You were only supposed to blow the bloody doors off...

10th June 2017

 

 

I woke up at 1.30 on Friday morning and made the mistake of checking the first few results. I never got back to bed. Whatever your political persuasion it is hard to see the election as anything other than a bad result for Theresa May. I think it was the best of possible results for the UK.
 
Anyone who has read my ramblings over the past decade or so will have gathered that I believe austerity was the wrong policy at the wrong time and that the decision to leave the EU was hugely misguided. Unlike many, I think it was right that May sought the approval of the electorate before the true Brexit negotiations started – I am delighted that approval was withheld.
 
There are many positives to take from the results. My natural leaning is toward progressive policies but I was concerned that under Corbyn’s friendly geography teacher persona lay a hard-left core that would simply see organised labour replacing the ultra-wealthy as the principal beneficiaries of socio-economic policies – leaving the many with little change. I was heartened by his acceptance of manifesto promises that conflicted with his own long-held views – his belief in party democracy appearing to trump his personal convictions. The Labour party now has a short period to rebuild, embrace those who had distanced themselves from Corbyn, and hopefully emerge nearer the centre with a deliverable alternative to austerity.
 
The rise of Ruth Davidson in Scotland has been a breath of fresh air. Her swift and unequivocal condemnation of the more illiberal views of the DUP was welcome, as was her assertion that country was more important than party. This makes a hard Brexit less likely.
The young have started to engage in the political process. For too long people of my generation and older have had a disproportionate influence and it’s great to see this starting to reverse.
 
And finally, Theresa May’s weak and wobbly performance has demolished any semblance of steeliness – this is no Iron Lady. We can now move from the silly confrontational negotiating stance to one that seeks the best outcome for both us and our long-term European friends and allies. The best negotiations result in a win-win.
 
If I were a betting man my money would be on a Labour Government by Christmas, with a small majority, supported by a progressive alliance. I think the chances of us leaving the EU during my lifetime have receded considerably. The negotiating timetable was impossibly tight even before the election was called. In two years’ time we will enter an interim arrangement and there we will stay indefinitely or at least until everyone has long forgotten about Farage, Gove and the £350m a day.
 
So, if this prediction came to pass, what would it mean for investors?
Broadly, it’s hard to see Labour’s spending pledges as any less realistic than the Tory’s. They would have been more appropriate in 2010; the risk now, especially against a background of falling immigration, is that we have too little productive capacity in the economy to absorb the additional expenditure and so risk stoking inflation, but they are at least pointing in the right direction. It is a great shame that Osborne abandoned the concept of a mixed economy in favour of a politically-motivated desire to reduce the size of the State. His failure to step in after the financial crisis, when the private sector was unable to, lies at the core of many of the tensions we now face.
 
We can look to the US for recent examples of both parties’ economic policies in action. Nationally, Obama introduced a Keynesian stimulus in 2010 that was not a million miles away from Labour’s proposals. It was universally accepted as being successful – covering its costs over a five-year cycle and stimulating growth. At around the same time the State of Kansas introduced tax cuts with the expectation that these would spur economic growth – along the lines the Tories are proposing. The Kansas experiment has been roundly judged to have failed. It would be too simplistic to cite two examples and draw firm conclusions, other than the Labour route does not have to lead to economic disaster.
 
While I would like to claim it was down to our skill, the fact is that much of the exceptional investment gains we have seen over the last twelve months have been illusorily. The fall in the pound after the referendum has seen the nominal sterling value of overseas assets and income increase. The real value of these gains will be eroded by inflation. Much of the currency depreciation was in the expectation of a hard Brexit. Any Brexit is going to be costly but a soft Brexit will be less so.
 
The UK economy is in a pretty dire place already. Last year we found ourselves growing at the fastest pace in the G7; in the first quarter of this year it was the slowest. This is after a 13% fall in the value of our currency and while we still have the benefits of full EU membership. It does not auger well for the future. Even before we have introduced controls, skilled immigration has fallen – in part because repatriated pounds are worth less but equally because foreigners no longer feel welcome – an aspect that leaves me both sad and ashamed.
 
