end June 2018 (link via Investegate). This has been another good year with share price total return up 13.4% compared to the All Country World Index 8.9%.

I have acquired this trust mainly for growth but it does offer a yield of around 1.0%. The total dividend for the full year will be increased by 11% to 5.55p which is covered by revenues of 7.14p.


Concluding his outlook, chairman Malcolm Scott said:

" Of course the bull market that began in March 2009 will not go on forever. Ultimately recessions cause bear markets. Many commentators are predicting a US, and indeed a global, recession in 2020. The catalyst for that will be apparent only in hindsight. In the meantime, we continue to believe that a diversified portfolio of companies exposed to growth around the world, and whose share prices are clearly supported by their underlying cashflows, will continue to serve your Company well over the longer term - come bull or bear."

3 Yr Comparison v Scottish Mortgage & Polar Technology
(click to enlarge)

This is early days for me, just 5 months in. The share price is currently 535p so a rise of 13% since purchase. It certainly seems to be less volatile compared to my other tech holdings, Scottish Mortgage and Polar Cap Technology Trust.

Interesting that the managers have hardly any UK-listed holdings. They say this is because all the best firms are unlisted and of the rest, they over-pay  in dividends and are under-invested in the business as a result. (This seems to tie in with my previous post on returns between the UK and US.)

For now, this can return to the bottom drawer but I may well add to my holding as my income-generating holdings are sold off. Currently however, the fall in the value of sterling does not offer such tempting deals.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Monday, 3 September 2018

UK v US Investment Returns

Whilst reading back my previous post on the amazing bull run in the US equity market, I was struck by the underperformance of the UK market by comparison.

Not so long back, much of my investments were made up of a mixture of individual shares and investment trusts focussed on the UK market. I was looking for natural income from these investments and the FTSE 100 offered a yield of around 4% compared to the yield of only 2% from the likes of the US market in the form of the S&P 500.

Whilst it has been reassuring to collect this income plus a little additional capital growth, I came to the conclusion in 2015 that my focus on natural income may have been a little short-sighted as more globally diverse options were often overlooked as they did not provide my required level of income.

Total Return

In 2015, I reviewed my strategy and decided to wind down my UK-listed individual shares in favour of globally diverse low cost index funds such as Vanguard Lifestrategy. This also included moving away from a reliance on natural income and a shift to taking my 'income' from the total return generated by these global funds.

Luckily this moved has worked out well due to the fact that global funds are priced in USD and the fall in the value of sterling post the Brexit referendum in June 2016 has boosted the returns on my index funds.

Global v UK Returns

Since March 2009, the US market has delivered a total return in excess of 400%. From a closing low of 677 it has risen to (currently) 2,900 and if we factor in dividends this gives an average total return of 17% p.a.
Compare L&G Index funds for US and UK
2009 to 2018 (click image to enlarge)

Unfortunately, the UK market has failed to keep pace and over the same period the FTSE 100 has risen just 190% on a total return basis. Yes the UK dividend yield has been much higher at ~4% compared to 2% in the US, but from a low of 3,750 in March 2009, the FTSE has risen to (currently) 7,500 or 100%.

I would surmise the difference is largely due to tech stocks. The US markets are home to the likes of Google, Apple, Amazon and Netflix which have delivered outstanding returns over the past decade. Tech accounts for 25% of the S&P. In contrast our markets are dominated by the struggling financial services (20%) and energy companies (18%) whilst tech companies account for less than 1% of our market.

Income in Retirement

I guess many investors will look to investment trusts or income funds to provide their steady 4% or 5% income. When I started my early retirement journey back in 2008, the bulk of my investments were a mix of UK higher yielding shares and ITs. I thought it made sense to try to preserve what capital I had accumulated and from that, maximise the income I could generate.

Looking back however, this was possibly not the best strategy. Hindsight of course is a wonderful thing but the lure of tempting natural yields should not mean the focus of total return is compromised.

A total return of 10% per annum over a decade providing a natural income of just 1% or 2% will always be far superior to a return of 7% which includes a yield of 4%.


The UK market has not offered the best returns for investors over the past decade. This may change as reversion to mean cannot be discounted over the longer period however, until the full saga of Brexit is played out - I am thinking probably at least 10 more years - we will likely continue to face headwinds.

