It’s your choice - know yourself
The investment industry recently celebrated an impressive anniversary. It is 150 years since individual investors first clubbed together to enjoy the benefits of a pooled investment via the Foreign & Colonial Investment Trust. The trust was established in 1868 to help investors of ‘moderate means’ to achieve their financial goals by putting their money to work in the exciting emerging markets of the time - far-flung and risky places like the United States of America!
It’s been a remarkable success story, paying a dividend to its shareholders in every year of its history and increasing its pay-out in each of the past 47 years. F&C was the first, but many other investment companies followed in its footsteps in the late 19th century. In fact, 23 investment trusts have track records going back over 100 years.
I mention investment trusts because I was recently investigating the 98 trusts that we currently offer on our new investment platform. There are plenty of great trusts to choose from - many in fact are closed-ended versions of funds on our Select 50 best buy list such as the Finsbury Growth and Income Trust, which looks a lot like the Lindsell Train UK Equity Fund. This is unsurprising, as both are managed by Nick Train. Then there’s Fidelity Special Values, similar but not exactly the same as Alex Wright’s Fidelity Special Situations Fund. Baillie Gifford runs a Japanese trust that mirrors the popular Japanese fund on the Select 50.
Investment trusts are different from open-ended funds. They have a fixed number of shares, which helps their managers invest for the long-term, particularly in less liquid investments like property and unlisted securities. They have the ability to hold income back to smooth dividends from year to year. They can employ borrowed money to magnify returns in good years. And investors can take advantage of the discount that shares sometimes trade at relative to their underlying asset value.
We built our new investment platform so that we can offer a much wider range of investments and meet our aim of becoming our customers' one-stop shop for all their investment needs. This now also includes individual equities, with most of the FTSE 350 stocks now available and a rolling programme of releases that will in time bring a wide range of equities and bonds onto the platform.
As we build out our offering, I and my team will also be expanding our coverage so that we can help guide you through the wider choices you will face. This Investment Outlook will continue to provide the market context for your investment choices, however you decide to put your money to work.
Trade Wars - why they matter
Donald Trump has been President for just over a year now. It has been quite a journey and investors can look back on his first 12 months with more satisfaction than they probably expected at the time of his inauguration in January 2017. Having convinced ourselves that a Trump Presidency would most likely look rather different to a Trump campaign trail, we must now accept that he will live up or down to his promises - for good and ill.
During the first year, investors were happy to focus on the positives. In particular, the promised de-regulation and tax reforms. Tax cuts may be a case of pouring fuel on a smouldering fire and cause problems down the track if they force Jay Powell at the Federal Reserve to raise interest rates faster than he would otherwise. But in the short term they are undoubtedly boosting corporate earnings and individual consumption.
That was last year’s story, though. 2018 has delivered a different angle on the Trump Presidency, focusing on his America First protectionist instincts and his increasing willingness to plough his own furrow, without consulting those around him. The announcement of tariffs on steel and aluminium imports is the most dramatic and important example of these tendencies.
Tariffs are bad economics and I suspect worse politics There are far fewer beneficiaries in America’s steel mills than there are workers in steel and aluminium consuming industries like the car manufacturers. Rising costs will naturally lead to job losses. It’s a zero-sum game. Targeting steel also looks to be an odd choice. As the chart shows, most US steel imports are from Canada and Europe, hardly the most obvious targets for the President’s protectionist ire.
US steel imports dominated by Western allies
Source: Thomson,Reuters Datastream, as at 15.3.18.
Past performance is not a reliable indicator of future returns.
History does not look favourably on steel tariffs. When President George Bush introduced them in 2002, they were ruled illegal by the World Trade Organisation and triggered retaliation by the EU, with targeted tit-for-tat tariffs on US agricultural products. This time around levies on iconic US goods like jeans, motorbikes and bourbon have been mentioned.
From an investment perspective, too, trade wars are bad news. The market fell sharply after the Bush tariffs, although there was plenty else going on at the time (dot.com crash, Gulf War preparations) to muddy the comparison. The general point holds that global trade and living standards are closely entwined. If you want to improve the lot of your core constituency of economically disenfranchised blue-collar workers, tariffs are a funny way to go about it.
