Every year feels like a fresh start, and certainly 2022 is a year many would like to forget. We wanted to start the 2023 “Howay the Ladds” series with the idea of perception. The quote below is the starting point for our blog.

“Perception is reality, but it may not be actuality, and you have got to be able to keep the difference between that.”

Bill Cowher

Download PDF of “Howay the Ladds”

February Spotlight

Rae and I recently stayed in a hotel and our daughters asked us to take a picture of the view from the hotel. This is the picture we took.

Taken on its own the view from the hotel is not very inspiring! That is reality. But the picture is only part of the scene. If I had taken a different picture, it would have shown rolling hills in the background and thatched cottages.

The world is such that often what we read or see and then believe is someone else’s perception and very often to maximise the impact it is taken out of context. It is not wrong; it just means that we are not always presented with all the facts.

We recently updated our investment matrix which was then read by a friend. After reading it they said “this is depressing”. Read on its own they were correct in their thinking. However, when I explained where we had come from and where we are today, their view changed.

We feel we take a different approach to investing money. But much of what we do is unseen. The two “touch points” to what we do are through the valuations and the annual rebalance. But getting to this point is something that is not seen. Rightly so, people’s perception of what we do can vary depending on what they see. Probably, if we speak to a fund manager, their perception of what we do is very different to a client’s perception.

In the last update we talked about the returns we target over the long-term, and briefly in this update we will talk about how we think we can get to this point. Yahoo Finance state that the average investors hold a stock for 5.5 months. We are aware of managers of portfolios similar to ours who move funds on a quarterly basis or more often. The feeling behind this is that you have to do something to get the returns you want.

The question is, what are those returns? If we want 20% p.a., then we must take more risk and be prepared to take losses. We call this gambling because it is the chase for returns that are very hard to achieve. It is not impossible and those who succeed are often the only ones we read about.

So, the starting point for us is two-fold. Firstly the process, and secondly being clear on what we are looking to achieve and whether this is achievable.

An important understanding is that even the very best fund managers get things wrong. So we must recognise when something hasn’t gone the way we expected and learn from this.

To achieve the outcomes, it means that in the background we are constantly working on the portfolios. We have a longer-term outlook of 5 years plus. We are aware of the short-term noise and we look to understand this. When we look back at the changes we have made over the last five years some of these have been because things have changed. As an example, higher rates and inflation mean that fixed income (debt) becomes more interesting.

The danger is when we read things and act impulsively on what we have read. Before we make any changes we do a great deal of research, we talk to managers, we look at different sources of information and then we make a decision.

We are also very open about what we do and share all fund manager research on the website. Many would lead us to the conclusion that investing is a secret dark art that only a few can do. We are of the opposite view: you need to do a lot of work and it is not easy, but you can share what you do.

So, where does this all lead. Over the last five years we have been monitoring all the funds we have removed and identified any learning points. During this period we have removed on average 8.6 funds a year, our average holding period is 5.40 years and the average return per holding is 64.30%. There are of course years when we remove fewer funds (2021 and 2022).

Whatever the perception of what we do is, it is not wrong. If it is that we send out a “rebalance” pack once a year and valuations twice a year, that is not wrong. The reality or actuality is that to achieve these requires a lot of work and a lot of research. So if we have a year where we make few changes that is okay, if we make more that is okay as well. Ultimately, we are not gamblers. We want to grow wealth over time, and to do that requires patience and time.

We thought to end we would share this graph which shows the performance of the portfolios since launch vs the target return of between 6% and 8%.

Tracking the market

Bitcoin had a brutal 2022, down over 65%. It reflects the danger of chasing returns when investors don’t understand the risks. It has recovered from these lows but remains significantly below the peak.

Across the markets we have seen a recovery in January but, except for the FTSE100, the indices are below the start of January 2022. We continue to believe that the market will be volatile, but it does provide comfort that although the markets have recovered, they are still some way from their peaks.

 1 January 20221 January 202331 January 2023Increase
Bitcoin USD47,686.8116,625.5123,139.28+39.20%
Crude Oil76.0880.5778.87-2.11%
S&P 5004,796.563,853.294,017.77+4.27%
Stoxx Index489.99430.01455.17+5.85%
FTSE 1007,505.207,451.707,765.20+4.21%
Hang Seng23,374.7519,570.4321,842.33+11.61%
Nikkei 22529,301.7925,834.9327,327.11+5.78%

Sources of data: CNBC, Yahoo Finance & Reuters

What is in and what is out?