The UK market makes up around 6% of the global market and the top 10 companies account for ~35% of the FTSE 100 index. A globally diverse index fund gives access to over 2,500 companies spread over 50 countries.

I think it makes sense to maintain my globally diverse portfolio. We do not know which areas of the global market will deliver the performance over the coming decade or two. My expectation is for more modest returns compared to the past 10 years. Maybe the UK will recover, maybe not...will the US tech companies continue to deliver or will the growth be delivered by the fast-growing China? Who knows...

Nobody can know when the US bull run will end so for me it's about managing risk which involves maintaining a sensible asset allocation in line with my desire for optimising gains matched with my need for minimising volatility during the next downturn. 

Accepting that nothing is certain, the probability of higher returns from my globally diverse equity exposure means I can hold a higher proportion of lower volatility bonds to achieve the same outcome.

Feel free to leave a comment below. What proportion of UK exposure do you hold compared to global? Do you think the US market is over-valued now?

Wednesday, 22 August 2018

The American Bull Run

Today marks the longest bull run in US history.  Since March 2009 the S&P 500 has gone 3,453 days without a 20% correction. Happy days for investors.

The index has risen by 325% during this period with tech companies such as Apple, Google, Amazon and Microsoft doing much of the heavy lifting. Factor in dividends and the figure is above 400%.

So far this year the US market is up by just over 8% boosted by Trump's decision to slash corporate tax rates from 35% to 21% last year.

Here in the UK markets have gained a modest 190% total return since the crash of 2008/09 however the FTSE has been fairly flat year to date.

How to Proceed from Here

How much longer can the markets continue to rise? I do not know is the honest answer. There will be no bell rung to indicate the top so what are the options?

1. Do nothing...9 times out of 10 this is the best solution. Ignore the media stories and focus on the long-term investing strategy.

2. Lock in some gains and move to cash. I did this with some of my investments in 2016 and came unstuck as the markets continued to make gains over the next two years whilst my cash actually lost value due to low interest rates/inflation.

This timing of the markets can therefore be risky. Also you have to make two good calls...first to cash in at the top and secondly, the decision on when to re-enter the market. After the markets have retreated 10%, will there be further falls to follow. Just as we cannot know the top, so we equally cannot know when the bottom of the market decline is reached.

3. Adjust asset allocation to reduce equities and increase bonds but again you may have some similar problems to cash in relation to timing. Also in some market conditions, bonds can be volatile and provide negative returns.


There is no getting away from the good returns offered by the markets in recent years. I have maintained my 60/40 portfolio during most of the past decade and returns have averaged around 9% p.a. after all platform and trading costs. This compares well with my cash savings which have delivered less than 2%.

After such a good run, but not knowing when the downturn will arrive, I think the best solution is to continue with my revised strategy and at the same time accept that portfolio returns may well be lower over the coming decade. Therefore it is more a matter of re-setting expectations and accepting a period of above-average returns will likely be followed by a period of below-average returns.

Feel free to comment below if you have a strategy for the end of the bull run.

Wednesday, 18 July 2018

Brexit Fudge

In my previous post on this subject a month back I said "I really believe that neither side will be served by an final outcome which is half in, half out...that would be the worst outcome for the UK". The white paper which was agreed at the recent gathering at Chequers offers exactly that - it is a complete cop out and fudge.

From the very start of her time as PM, Mrs May has said Brexit means Brexit. On the day she became PM in July 2016 she stood outside 10 Downing St and said :

"There must be no attempts to remain inside the EU, no attempts to rejoin it by the back door and no second referendum. The country voted to leave the EU and, as Prime Minister, I will make sure that we leave the EU".

At the time, I took those words at face value but I am now wondering how sincere she was then or has she changed her mind and bottled out of pushing through some tough policy decisions? I honestly do not understand how she gets from that statement to what is laid out in the white paper.

In the crunch meeting of the cabinet at Chequers in early July, the PM presented her white paper which set out her detailed position on Brexit which prompted the resignation of Brexit Secretary David Davis, Brexit Minister Steve Baker and Foreign Secretary Boris Johnson. It seems clear from the statement of Baker that for several months there has been a secret 'establishment elite' set up by the cabinet office working on a parallel plan to deliver a much softer Brexit to the plan the Brexit Secretary and DExEU had been working on. He calls it EEA-lite.

