Robo Advisor Anyone?

I was watching an interesting program on BBC4 this week relating to how algorithms impact our everyday lives. Some example included the little square that comes up to identify a face on our cameras, their use in the NHS to identify suitable matching kidney donors and Google‘s pagerank.

It did not touch on investments but I was wondering to what extent they may be useful in this area.

Since the introduction of RDR in the UK, the fees charged by financial advisers has become much more transparent. Those who need advice on such things as pension planning and investments now have to pay an upfront charge to the adviser. Depending on the nature of the advice and complexity, the charges could range typically between £1,000 to £2,000+vat. Many people will be put off and will either attempt to do the job themselves on a DIY basis or may not bother at all.

Could a robo advisor replace the traditional financial adviser at a fraction of the cost and provide reliable solutions?

Robo advisors operate on the principle that markets are efficient, sufficiently so to make it extremely difficult to outperform on a consistent basis. Many of the US-based robo advisers like Wealthfront and Betterment are built around the twin proposition of Modern Portfolio Theory and low cost index investing.

You fill out a detailed online questionnaire - risk tolerance, time horizon etc. The computer algorithm then uses this information to suggest a customised portfolio using low cost index funds and ETFs. Use appropriate tax wrappers, ISA, Pension etc. Rebalance when necessary - hey presto….

Vanguard is a leading robo-advisor in the USA. It launched its personal adviser service earlier this year for those with a minimum of $50,000 to invest and charges 0.30% p.a. for the service.

I see they are now considering introducing a direct to consumer (D2C) platform in the UK which should be an interesting development and will provide an opportunity for them to offer a robo adviser service in the UK. I suspect a few IFAs may be getting a little twitchy at the prospect. But competition is good....right?

They would then compete with the likes of Hargreaves Lansdown, Fidelity, Barclays and TD Direct who between them currently take around two thirds of D2C assets.

I am no expert but it looks like algorithmic investing may provide a valuable tool to the small investor. With a reliable and robust programme, it could sift through thousands of investing permutations to come up with a range of the best options to suit the criteria required by the individual. Of course the end result can only be as good as the programme permits so the way it is set up will be the crucial element.

For example, I could stipulate that I require a portfolio offering the lowest cost with the highest total return from a global market place using a mix of 50% equities and 50% bonds combined with the lowest volatility over a period of 20 years.

It could be a tool to optimise income drawdown for a given lump sum over a given period whilst reducing volatility.

The speed at which the world is changing, I can foresee a time not too far off when the majority will be tapping in a few basic details into their computers for a ready-made lifelong investment solution... copies of ‘Smarter Investing’ will be left on the bookshelf gathering dust - or is this a bit of a fantasy?

All thoughts as ever welcome - leave a comment below.

'Smarter Investing' - Review

I finally got hold of a copy of Tim Hale’s ‘Smarter Investing’ from my local library last week - it has been on my ‘to do’ list for the past couple of years!

The book was the inspiration for Retirement Investing Today to devise his starting plan for a low cost investment strategy and which appears to have served him well so far as he closes ever nearer to financial independence.

The original version was published in 2006 - this 3rd edition came out in late 2013 so is relatively up to date. Some things have changed - the arrival of Vanguard to the UK markets, the nature of financial advice following the introduction of RDR - some things remain much the same - investor behaviour, the uncertainty of markets etc.

The underlying thesis of the book remains - to construct a robust portfolio which can withstand whatever storms the markets suffer over both short and long term.

As I have been moving my investing strategy more towards index funds over the past year or so, I was interested to read how Hale made the argument for passive investing and the evidence drawn upon in support.

The case against managed funds

Fact - the market will always beat the average investor, professional or amateur. The market consists of all investors, the return of the average investor must be the return of the market before all costs. After costs, therefore the return for the average investor must be below the market.

Hale quotes a 20 yr study by Dalbar in 2011 which shows the average investor made a return of just 4% p.a over the period compared to the average market return of just under 10% p.a.

He suggests industry costs are excessive for managed funds, and that a good record of past performance of any individual fund offers little reassurance that its future performance will be good, bad or indifferent.

Looking for future winners over the next 20 yrs from over 2,000 UK funds is compared to looking for a needle in a haystack. Research by Bogle in 2007 covering a 35 yr period revealed that less than 1% of the 355 US equity mutual funds delivered consistent out-performance.

Hale suggests the issue of whether active management can beat the market depends upon 3 questions :

• Can active managers beat the market after costs?
• If so, do some do it consistently over time based on skill rather than luck?
• Finally, does the average investor have a reasonable chance of identifying them in advance?

The author then proceeds to address each of these questions at some length. His conclusion - Hale is convinced the best way for investors to capture the returns is via low cost, globally diversified index funds.

Smarter Investing

For all the above reasons (and many more), the book suggests  avoiding the complications generated by media advertising, stock tip columns, fund rankings and other streams of endless ‘noise’, side step stock-picking, buy/sell signals, economists and active management, all of which are mostly irrelevant and confusing for most average investors.

