Wednesday, 22 November 2017

The Autumn Budget

The Chancellor's credibility was severely dented after his first budget in March when he had to backtrack on national insurance rises for the self employed which were at odds with a manifesto pledge not  to increase NIC levels.

Shortly afterwards, the PM called a snap election which failed to deliver the increased majority and left the Government without a majority and now relying on the DUP. Added to this is the well-documented Tory in-fighting over Brexit which is creating a very unsettled feel at the top table.

Against this difficult backdrop, Hammond has to balance the books and continue the efforts to reduce the borrowing deficit whilst trying to counter the allure of Labour's borrow & spend strategy which seemed to be popular at the general election, particularly with the younger voters.


Our borrowing is still not under control. Net PSBR now stands at £1.8 trillion which is almost 4x the figure for 2007 (~£500bn). Admitedly  the annual deficit has been gradually coming down year on year since 2009 when we borrowed £152bn but the fact remains we continue to borrow each year - estimates for this year are £60bn.

Last month alone, the government paid £6m in debt interest - the highest amount for a single month on record.

The more we borrow, the more we pay in interest which is linked to inflation rates and this means less to spend on welfare and essential public services, housing and infrastructure. At some point we have to grasp the nettle and start to live within our means.


Unfortunately, the chancellor's scope for big changes has been curtailed by the OBRs forecast for productivity and growth. Whilst employment has risen to near record levels in the UK , productivity growth has averaged just  0.1% since 2008, compared to 2.1% in the previous decade. The OBR has revised down its forecast for GDP growth in 2017 to 1.5%.

The OBR forecast debt will peak at 86.5 % of GDP in 2017-18 the highest it has been in 50 years.

On Brexit, the government have set aside a further £3bn of new money to prepare for the possibility of a 'no deal' which looks to be a prudent provision given the way negotiations are shaping up.

On a more positive note, I am pleased to see that pensions and savings have been left alone. The relevant changes are few :
The starting rate for savings income that is subject to the 0% starting rate will be kept at its current level of £5,000 for 2018-19. 
After a big jump last year, the ISA limit for 2018-19 will remain unchanged at £20,000. The annual subscription limit for Junior ISAs and Child Trust Funds for 2018-19 will be uprated in line with CPI to £4,260. 
The lifetime allowance for pension savings will increase in line with CPI, rising to £1,030,000 for 2018-19. 
From next April, personal allowances will increase from £11,500 to £11,850 (up 3% in line with inflation) and HR tax allowance up to £46,350.


As widely forecast, there was a focus on the housing situation. There was an extra £15bn of new money bringing the total to £44bn over the next 5 years combined with a reform of planning laws to free up available land for more houses. The target is for 300,000 new homes per year by the mid 2020s.

In addition stamp duty has been abolished for first time buyers of properties up to £300,000. So, likely to push up prices - particularly in London and the SE, which will make buying a house even more unaffordable.

Of course there are many other provisions in the budget - help for those on Universal Credit, an increase in the national living wage, more money for the NHS etc. but notably there is nothing on the thorny issue of funding for long-term care which became a big issue at the last election. Here's the Budget from HM Treasury in full.

The chancellor has been under pressure from many quarters in recent months and the relationship with the PM is strained. I suspect he has bought himself a little more time with this relatively 'safe' budget...time will tell.

What do you make of it all? Were there any benefits for you? Feel free to leave a comment below.

Friday, 3 November 2017

Scottish Mortgage - Interim Results

Scottish Mortgage is an actively managed, low cost investment trust, investing in a high conviction, global portfolio of companies with the aim of maximising its total return to its shareholders over the long term. The managers aim to achieve a greater return than the FTSE All World Index (in sterling terms) over a five year rolling period.

It joined my SIPP portfolio at the start of the year at my initial purchase price of 338p. The share price has advanced 35% over the year to currently 457p which is naturally very pleasing.

The trust has today issued results for the halfyear to end September 2017 (link via Investegate). Share price total return is up 15.4% compared to 1% for the benchmark FTSE All-World index.  

Scottish Mortgage has increased total net assets to more than £6 bn making it one of the UK's largest investment trusts. It was promoted earlier this year to become the only investment trust in the FTSE 100 which provided a boost to the share price as it now has to be held by all the FTSE 100 index funds.

The managers, James Anderson and Tom Slater run a conviction portfolio of around 75 shares. The result is a portfolio dominated by big holdings in some of the companies involved in the new world of social media, the internet, healthcare, eco-friendly energy and gene therapy.

The top ten holdings account for 49% of the portfolio and include Amazon 7.7%, Baidu 5.4% (China's equivalent of Google), Alibaba 6.8%, Facebook 4.7%, Tesla Motors 6.8% and Alphabet (Google) 4.2%.

Some 13% of the portfolio is invested in unquoted companies - online music provider Spotify, Dropbox, peer-to-peer lender Funding Circle and airbnb to name a few I am familiar with.

“These are truly global businesses, significantly impacting their large publicly-listed competitors, but as yet they remain private companies,” said the statement.

“This makes it hard for most innovators (professional or individual) to benefit from the capital creation of their growth.”

Largest holding Amazon has become a giant in global retail. Over just 10 years it has grown more than 25-fold from a market cap of  $20bn to currently over $500bn.

Many of these network businesses now seem to have reached a critical tipping point, whereby their sheer dominance and scale become a reinforcing competitive advantage. This stems from the developments within machine learning and artificial intelligence (AI). The increased level of global connectivity, through the combination of the relatively new infrastructure of the mobile internet, social media and smart devices, has produced an explosion in the proliferation of data. The volume of this is now so great that no human could hope to curate the content. It will require machine learning and AI to process it. The leaders in these fields need access to the best data sets, produced by the largest networks. It is no accident that Baidu, Alphabet, and Facebook are leaders in this area.

Scottish Mortgage offers a clear, consistent and simple proposition: a portfolio of long term investments in what the managers believe to be the best growth businesses, operating in any industry and anywhere around the world.

Over the past ten years, the trust has delivered a return of 300%  (second only to Linsell Train). Although this is essentially a global growth trust, it is worth noting it has increased its dividend every year for the past 33 years. Whereas the likes of my UK income trusts such as City of London provide a steady 4% or so natural yield, I am hoping to take my required 'income' from the sale of shares at some opportune future point. Were I to sell today, the profit from the appreciation in the share price since purchase would provide my 4% 'income' for the next 9 years.

3 Yr Chart  SMT v City of London
(click to enlarge)
Obviously I am pleased with progress since my purchase and hope to add to my initial holding when there is the inevitable pull-back down the line but for now the current holding will return to the bottom drawer.

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!