It feels to me there are some very powerful interests who have decided they want an outcome of 'business as usual' whilst at the same time giving the appearance of delivering on the Brexit vote. I imagine the Chancellor and some senior civil servants such as Heywood, Robbins and other senior mandarins have been shaping the direction of travel for some time. I have heard it referred to as the 'Hotel California' option where you can check out any time you like but never leave.

This is a plot which would not seem out of place in the 'House of Cards' political drama. I am wondering who is really controlling our PM behind the scenes. Everything is certainly not how it looks on the surface...maybe that is how real politics works, tell everybody one thing whilst secretly planning to do the opposite.

Proposals on Trade

The PM repeats her mantra that we are leaving the customs union and the single market... if she says it enough times it will be true.

The phased introduction of a new Facilitated Customs Arrangement that would remove the need for customs checks and controls between the UK and the EU as if in a combined customs territory, while enabling the UK to control tariffs for its own trade with the rest of the world and ensure businesses pay the right tariff...

This is effectively a plan to remain in the single market for goods but not services which account for 80% of our economy. Mrs May can sell this on the basis of free-flow of goods and no hard border in NI whist seemingly retaining the freedom to negotiate trade deals with other non-EU countries such as the USA. Note the word 'phased'...this is a fudge and designed to get the government past the next election in 2022

A common rulebook for goods including agri-food, covering only those rules necessary to provide for frictionless trade at the border – meaning that the UK would make an upfront choice to commit by treaty to ongoing harmonisation with the relevant EU rules, with all those rules legislated for by Parliament or the devolved legislatures.

This is not a common rule book, it is the EU rule book and any trade deal we want with other countries would have to comply and this ties us indefinitely to the EU and would compromise our ability to strike our independent deals with some of the largest economies - the likes of India, China and US who would likely negotiate deals directly with the EU rather than the UK.

Mrs May has now set out her Brexit stall which, even before it is watered down during further negotiations with the EU, will satisfy neither remainers or leavers. It will be BRINO - Brexit in name only and we will be neither fully in or fully out. What an absolute shambles we seem to have made for ourselves.

In the referendum the question was very simple - do you want to leave the EU or remain in the EU? The outcome was leave but this is now being reinterpreted as leave means half-in and half-out. If that had been a third option on the ballot paper I wonder how many people would have voted for it.

Her judgment is not the best. She called a general election in 2017 which badly backfired and resulted in her party losing their majority. She offered to stay on as PM as long as they wanted her.
She is now gambling again. Maybe she has an addiction problem and needs some help.

The Options

I am really not at all sure where things will go from here.

Parliament breaks up for the holidays next week which will provide some time for all sides to reflect. We voted to leave the EU, Article 50 was triggered last March and most of the MPs accept we will leave but cannot agree on what formula this will take. 

If a Chequers-based deal can be agreed by the end of this year, then this would need to be approved by Parliament. The SNP and Labour would not be in favour and there will likely be a large number of ERG MPs against so I cannot see it getting approval. If rejected then the PM would have to resign and call a general election.

I believe the EU are unlikely to agree the Chequers proposals unless drastically watered down in which case we could move to no deal and leave on WTO rules. After all, our PM has always said no deal is better than a bad deal. This is how we operate with countries outside of the EU and it is the basis for trade between the EU and USA. Of course, it would not preclude a trade deal with the EU at a later date when the economic benefits to both sides became clearer.

However a no deal situation would likewise need the approval of Parliament and may also be rejected with the same result.

There are some calling for a second referendum. In my humble opinion this is a non-starter. This needs to be authorised by Parliament which is very unlikely and, whilst there was overwhelming support for the first, there would be little support for a second. Also, what would be the question asked in a second referendum..surely not the same as the first? A second referendum would not resolve this issue...what then, a third referendum?

This is unravelling at a rate of knots, the government are losing credibility and if something is not done quickly we will face the prospect of a national emergency. It's anyone's guess how this will end up but I honestly cannot see a good outcome from where we are now. 

Maybe time to stockpile some tinned food and get hold of a generator.

As they say, interesting times!