Energy still dominates the top ten funds, with 8 out of the 10 funds being energy related. Interestingly, the top two are not energy funds! The top three are HSBC MSCI Turkey NAV GBP +82.40%, iShares MSCI Turkey UCITS ETF GBP +79.90% and iShares S&P 500 Energy Sector UCITS ETF CHF +50.60%.

The bottom ten remains a diverse mix of technology, emerging Europe, and specialist investments. The bottom three are Schroder ISF Emerging Europe A Dis NAV GBP AV -62.10%, HAN ETC Group Digital Assets & Blockchain Equity UCITS ETF Acc USD -57.40%, and Liontrust Russia C Acc -55.50%.

The most recent data from the Investment Association is up to the end of December. Outflows have slowed and November was slightly positive.

Areas seeing large outflows of assets included UK All Companies -£1,001 million, Europe excluding UK -£223 million, Short Term Money Market -£490 million.

In terms of inflows, these were relatively small, but the main ones were Global +£237 million and North America +£358 million.

It is difficult to say whether we are seeing a turning point. However, we have said before that investor behaviour is such that when markets are rising they invest, when they are going down they tend to take money out. Clearly there is a degree of uncertainty but trying to time the bottom of the market is almost impossible to do. With a longer-term outlook, when asset prices are cheap that is where the most opportunities will be found.

We wanted to share some charts. We can’t forecast the future but we can look to history. We think these should provide comfort for investors.

Sources of data: TrustNet, Investment Association

Talking shop with fund managers

We have spoken to a few fund managers so far this year. We will write up the notes and these will be added to the website shortly. To read please follow this link – https://lwmconsultants.com/portfolio/fund-manager-meetings/

We will shortly be writing to all holders in the Positive Impact Portfolio, but we wanted to provide some insight to an investment which has gone down significantly and what we are doing and what we have learnt.

Home REIT provides long-term accommodation for the homeless. The homes are sourced on the back of a specific request from a housing association. Ultimately the rent is backed by the government. In terms of the Positive Impact Portfolio this fits well with our social impact theme.

We did significant research into the trust. The trust also has large institutional investors including M&G (15.4%), BlackRock (9.30%), Liontrust (5.73%) and Rathbone Investment Management Ltd (3.99%).

We had spoken to the management team and our analysis is on the website. We had also spoken to some of our contacts at investment houses and nothing was flagged as an area of concern. We made the investment in July 2022.

Towards the end of 2022, a company in the US shorted the stock. This means that they were “betting” on the share price coming down. What they then did was issue a negative report questioning some of the aspects of the business. This forced the share price down and the company shorting the stock made a significant profit.

We spoke to the management and felt comfortable that action was being taken, but we were aware that until the enhanced audited accounts came out the share price would be volatile. In January the shares were temporarily de-listed.

During this time we have been in contact with the management team and we have also been in contact with some of the large institutional investors. The institutional investors are actively engaging with the management team and working together to deliver a positive outcome. This gives us confidence that the shares will be re-listed and we expect that if the right steps are put in place we will see a recovery in the share price.

What have we learnt from this? A similar action took place against Civitas which is another holding. There are two learning outcomes. Firstly, we must ignore what is being written in the press and engage with other parties, and secondly with these investments we cannot control external threats. If someone decides to profit from forcing the share price down, we can’t control that. Ultimately, however well we do the research, however well we engage, this is an external risk that we had never considered and therefore it may be a reason for us to either stay away from these types of investments or look to larger investment houses to manage them.

In conclusion, we wanted to share this as a way of showing what happens behind the scenes. The wider view. It is not just about the outcomes, it is about how we get to that point, and then learning from what we do. If things don’t work out, why is this, is there something we missed, is it just unfortunate? Sometimes things change and we must adapt to reflect that. Sometimes external forces come into play and we cannot predict that, but we can build that risk into the process.

Back to where we started:

“Perception is reality, but it may not be actuality, and you have got to be able to keep the difference between that.”

In conclusion, what we read about Home REIT is what people want us to read. It is not necessarily incorrect but like the picture at the start, there is a wider perspective to consider.

General disclaimer: The data has been sourced from external sources and although we have looked to ensure this is as accurate as possible, we are not responsible for data they supply. The view on markets is written in a personal capacity and reflects the view of the author, it does not necessarily reflect the views of LWM Consultants. Equally the views under talking shop are those of individual fund managers. Individuals wishing to buy any product or service because of this blog must seek advice or carry out their own research before making any decision. The author will not be held liable for decisions made because of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.