The strategy is then simple, calm and relaxed - it is focussed on index funds and long-term asset mix.
"This is concerned with building and holding a sensible portfolio that provides the greatest chance of success…it’s about pursuing options that increase the chances of success, avoiding the chase for returns or trying to beat the market".

Smarter Strategies

Te book goes on to cover many of the basic pointers for a successful outcome - it covers the process of deciding on asset allocation and asset mix in some detail, also practical aspects such as compounding and the need to minimise costs, the ongoing maintenance of a portfolio and importantly a section on contending with human behaviour and emotions and how we can often be our own worst enemy.

The second part of the book looks at many aspects of controlling risk as well as the practical aspect of building a portfolio.

Whilst it is important to understand and evaluate risk in its many forms, it is probably easier than managing a diy portfolio over many years as the markets gyrate and any initial enthusiasm is challenged. This is why I would place more emphasis on the early chapters, particularly understanding human behaviour and ways to minimise making poor investing decisions

Simpler Decisions for a better result

This is the sub title of the book and a message repeated throughout is to keep things simple. Don’t try to select the handful of funds that may succeed from the thousands on offer. Don’t invest in things you do not understand. Review your portfolio just once per year. Don’t get sidetracked by media hype. Don’t put all your eggs in one basket and don’t worry about the things outside of your control.

“Smarter Investors realise that investing is not about trying to be an economist, or knowing how to read a company balance sheet, or having the ability  to pick and choose when to be in and out of the markets, or what stocks to buy and sell. What they do know is that their mix of assets has a good chance of delivering them a successful outcome and will not lose them too much if things don’t go as planned.”

Conclusion

For the newcomer to investing, this book is a great resource - if I were to be critical, possibly a little too long for my liking and a little repetitive in parts but that would be nit picking. Also, the cost at £19.99 is possibly a little prohibitive for some so if, like me, you can get hold of a copy at the local library, so much the better.

That said, I enjoyed the book very much and even as a seasoned investor for many years, I have taken away many points to learn from and hopefully improve my own investing process.

The essence of the book are simple and probably common sense - invest in things you understand, use simple low cost funds, globally diversified passive index will probably do a better job compared to managed funds and be aware of the many human traits and poor practices which often can sabotage the chances of a good outcome for the small investor.

Its not rocket science but I guess from time to time all investors need to be reminded of some of the basics.

A really great effort from Tim Hale and, I would say, one of the best investing books on the market for UK small investors.

Leave a comment below if you have read this book. Let other know what you think of it.

City of London - Final Results

Last week I was a little underwhelmed by the results of Murray Income investment trust. This week it’s the turn of CTY, also in the UK income sector.

City of London is one of my steady, predictable, middle-of-the-road income trusts. In my corresponding post two year ago I referred to CTY as feeling like a dependable, faithful old carthorse.

City have just announced full year results for the year to 30th June 2015 (link via Investegate). Share price total return has increased by 7.2% over the year compared to the FTSE All Share benchmark of 2.6%. Dividends have increased by 3.6% from 14.76p to currently 15.30p giving a yield of 4.0%.  Reserves were bolstered by the addition of a further £3.83m. The dividend was increased for the 49th consecutive year.

2 yr chart - City of London v Murray Income
(click to enlarge)

Earnings per share rose by 9.8% to 16.84p, partly reflecting the underlying dividend growth from investments held - 7.2% - but also the rise in the US dollar compared with sterling, enhancing the sterling value of dividend payments from those UK companies which declare their dividends in US dollars. In addition, special dividends rose from £1.29m last year to £4.21m.

Ongoing charges are 0.42% and remain the lowest in the sector.

Over the year there was again a reduction in the weighting in large companies with a corresponding increase in the weighting of medium-sized companies.  Large companies (FTSE 100) now account for 66% of the portfolio, medium companies 23% and overseas-listed companies 11%.

Relative to the FTSE All-Share Index, City of London benefited from being significantly underrepresented in the oil and mining sectors. The best three stocks held in the portfolio which contributed to performance were all housebuilders: Taylor Wimpey, Persimmon and Berkeley Group.
This trust is possibly the nearest proxy to a HYP portfolio often discussed on the Motley Fool discussion boards.

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 IT portfolio (ISA and SIPP drawdown)…and yes, it still feels like a dependable, faithful old carthorse. Total return over the past 10 years has been 9.5% p.a.

The trust has been managed by Job Curtis since 1991. This is a seriously long stretch as a fund manager and I am wondering how much longer he will carry on - maybe after 25 yrs he will decide to call it a day - who knows?

Unlike Murray Income trust and Murray International which have disappointed over the past couple of years, I am happy to continue holding CTY for the foreseeable…

As ever, please DYOR

Murray Income - Final Results

Murray Income Trust has been in my basket of income focussed investments trusts for several years. It has a record of increasing annual dividends in each of the past 40 years.

It has been managed by Charles Luke and his team at Aberdeen Asset Management since 2005. It is essentially a UK income trust but like several others in this sector, the management have been gradually increasing their exposure to larger, high-quality overseas listed companies. These currently make up 16% of the portfolio and include Roche, Microsoft and Nestle.