With so much political uncertainty around Brexit it is simply not credible to assume private sector investment will step up to the plate to fill the gap left by a schism with Europe. The time for a mixed economic response that sees Government expenditure alongside private capital is surely now if we are to dampen the negative effects of Brexit. Against this background, Labour’s tax and spending plans appear not simply plausible but timely and essential.
The housing market remains a concern and the election has not improved the outlook. The rise in the youth vote will mean all parties will shift their focus to improving the lot for this cohort – which boils down to fixing the housing market. There is no pain-free way forward. The failure by successive Governments to boost supply has led to housing becoming an over-priced asset while the growth of the buy-to-let sector has increased risks. An increase in supply coupled with reduced demand on the back of lower immigration will see prices fall. With luck this will be experienced as depressed future growth – history suggests it is more likely instead to be a dramatic correction. The housing market is key to consumer confidence. Although we cannot spend the value of our homes they nonetheless exert a strong psychological influence. If house prices are rising we feel more confident and are more likely to spend, and the opposite when they are falling.
 
Compared to global market capitalisations our core portfolios have a UK bias. The justification for this rests on the multinational nature of many UK listed firms and the perception of relatively low political and currency risks. Over coming weeks we will be looking carefully at the extent this bias remains justified and the degree to which our portfolios are exposed to the effects of a strengthening pound if the risks from a hard Brexit continue to diminish. We have a reasonable exposure to smaller and mid-cap UK companies. Although these reflect factors that are likely to see stronger returns over the long term they are also firms that will tend to be more dependent on the domestic economy. We will be considering whether the extent of our tilt towards these areas remains appropriate.
 
Overall, these are minor tweaks to our long-term strategy. We remain of the view that in these uncertain times diversification is the key to managing risk.
 
Keep calm and carry on!
 
Richard Ross

June 2017

 

If you're interested in finding out more about how the Millennial generation is likely to change our world over the next decade then why not come to our Masterclass at the UEA on 18th July? Two of our Millennials, Radi and James, will be presenting their research on long-term socio-economic trends. Very interesting stuff with some surprising conclusions. More details and book a place here: http://www.chadwicks.co.uk/seminar-registration/july-2017-new-generation-investing/

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Foolin’ Around

1st April 2017

 

I’m writing this month’s musings on All Fools Day. It’s past noon. While I seem to have got away unscathed, with the benefit of hindsight, sitting in my car with the doors locked for five hours seems a lot of trouble to go to simply to avoid looking a fool. Still, it seemed a good idea when Mrs R suggested it...
 
We married young, although at the time we felt very grown-up. She was 19 and I had just turned 21. Back in those days, life was somehow more straightforward. You had to wait until June to get fresh strawberries (and even then, it was touch and go), shops didn’t start selling Christmas cards until December and there was one day a year when you had to tread very carefully to avoid any banana skins. We tied the knot in March so our first April Fools’ day came around fairly quickly. I was at the stage where I was playing the role of ‘responsible young man’ (don’t worry, it didn’t last) and as such felt it inappropriate to engage in childish frivolities. Unfortunately, as I plunged my foot into a boot full of cold water I realised my new wife had no such inhibitions.
 
Over the years I’ve come to accept I’m a soft target – a combination of being easily distracted and fundamentally trusting leaves me vulnerable to even the most amateur trickster. The one positive I draw from Trump and Brexit is that they suggest I’m not alone in being easily fooled.
 
Of course, our clients put a lot of faith in us not being easily fooled. This means we spend a fair bit of time trying to avoid leaping in before we’ve had a good rummage around. Lately we’ve been looking closely at Megatrends. Most of the time we focus on the current environment but we were interested in the investment potential of the long-term structural engines of change in three key areas – demographics, technology and the environment. Radi and James (respectively, our Head of Investment Research and our Investment Analyst) have put together a joint research paper that throws up some interesting and unexpected observations. Our starting hypothesis was that our longer term investors (our multi-generational clients) could benefit by investing early in areas that were likely to see higher levels of growth over the very long term but where the exact timing was difficult to pin down.
 
If you’d asked me before we’d carried out the research which of the three drivers would have the greatest impact over the next 50 years, I’d have said technology. Once you start looking at it properly it quickly becomes obvious that, while all three drivers interact to a degree, demography is way, way out in front as the most significant influence.
 