Preparing for inflation
Inflation has not hit double digits anywhere in the developed world for a generation or more. Many investors have forgotten what it means and how to deal with it. They may need to reacquaint themselves with its malign effects if the increase in inflation expectations shown in the chart here is realised.
Inflation expectation rising around the world
Source: Thomson,Reuters Datastream, as at 15.3.18.
Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may also affect the value of an investment.
Inflation is a hidden tax. Even a modest 3% rate will reduce the value of your assets by half in 24 years. Many of us will hope to spend that long in retirement. Inflation is also a drag on the performance of stocks and bonds. Since the 1930s, US shares have delivered total returns of 14% in periods of falling inflation but pretty much zero when it has been rising. Treasury bonds have given a 4% real return when inflation is falling and a small negative return when it is rising.
Fortunately, there are some asset classes that perform better as prices rise. Commodities tend to do well if prices are rising on the back of increased demand. The best way to play this phase can be through commodity producers which can enjoy a lag between the onset of resource price hikes and a rise in their own costs.
Property is also worth a look because it is a physical asset in short supply (although as I note elsewhere the price paid for this is high today). Inflation-linked bonds benefit from having their income and capital value adjusted in line with prices.
So, there are places to shelter if inflation does start to stir. But it is worth remembering that these assets will tend to underperform if the inflationary threat fails to materialise. The case for inflation is by no means secure as the most recent non-farm-payroll employment data showed. Wage growth is not a given.
Growth or value?
One of the big debates in investment today is between proponents of so-called value investing and those investors who prefer to back high-quality, reliable growth stocks. A value investor looks for good companies at a great price. Quality or growth investors on the other hand are looking for the best businesses and are happy if they can buy them at a reasonable price.
I recently met up with two champions of the respective approaches, interviewing value-investor Alex Wright (Fidelity Special Situations) and quality specialist Nick Train (Lindsell Train UK Equity) for our MoneyTalk video series. What they have to say on the subject is interesting because many people feel that we are at a watershed moment when quality is poised to hand over the baton to value.
In a low-growth, low-inflation world, investors have flocked to quality in search of the perceived safety of reliable companies that can deliver growth in an unfriendly world. These companies sell goods and services that consumers will buy come what may. At the same time, investors have shunned the cyclical companies that only do well when the economy is firing on all cylinders. With employment at record levels, inflation returning and interest rates and bond yields on the up, the consensus is that value might be about to have its moment in the sun.
My conclusion in the MoneyTalk film (available on our website or You Tube) is that while the debate between value and growth will continue to rage, investors shouldn’t care. Both Alex Wright and Nick Train are good investors. A portfolio which holds both of these funds (both are on the Select 50) will be well placed regardless of which style comes out on top. As the chart shows, both funds have outpaced the FTSE 100 over the past 10 years.
Why active management matters
Source: Thomson,Reuters Datastream, as at 15.3.18.
Past performance is not a reliable indicator of future returns. For full 5 year performance figures please see Select 50 performance.
Keeping your balance - Select 50 Balanced Fund
Jim Rogers, who made his fortune alongside George Soros in the 1970s said: ‘the way to get rich is to put your eggs in one basket, but to watch that basket very carefully’.
He is, of course, both right and wrong when he says this. If you pick the right basket, you will not want your eggs anywhere else. Unfortunately, without a crystal ball it is impossible to consistently pick that high-performing basket. For the rest of us, some form of diversification is an essential part of our investment approach.
This anecdote jumped out at me recently because we have just launched a fund aimed precisely at helping investors to achieve that diversification. The Fidelity Select 50 Balanced Fund is, as its name suggests, a fund of funds that uses the Select 50 best buy list as its core universe (at least 80% of the fund by value) and aims to deliver capital growth with a well-balanced and diversified portfolio of equities and bonds investing around the world. It’s managed by a very experienced investor in our Multi Asset team, Ayesha Akbar.
This feels like a particularly good time to be investing in a balanced fund. There is great uncertainty about the outlook for both equities and bonds. A mix of the two feels like a sensible option right now. We also believe the Select 50 Balanced Fund will appeal to the many investors who have told us that they like the Select 50 but still find it hard to decide which funds to invest in. If this sounds familiar, please do have a look at our new fund. I hope you like it.