It has today issued its results for the full year to 30th June 2015 (link via Investegate).

Net asset  total return is down -2.2% and share price TR - 5.7% compared to the FTSE All Share Index increase of +2.6%. The reason for the under-performance is the share price having moved from premium to trading at a discount to NAV.

The board are proposing a final dividend of 11.0p making a total of 32.0p for the full year - an increase of just 2.4% compared to the previous year (31.25p). At the current share price of around 680p, the yield is 4.7%.

The trusts performance benefited from smaller companies exposure via holdings of Aberforth Smaller Companies Trust.

The managers policy is to buy and hold for the longer term - portfolio turnover was again very modest with just two additions - fund manager Schroders and chemical company Elementis. The portfolio currently comprises 47 holdings with the overseas exposure representing 16.5% of gross assets at the year-end.

Income generation has been better this year, partly due to the fall in the value of sterling - 50% of the holdings derive their income from the US dollars or euros. The income generated was 33.1p per share which therefore just covers the dividend of 32p. The Board say they are hoping to make more progress on increasing the dividend over the coming year and the recent pull-back of sterling against the dollar should help.

"Although the short term outlook for equity returns is likely to stay difficult, we remain sanguine about the medium to long term opportunities for the companies in the portfolio.  We believe that globally competitive businesses with strong balance sheets will prosper over the long term and ultimately offer the best earnings and dividend growth prospects".
Charles Luke.

I note that notwithstanding the poor performance, the management fees have increased and total expenses for the year are up from 0.70% to 0.83% - £4.29m including transaction charges. I don’t mind paying a little extra for out-performance but not for under-performance!

Overall, another disappointing performance for the year with the promise of a little more to come in the way of income next year. Combined with the poor performance by Murray International, my strategy transition towards lower cost index funds and ETFs is looking increasingly a good move. I took the opportunity to sell off part of my ISA holding earlier this year but will probably reluctantly hold on for the time being and hope for a turnaround in fortunes - at least I can take some comfort from the regular quarterly dividends whilst I wait!

As ever, slow and steady steps….

Shares Portfolio - Sales & New Purchase

In March I started to put into place my revised strategy in relation to my individual shares portfolio.

Having come to the conclusion that my individual shares have been the weakest link of my income strategy to-date, I have been in the process of gradually winding down the shares portfolio and redirecting investment proceeds towards my investment trusts, ETFs and also to embrace the possibility of more low cost globally diversified index funds such as Vanguard LifeStrategy.

So far this year I have sold the following shares - Imperial Tobacco, Hargreaves Lansdown, DS Smith, Sage Group, Diageo, Nicholls, Charles Stanley, Centrica, Reckitt & Benckiser, Sainsbury, Plastic Capital and IG Group.

Many were sold at the high point of the market earlier in the year and, with the exception of Plastic Capital, all had made significant gains both year to-date and also in relation to cost of purchase.

Recent Sales

Earlier in August - luckily just before the market downturn, I took the opportunity to sell three further holdings.

First of all GlaxoSmithKline - the company recently announced they intend to hold the dividend at 80p for the coming 3 years. The capital value is just about the same as in 2012. I decided I had a sufficient holding in my UK-focussed investment trusts such as Edinburgh, City of London etc - sale price 1420p.

Secondly my holding in easyJet was sold @ 1730p - the share price has been a tad too volatile for my liking.

Finally, after a decent run in recent months, I decided to take profits in Booker Group having received the final dividend and also a further return of capital. The sale price was 178p.

Purchase

The net proceeds of £5,260 have been transferred to my new ISA account with Halifax Share Dealing. Fortunately the market ‘correction’ came whilst the funds were in transit between accounts. The proceeds have now been reinvested in a further 40.43 units in Vanguard LS60 which takes the total holding to 96.13 units.

These are accumulation units and therefore no income is distributed. My plan is to sell off some of the units each year to provide ‘income’.

The shares portfolio is now looking quite different to the one at the start of 2015. The remaining shares consist of BHP Billiton, Next, Unilever, Tesco, Sky, IMI, Amec Foster, Legal & General and Berkeley Group.

I am thinking that, as and when there are further disposals, it will not really be a shares portfolio any longer. Therefore, from the start of 2016 I will possibly amalgamate this portfolio with my collectives portfolio. There is already some overlap with the Vanguard Equity Income funds and LifeStrategy funds.

Good Enough

I have held my individual shares portfolio for many years - I think a part of me wanted to play the fund manager thinking I could generate a better return than the professionals. I am happy to conclude that Mr Market is too efficient for my efforts to bear fruit.

I am slowly learning to be comfortable with ‘good enough’. I’m now more globally diversified - not perfect but for now - good enough. I am edging slowly away from the rollercoaster of individual shares and entering the relative calm waters of the 60/40 Lifestrategy option. Over the coming decade, I am thinking of a steady 5% or 6% return on average (after inflation) - that will do for me.

When people ask how my portfolio is doing… you know the answer!!

Take it easy.