I’d previously thought of the ageing population seen in most developed economies as primarily a resource problem. I hadn’t fully appreciated the impact a declining working population has on economic growth. It’s obvious when you think about it – GDP is fundamentally the total of individual productivity multiplied by the number of working people.
 
The Japanese example shows us that, even for a technologically advanced nation, it is very difficult to achieve sufficient productivity improvements to maintain growth against the background of a falling population. Since the financial crisis, productivity in the UK has lagged well behind most of the developed world and what GDP growth we’ve experienced correlates pretty closely with immigration levels. Just saying…
 
Other areas that got me thinking were the regions where the population is continuing to grow. Developing economies have higher growth potential – for example, South Korea saw per capita GDP increase almost 13 times over the 30 years to 2010 – so surely investing here makes good sense? Well, maybe…
In the jargon, Economic activity is the result of the application of two factors of production Capital and Labour. Capital in this case is you investing your pension, ISA, portfolio, or whatever so companies can invest in factories, equipment and all the other things they need to produce goods and services. Labour is the people working for the companies. The economic benefits of this activity are not shared equally.
 
What tends to happen is that when an economy is developing a greater share goes to Labour. We can find evidence for this in the burgeoning middle class in many of these countries. As the economy matures so the share going to Capital increases until we get to the sort of situation we have in the UK, Japan and other developed economies. Wages stagnate as economic benefits increasingly flow to capital even though an aging population should mean Labour becomes a rarer (and therefore more expensive) commodity.
 
So, if we were considering investing in some of these developing economies perhaps we should be looking at demographic and social indicators rather than economic expectations to better judge whether we are likely to see a reasonable share of the growth cake?
 
The final demographic aspect I hadn’t really appreciated is the rise in spending power of the Millennials as they benefit from a combined inheritance of $30 trillion over the next thirty years - the largest ever intergenerational transfer of wealth.
 
Looks like I’m going to have to start treating our bright young things with a bit more respect!
 
Talking of which, if you’d like to read Radi and James’ excellent report it will be available on our all-new website in a couple of weeks’ time – or email me for a pdf.
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Michelle. ma belle

14th January 2017

 
 
We had a pretty good Christmas; a house packed with three generations whose combined ability to strip a house bare of food and drink would give a swarm of locusts a run for their money. Boxing Day evening saw the younger members packed off to bed while their elders slumped in a postprandial torpor, trying to summon up the energy to stuff away another mince pie. This gave Mrs R the opportunity she had been waiting for. Their guard was down; it was the perfect moment to introduce The Talk - what would happen to both acres that comprise the vast Ross Estate when we were called to a higher, or at least different, place?
 
The cobbler’s children have no shoes; the Ross children have no financial plan and now seemed as good a time as any to begin to put things right.
 
It started out well. More by luck than judgement we seem to have produced a brood that, even into adulthood, I still like (I’ve always thought you have to love your children but liking them is a bonus) and their initial responses along the lines of ‘we’re not interested in your money’ were reassuring. Thankfully, none was cruel enough to point out that a third of what was left after we’d paid for our dotage wouldn’t buy much more than a cup of tea and a bacon sandwich over which to reflect on our passing.
 
We should have left it there, kept things simple. But Mrs R had to nudge them. Over the next twenty minutes a disturbing narrative developed. A casual observer could easily draw parallels with a wider post-truth zeitgeist; unfortunately I was not only a participant, I was the protagonist.
 
It goes without saying that Mrs R emerged as a paragon who could be relied upon completely. I, on the other hand, had barely waited for the flowers to fade on the late Mrs R’s grave before I was off with a floozy so obviously only after me for my money. It would all end in tears when she ran away with a boy nearer her own age – taking their inheritance with her. Her name was Michelle. That I can only think of one Michelle I know and he’s a French chef called Michel, didn’t matter – they weren’t coming to our wedding and that was that. The only answer was for me to make sure any money I had was protected from her grasp.
 
Hang on, I protested, I love your mother dearly but she might fall under a bus tomorrow. I could live another 30 years. I could be happily married to someone else for another 25. Do you really expect me to restrict myself for the rest of my life?
 
       Yes
 
       Why?
 
       We’ve told you – we don’t like Michelle
 
   THERE IS NO MICHELLE!!!  
 
