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 Olly 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!

Monday 9 July 2018

My Strategy is Evolving

As it is over 3 years since I last reviewed my investing strategy, I thought maybe time for an update on where I am going with it.

Looking back to early 2013 when I started this blog, it is clear there has been quite a significant move. Back then I was focussed on a portfolio of individual higher yielding UK shares combined with a ‘basket’ of investment trusts to generate the natural income I required in retirement.

Fast forward to 2018 and the individual shares are all sold along with some of the investment trusts in both ISA and SIPP drawdown. They are replaced by a large portion of Vanguard index funds and a few more diversified ITs such as Scottish Mortgage, Mid Wynd, TR Property and Capital Gearing.

My circumstances have changed this year as I now receive my state pension. It will be £8,450 for the coming year and this is around £2,000 per year more than I had been expecting when I last reviewed my strategy in 2015 which has come as a pleasant surprise. It means I have less need for income from my investments - ISA and SIPP. This means I need to reassess my plans and make a few changes to my portfolio to reflect the new situation.

The Next Phase

My focus over the past 10 years has involved funding my decision to take early retirement from age 55 yrs. Therefore the plan had been to generate income from my investments to bridge the gap to state pension...and now that part of the journey is mission accomplished!

There now needs to be a plan for the next decade and beyond which takes account of my changed situation.

I follow a fairly simple lifestyle - it seems to me the easiest way to grow wealthier is learning to live with less, because living with less has a higher success rate than attempting to make a fortune, and fortunes tend to push aspirations and desires higher anyway. I am lucky in that I seem to always have had an ability to live within my means so, whilst my lifestyle remains modest - some would say frugal - this is more by design and choice. I accept most people would happily spend the additional money on more holidays, clothes, new car maybe and a host of other delights. However for someone who likes a simple life, spending money on these things would be a bit pointless. Plato said "The greatest wealth is to live content with little".

One book that had a big impact for me in the 1970s was Erich Fromm 'To Have or To Be' which I suspect is as relevant today as it was 40 years ago. I probably did not realise at the time but it no doubt shaped the way I look at life.

As generating income is no longer required, I am now free to consider more options. My basic income needs are now secure with the start of the state pension which will rise year on year to keep pace with inflation. The capital which has been used in my SIPP and ISA to generate the income needed to live on over the past 10 years is now released for other uses. I could think about a better house in a more expensive final move maybe... and also consider a combination of capital preservation and a return to some options for growth. Some themes I have in mind would be technology, biotech, new wave energy and AI/robotics.

Where I am up to now?

Now in my mid 60s, I am hoping for another 20 years if I am lucky. Well, the first thing to say is I accept there are no perfect strategies - what works for one investor possibly will not work out for another. Also, each person will be at a slightly different stage, different goals, varying timeframe etc. The can therefore be no 'one-size-fits-all'.

That said, obviously some strategies have more chance of a good outcome compared to others.

I am hoping equities will continue to provide a better return than bonds so I will continue to tilt in their favour for a while longer. The UK income trusts have done the job required but global diversity is a better option. The resignations of the Brexit secretary followed by the Foreign Secretary today has thrown the whole process into turmoil and I suspect this will put further pressures on sterling for some time.

I was fascinated by the research highlighted in a recent post which suggested the higher returns from equities were generated by just a handful of individual stocks. Therefore to have a chance of generating this outperformance over bonds, I need a global index fund which should include the 1 in 20 companies which deliver or hold an actively managed fund which has a good chance of identifying and holding some of these big performers in its portfolio.

I will therefore continue working towards a core of global low cost multi-asset such as my Lifestrategy, HSBC Global Strategy etc. which will increase to around 60% of my portfolio (currently 40%) and then several satellite holdings of actively managed globally diverse funds such as Scottish Mortgage and Mid Wynd which can hopefully add a little extra return.
(click to enlarge)

My UK equity income trusts and other income holdings are no longer needed so I will be looking to replace them at some point. My managed investment trusts have provided mixed returns in recent years. Some have done very well - Nick Train’s Finsbury Growth & Income and smaller company specialist Aberforth for example, others are more 'steady Eddies' such as City of London - whilst others have struggled - for example Edinburgh which has now been sold.

All the evidence suggests that most actively managed funds do not consistently beat the market over time - but some do! For example Finsbury, Aberforth, Polar Capital Technology and Scottish Mortgage have outstanding records over the past decade despite taking a huge 50% hit to their share prices in the market turmoil of late 2008.

I know I can never achieve a perfect portfolio - I am continuing to believe in the concept of ‘good enough’.

Feel free to share any thoughts with others in the comments section below - how is your strategy evolving?

Monday 2 July 2018

Baillie Gifford Managed - Portfolio Purchase

Following on from my purchase of Polar Capital Tech last week, I have now decided to add this global multi-asset one-stop managed fund to the mix.

This £3.4bn fund invests in a mix of global shares, bonds and cash..but not property. It is listed in the 40% to 85% for the Mixed Investment 40-85% Shares Sector. It tends to hold 70 to 80% allocation to shares and a bias towards growth-focused companies. 

Overall, long-term performance has been good and return over the past 5 years has been 70.8% compared to 43.0% average for the sector. However I would expect the fund with 70 to 80% equities to perform better than the ones with 40 to 50% equities over the past few years.

The fund has ongoing charges of 0.43% and a current turnover of ~15% p.a. which reflects the managers commitment to long term buy/hold. 

I appreciate the focus on patience at Baillie Gifford which means the managers will make their assessment on portfolio holdings over a long period, maybe up to 10 years. This helps to remove the pressure to react to market volatility and peer pressure on performance.


This is a global fund with a wide geographic mix of mainly equities. The main breakdown is UK 20%, USA 20%, Europe 17%, Asia Pacific 12% and Emerging Markets 7%. The rest is made up of global bonds which are a mix of government and corporate as well as around 6% in cash. This is a managed fund so the geographic mix as well as the balance between equities/bonds will fluctuate.

Some of the larger equity holdings include Amazon 2.2%, Netflix 1.1%, Facebook 0.9%, Prudential 0.9%, Nestle 0.8%, Diageo 0.7%. In addition to stand-alone equities, the fund holds several of its own funds such as BG British Smaller Companies, BG Japanese Smaller Companies and BG Emerging Markets Growth fund.

7 Yrs Comparison v VLS 80
(click to enlarge)

This fund would certainly do a similar job to the likes of Vanguard Lifestrategy 80 or HSBC Global Strategy Dynamic as a global multi-asset stand alone option for those who are happy to keep things very simple. This fund will therefore become a part of my multi-asset core portfolio alongside Lifestrategy and HSBC Global Strategy.

My initial purchase price is £10.62. I will see how things develop and compare to my Vanguard funds but may well be looking to build a larger stake in this fund over time. At the present however, I would prefer sterling to be a little higher so will reassess when the £ is back above £1.40 (currently $1.32).

My asset allocation has shifted as a result of recent sales/additions and is probably best depicted by a pie chart which I will update from time to time on my 'portfolio' page.
July 2018  (click to enlarge)

Feel free to comment below if you have any thoughts on the BG Managed fund.

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!