For more than 25 years I have either run money, advised portfolio managers or written research about investing. Why aren’t you retired then, I hear someone shouting from the back. It’s a good question to ask all financial “experts”. My answer, for what it’s worth, is: four kids, divorce and always being first to the bar.
Over my career I have learned that the giving of advice suffers from two problems. First, it’s often wrong. Trump as president? Will never happen. Buy emerging market equities — oops. And second, the giver rarely suffers when it is wrong.
This new weekly column will try its darndest to minimise the number of bad calls. Better still, why don’t we agree that sometimes we’ll be extremely late to a good idea, or so far ahead of the curve that we won’t be alive to celebrate our gains? I won’t ever say the word “wrong” if you don’t.
As for having no skin in the game, there will be no recommendations that I do not participate in — whether buying, selling or downing tools for the summer. We’re in this together. And by leaving single-name stocks to the Reddit brigade — sticking only to sectors, indices and large asset classes — we cannot be accused of market manipulation.
To ensure my money is where my pen is, you will be able to view the performance of my portfolio each week. Except for a small investment in a friend’s data business (Essentia Analytics) I have no other savings. Just as playing poker without money is for children, investing without the joy and fear that come with putting your own assets on the line is mere fantasy.
This is why so many model portfolios shoot the lights out. They are not real. What is, as I experienced in 1999, is being five percentage points underweight News Corp as it rose and rose during the dotcom bubble. I was sure it would pop, but my doubts grew. What was I missing? Colleagues stop looking you in the eye. You don’t sleep. Hardly eat. Eventually my relative returns were so bad I was forced to buy. Then it tanked.
It wasn’t even my money. Clients were the losers. Which is why I consider the writing of a personal finance column such a responsibility. Some readers will be minted, others bearing unimaginable financial pressures. There is no way I would consider offering up recommendations if I weren’t to follow them myself.
Let’s begin with a target. I want to double the size of my pension within a decade, in real terms. That is an inflation-adjusted return of just above 7 per cent a year. Long-run equity returns are a tad below this, so it might not seem ambitious. But we are coming off a multi-decade bull market, valuations are still rich and the world is facing crises aplenty. I reckon this is a sensible aspiration — not too greedy, realistic and with scope for upside.
Now to open the book. My only investments lie in two defined contribution pension schemes of roughly the same size, totalling £438,000. The largest bet is a 27 per cent exposure to UK equities, then cash at a smidgen less, followed by a world ex-UK equity fund. Then it drops to an 11 per cent holding of Pacific ex-Japan stocks, and the same weighting in Japanese shares. That’s it. No fixed income. No alternatives. No gold.
Over the coming months, we’ll analyse these positions and any news that affects them. What made me buy? Does the investment case still make sense? What’s better out there? But in the week of the Autumn Statement, how about we start with that whopping UK equity exposure?
I had moved out of risk assets before the pandemic (a fluke) and when equity markets collapsed in the first quarter of 2020, I wanted to rebuild my equity exposure. But what to buy first? I didn’t necessarily care where, only that the market had to be cheap enough to compensate for the still-extreme uncertainty around Covid.
The forward price/earnings ratio of the US S&P 500 had dropped from 20 to 14 times. But UK indices, whose prices had fallen by a quarter, were on nine times. One day I will write about PE ratios and why they are silly. But silliness in single digits is often a buy signal.
So it proved. My FTSE All Share ETF is up one-third since then. What now? Unusually, the index is cheaper on an earnings basis today than when I bought it, despite the rally. One reason is that oil company share prices have merely doubled since 2020, while their profits have skyrocketed. Similarly, bank and pharma share prices have trailed some spectacular earnings rebounds.
The low multiple also reflects concerns that profitability is going to collapse next year — by up to one-third based on consensus estimates. That seems harsh. Besides, earnings dropped by way more than that in 2020 and stocks bounced. Remember too that the UK has a rump of amazing companies no one’s heard of. These tend to be asset-light businesses in pharma and technology with valuable patents and impressive R&D pipelines. The median cashflow return on invested capital for UK indices is world class.
Because the majority of revenues on UK equities are derived overseas, a weak pound is good for translated earnings. If the Autumn Statement fails to convince markets, therefore, stocks should be a nice hedge. Indeed, there is a 60 per cent inverse correlation between the quarterly returns of the FTSE All-Share index since 1969 and sterling versus the dollar. Be warned, though, in the past five years the correlation is reversed.
I’m going to keep my weighting in UK stocks. Experience tells me the best time to own anything is when it makes me feel terribly uncomfortable. I’ve got that sensation now for sure. Don’t you?