It was all fairly light-hearted but it serves to illustrate just how easily family discussions can escalate to internecine warfare. Dicken’s fictional Jarndyce and Jarndyce lead a long and sorry line of real and fictional litigants who have seen their inheritance melt away. Examples are easy to find. Peter Ustinov’s family has been battling since his death over a decade ago to the extent that his son is close to bankruptcy and the estate pretty much exhausted by legal fees. More recently, Robin Williams’ widow and children locked horns over the terms of his will. And it’s not even about the money. In Robin Williams’ case they are arguing about his memorabilia, which you’d think would be worth little compared to his overall wealth.
 
When it comes to estate planning, Inheritance Tax and divorce protection are important, but it is when we encourage family discussions well in advance that we add most value. It is usually when people are hit with the unexpected that things start to turn nasty. As with so many things, communication is key.
 
A trend we’ve seen developing is the move towards a desire to create a legacy – wealth that will be handed down through many generations. Often it’s people who had expected to leave behind a business that could be this legacy, only to realise, late in the day, that their children really weren’t that interested in running the family firm. This is an increasingly familiar situation – the rates of familial business succession have been plummeting for years. When you put a business into the mix, the potential for misunderstanding increases exponentially, making early discussion vital.
 
Wealth management is usually about helping people build a pot of money and then spend it at a rate that means it doesn’t run out before they do. Because we expect people to use most of their money during their retirement we must invest in reasonably liquid assets – we need to know that when we need the money we’ll be able to get it.
 
Taking an intergenerational view fundamentally alters our approach. Rather than managing a portfolio to sustain an income through a retirement with perhaps a bit left over at the end for family and friends, legacy planning starts with the assumption that the portfolio will be invested to create an indefinite income that spans generations. Relieved of the burden of maintaining liquidity we can look at longer-term trends.
 
For example, investing in a basket of developed market shares for five years will give a better return than cash just two thirds of the time. Not bad but hardly compelling. Extend the investment period to fifteen years and your basket will outperform cash over 90% of the time.
 
Similarly, small companies outperform large companies in two out of every three years but 95% of the time over fifteen years. Having an indefinite investment horizon means we can take advantage of these persistent factor advantages. It also means we can, more or less, close our eyes to capital value volatility and concentrate instead on creating a rising income stream.
 
We can also look to other indefinite investors such as the endowment funds of Ivy League universities for examples of alternative approaches. The Yale endowment fund runs to $25bn. Its investment allocation looks very different to a typical individual portfolio. Up to 50% of the fund is held in illiquid assets (venture capital, leveraged buyouts, real estate and natural resources) with only 4% of the fund in domestic (US) equities.
 
We can think about investments that reflect underlying socio-economic, industrial and political trends such as an aging population, the rise in robotics or the increasing importance of clean, reliable water supplies, gaining exposure to these areas through a growing number of specialist thematic investment funds. Having a team of enthusiastic economists makes us well placed to assess these opportunities.
 
None of which should bother the Ross children – Michelle would have spent the money long before any of the trends play out…
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If you don't know me by now....

9th November 2016

integrity (ɪnˈtɛɡrɪti/) noun
the quality of being honest and having strong moral principles
the state of being whole and undivided
 
And so another season begins.
 
I rifle through the pile of shirts, hunt down a No.4 and, pushing kit bags to one side, claim my place on the bench to start the ritual pre-game preparation. As a younger man I’d use this time thinking about my chances of scoring a try, today I’m hoping to get through the game intact. Unfamiliar faces meet my gaze as I scan the room; I know the names of only half the team and have played regularly with no more than a small handful. No worries, I’m down as replacement and my plan is to come on for the last ten minutes. This should mean I can claim I played a part in our historic victory while still being able to get out of bed relatively easily tomorrow morning.
 
Fifteen minutes in, flanker Chris comes off with a nasty gash to his head and I’m puffing around the park, after striplings a third my age. Man for man we are the bigger, stronger side but they are younger and fitter, much fitter. More importantly they are a team whereas we are a bunch of blokes in similar shirts. This proves a critical distinction as the game develops a relentless rhythm. Our strength means we tend to win the ball initially but no-one is quite sure if it’s their job to take it on. There is a split second of hesitation, no more than a moment but long enough for one of the opposition gazelles to pinch the ball and go haring off up the pitch. Once they are running at pace we can do little but stand back and hope they trip on a divot. There is no way we will get close enough to tackle them.
 
By the end of the game we are starting to understand one another, to build the magic that makes the whole greater than the sum of the parts. This special bond is at the core of every successful team, whether in sport or business. Once we know our teammates we can start to rely on them, to trust them.
 
Trust here is not about honesty, it more nuanced. It is about each knowing how someone will react to a situation. Will he expect me to take on the ball or will he pick it up and run with it himself? Trust is important because only when we truly trust our colleagues can we start transferring our tacit knowledge – the embedded knowledge that is a combination of experience and intuition; the deeper, more valuable knowledge.
 
Without trust we must build teams of all-rounders because we need to be confident that all bases are covered. Unfortunately, even good all-rounders tend not to be remarkable in any particular areas – it sort of goes against the definition. This means our team is likely to be competent but not outstanding.
 
However, with trust we can build a team of people who are brilliant in specific areas, but weak in others. By combining different skills a weakness here can be covered by a strength there. This is the type of team that has the potential to be exceptional and sits at the heart of our most successful businesses.
 
Integrity is the starting point for building a trust relationship. Shared values and ethics alongside the confidence that everyone will apply these with the same rigour creates a firm foundation that can be supported by other elements, such as our brand. Our brand is what captures the essence of our business. It conveys both to ourselves and the outside world what working with us is like. It is the sum of everything our clients see, hear and touch. It is intangible but the experience it suggests is tangible evidence of our integrity.
 
By behaving with integrity, in the sense of having strong shared values, we can create a team that itself will have integrity, in the sense of being whole.
 
The final score, 64-nil, perhaps flatters the opposition, but not much. We were pretty useless.
 
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Thinking of selling your business? 
Five things to consider..

13th September 2016

 
1.       How much is my business worth?
 
There is no magic formula to value your business – you will want as much as possible and the buyer will want to pay as little as possible; the value will sit somewhere between the two. 
Increasingly. the value of a business sits not in its plant and machinery, its computers and buildings but in the knowledge and skills of its employees and the way these are organised.  Understanding and capitalising on the value of these intangible assets is the key to maximising a sale value.
 
2.       Sell when you want to rather than when you have to
 
TIME : PLAN : RESEARCH
 
 A strategic approach will put you, as the seller, in a far better position when it comes to negotiating your business sale. 
 
 The process of selling a business is neither easy or quick. The longer time you have to plan your exit and prepare your business, the smoother the process will be. It will give you time to research who would be interested in buying your business and structure it in a way that it is more attractive to those people.
 
3.       The stumbling blocks to a smooth sale
  • No strategic approach to exit
  • Accountancy issues
  • Legal issues
  • Lack of good housekeeping
 
4.       How to structure and prepare your employees
Keeping the potential sale of a business confidential is virtually impossible, especially during a buyer’s due diligence process.
 
In the years before your planned sale, it is important to structure your organisation to encourage knowledge transfer. A more open approach will help eliminate rumours and concerns of affected customers, employees, and vendors, all of whom usually presume a sale will affect them negatively unless they have a better understanding of the process.
 
5.       How to replace the income from your business
 
Small business owners reap a number of financial benefits from their ownership. Many draw a competitive salary, receive regular bonuses as profits increase and enjoy significant entertainment and travel budgets paid by the company.  So how much will you need in retirement and will the profits from the sale last you?
Our autumn masterclass will look into all of these areas in more detail drawing from case studies, experience and a range of professional expertise.
 
To book a place, please call Emma on 01603 597701 or visit the masterclasses page here for more information.
 
 
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Rainy Sunday

9th September 2016

 

'I want a system where the Government is able to decide who comes into the country - I think that's what the British people want' Theresa May 5/9/16

 

Sunday afternoons at a boarding school can tend to drag. When I arrived at mine in 1969 Sunday afternoon walks were compulsory. The boys would get into pairs, form a long untidy crocodile and march off in one direction while the girls went in a similar, but neater, formation the opposite way. If the crocodiles looked likely to meet the boys marked time to allow the girls to pass unsullied.

By my middle teens the regime had become more liberal. Walks had gone and we filled our time listening to Bowie and Reed. My focus changed from trying to trip the boy in front to trying to get a girl, any girl really, to notice me. Eventually one did, but, as she pointed out, it took three years. 

I don’t know who of us suggested it but it was one of those early Autumn Sunday afternoons that saw me running outside into a Biblical thunderstorm with the future Mrs R. Within seconds we were soaked through and beyond caring; splashing through newly formed streams; rolling on the grass; pushing each other into deep puddles. I still remember kissing cold wet lips while the rain coursed over us.

That the memory has lingered for over forty years is possibly down to it being one of the few times I enjoyed getting caught in the rain. For most of my life I’ve looked on bad weather as something best avoided. I usually manage to hit it around twenty miles into a forty-mile bike ride or just after half time at Broadland, where the rain is always sleet and attacks you horizontally from across the broad expanse of Breydon Water. I can’t help but feel it would be rather splendid to be able to control the weather rather than simply be a slave to its vagaries.

Of course, our atmosphere is a complex system. Ordering a sunny day for your bike ride could have disastrous effects on the other side of the globe. If some day weather control moves from science fiction one fact is sure to remain: you can’t stop thunderstorms by regulating against them.

I get the impression that my weather aspirations are similar to the way politicians view markets. It would be rather splendid to be able to control them, particularly when they feel they are behaving inconveniently.

The labour market is one that is getting a lot of attention after the Brexit vote. The claim is we have uncontrolled immigration. This is odd, coming as it frequently does from self-proclaimed free-marketeers.

Last year we had net immigration of around 300,000, half from the EU. Yet unemployment fell and employment rose. In aggregate, immigrants are net contributors to the public purse and as individuals they are less likely to be unemployed than the average born and bred Brit. This suggests a market that is close to equilibrium and functioning well. Immigration is controlled – it is controlled by the market; the fundamental force so revered by the people now seeking to rein in its powers.

Like the weather, markets are complex; there is a long and sorry litany of unexpected consequences when Governments have moved to influence markets for political ends – even if the end is one the people declaimed. If you think of a market as a balloon, if you regulate to squeeze one area it simply pops out somewhere else.

I happen to enjoy working with foreigners – our office is not quite the United Nations but we are a fairly cosmopolitan bunch. For those who are less comfortable with immigration, regulation to restrict numbers is the wrong approach and will not work without harming the market.

That does not necessarily mean immigration cannot be reduced without causing economic damage. For example, we have around a million people unemployed and many more with only basic skills. The response that would see a sustained reduction in immigration is a proper commitment to improving the skills base through training and education – seeing the future as something to invest in rather than a target for cuts. We need more schools and colleges delivering life-long learning and training to reduce immigration, not regulation, quotas and tighter boarders.

I fear the runaway Brexit train now has too much momentum and we have lost the opportunity for a strategic response to immigration but sometimes life surprises you…

When I got back with The Future Mrs R wet, bedraggled, grinning broadly and expecting a bollocking we were met by the girls’ matron brandishing two towels, suggesting we get out of our wet clothes before we caught our deaths. There’s something vaguely matronish (if not matronly) about Teresa May, so maybe, just maybe…

 
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Portfolio management - One political catastrophe at a time
 
 
July 6th 2016
 
 
The Brexit vote was a real test for our portfolios. We had followed the old adage of ‘hope for the best but plan for the worst’ so, while we were deeply disappointed with the result we were at least confident that our clients’ portfolios were reasonably well protected.
 
Research, test and then test some more… 
 
In May we ran some test scenarios to see what the effect of a Brexit vote might be. We tried to model the interactions between different markets, asset types and currencies, working on an assumption that a Brexit vote would lead to a 10% reduction in the value of Sterling and a similar fall in the main stock market. Our somewhat crude model suggested portfolios might be expected to fall around 3% in this extreme example. In the event neither assumption was a million miles out, however the portfolios proved very much more resilient than our modelling predicted. The way we manage money means pretty much everyone’s portfolio is unique but they are all similar. The chart below shows the average return across all portfolios over the five days around the vote – in the event our portfolios in aggregate lost less than 10% of the model prediction and very much less than markets generally. We virtually eliminated volatility over the period. We are acutely aware of the dangers of hubris; we are only just out of the starting gates in terms of this crisis and it has a very long way to run, but I think we can say we’ve had a good start, so far so good.
 
 
 
 
 
 
 
How did we manage this? 
 
Nothing to do with being clever I’m afraid – in the main it was simply because we took the decision to increase diversification at the start of the year in response to what we perceived were heightened global risks. Although, perhaps we were just a little bit clever. We spent a fair while debating whether we should hedge against the Yen – Japanese funds did incredibly well in the wake of Abe’s stimulus package but a lot of these gains were lost to Sterling investors through currency movements. Following Abe’s re-election and the rekindling of his stimulus policy, Radi carried out a lot of research before concluding we were better not to hedge. This meant that when markets around the world fell sharply the 7% fall in the Japanese market was more than compensated for by the 15% devaluation of the pound against the Yen.
 
 
If we’ve not lost money does this mean Brexit is good? 
 
I was struck by a comment leading Brexiteer and Leader of the House Mr Grayling made on Monday 27th June. Asked whether Project Fear was turning into Project Reality, with equity markets around the world in freefall and the pound collapsing he replied that it wasn’t all bad – the price of Government Bonds was rising. That one comment laid bare his ignorance. Government bond prices rise when the yield falls. The yield falls because people have no confidence in the future. That yields have fallen below 1% indicates that a great number of people far cleverer than you, me and certainly, it would appear, Mr Grayling, feel the future outlook is so dire they are prepared to accept a negative real return rather than risk their capital.
 
Our client’s portfolios have performed well in large part because the pound has collapsed. The FTSE 100, which is dominated by 20 multinational companies, has out-performed the FTSE 250 because the overseas earnings of those multinationals will receive a Sterling boost from the de facto devaluation. Although this is very useful for investors it is important to appreciate the expected increased profits are dependent on the continued perception of the UK as a weakened economy.
 
A lower pound means our exports will be cheaper – if we can manage to persuade companies like Nissan to stay while we negotiate a new relationship with the EU then that should be helpful. However, it also means imports will be more expensive. Great – it will encourage us to buy more from our own manufacturers and mean they will also be able to export more. Except we import a vast amount more than we export. The current account deficit is £32,600,000,000, around a third of a trillion pounds. It is naïve to think we could reduce this meaningfully overnight. What is more likely to happen is we will import inflation. 
 
But isn’t inflation a good thing? it seems only five minutes ago that we were worried about deflation. There is good inflation, there is bad inflation and there is blimmin’ terrible inflation. This is in the latter category because it is not driven by higher wages, it is not driven by increased profits it is simply a result of a reappraisal of the value of the UK. It means that it will be borne by consumers with little hope of compensatory pay increases and companies with little room to increase their prices. It will lead directly to a squeeze on living standards and profits. We will all be poorer, which means we will buy less of the good and services our native companies are offering which will simply accelerate the downward spiral.
 
And to the extent the lower pound dissuades us from buying as many imports so this means those exporting to us will be able to buy less from us, even if our goods are now cheaper.
 
In short, to answer the question… 
 
The relatively benign reaction of the markets is an illusion hidden behind the smokescreen of the fall in the pound. It is not good news.
 
So where do we go from here? 
 
It’s worth thinking back to the reasons we structured our clients’ portfolios as we did.  We considered there were a number of potentially larger than usual global risks. At the time – indeed until last Friday morning – we felt Brexit was unlikely. Our primary concerns centered on the general slowdown and potential reversal of the global recovery, the persistence of low oil prices and the tension between very fragile economies barely out of recession and a US economy that wanted to start the move towards unwinding QE and normalising interest rates. All those risks persist; all that has changed is Brexit has heightened them. We therefore feel our core strategy remains unchanged – we continue to diversify widely and in times of heightened risk we aim for a low volatility. The current beta of our core model portfolio is 0.5, which means it is expected to be half as volatile as the market portfolio.
 
There have been some changes which have proven not to be advantageous. We reduced exposure to the FTSE100 in favour of the FTSE250. At the time we felt the global risks were higher than domestic risks and reducing exposure to overseas earnings was prudent. Over the referendum this has proven to be a mistake but we are comfortable with maintaining this exposure as providing a degree of diversification against global risks.
 
An so to the Autumn..
 
Overall, we feel we have jumped over the first hurdle reasonably safely and are now turning eyes towards the next ones – postponed autumn Brexit decision, autumn US president elections, autumn US Fed interest rate decision – it’s going to be an interesting autumn…
 
For more information on how we manage our clients’ money, please do not hesitate to contact us on 01603 597700.
 
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Up, up and Away

June 24th 2016

 
So, the battle is over.
 
As bright sunshine pours over the rain sodden field of conflict and the discarded standards of the Leave and Remain camps lie trampled into the puddles from last night’s downpour it is hard to ignore the sense that while the Brexiteers got more votes, none of us has won. The campaign has lifted the lid to reveal a side of the British psyche that is, at best, unedifying. I am left feeling that we have not simply shot ourselves in the foot, we have blown off both legs.
 
How have we come to this point? Is this a Peasants Revolt for our times? Too many are disenfranchised. Too many work long hours yet rely on benefits to survive. Too many feel the squeeze on resources, blaming immigration rather than poor planning. Too many feel they have nothing to lose. And what hope does the Government give them? None; only a future of more austerity while the schism between haves and have-nots continues to widen. Is it any wonder if this was the moment they seized the opportunity to rebel, to give Cameron and all the other ‘haves’ a bloody nose?
 
Does it really matter? Surely we’re a strong country and we’ll be even stronger on our own? A couple of years ago, studying Economics as a post-graduate, I spent a semester poring over the European Union gaining some insight into the value of tariff-free trade; of free-movement of people; of the way trade deals are struck between large trading blocs, not individual countries. I understand the considerable value of what we had – I have no idea of the value of what we might achieve. In this I am no more ignorant than anyone else – we are heading into an uncertain future.
 
We can think about the likely consequences. Within hours of the result international financial services companies were calling on the Government to delay starting negotiations so they had time to arrange their departure. Even before the vote Foreign Direct Investment into the UK was falling; we can expect that trend to accelerate. Will Multinationals continue to see the UK as a natural gateway to Europe?
 
We may not like immigration but, as anyone in financial services will be acutely aware, we’re facing an aging crisis. Each year 700,000 people turn 65, stop working and start living a life on benefits. In a decade we’ll be pleading for young people to make their lives here. What a sad irony that the demographic most reliant on a young, vital workforce was the one that most enthusiastically embraced Leave.
 
We can look forward to months of political uncertainty. It is right Cameron is going – he has been unashamedly cavalier with our futures and this dangerous farce has exposed a naive opportunism that ill-becomes a leader. Or an ex-Mayor for that matter.
 
Where does this leave client portfolios? In times of uncertainty there are two fundamental approaches - to avoid or to manage the risk. Avoiding would have meant moving client portfolios to cash over the referendum period, which may yet turn out to have been the better call. However, our approach has been and remains to manage risk by increasing diversification. Although predominately passive we have introduced some specific actively managed funds where they can provide exposure to non-correlating assets. We have a higher than usual exposure to overseas markets where the fall in the value of the pound should compensate for some of the market volatility. We have introduced a UK infrastructure fund that is likely to benefit from the financial stimulus that looks more certain if we are to lessen the depth of the forthcoming Brexit recession. We also introduced a long-dated Gilt fund as an ultimate insurance policy that looks like being our best-performing holding.
 
We took these positions at the beginning of the year to reflect what we perceived as higher global risks at a time when it appeared the referendum would be no more than a sideshow – none of those risks has gone away, the Brexit vote has simply amplified them. It is going to be a very difficult time ahead.
 
The referendum debate has shone a light on the way we make decisions. The cosmopolitan view was that it was all about the economy, stupid – people would vote with their wallets. In the event, other influences were at play.
 
In our July Masterclass we’ll be looking at the underlying cues and biases that impact our decisions in an introduction to Behavioural Economics. If you would like to come along you can find more details and book a place here 
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Chasing Cars

May 2016 

 
I once had a 4.2 litre XJ6.
 
It cost about as much as a second-hand Cortina but magically commanded effortless respect. It was fast, comfortable and I managed to resist the urge either to get a sheepskin coat or join a golf club and quaff pink gins at the 19th.
 
‘Wel
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