Wednesday, 19 March 2014

Portfolio Update March 2014


Since my end of year post on January the 3rd, the markets have been fairly stagnant. The FTSE All-Share (my new benchmark index), has fallen about 1.1%. My portfolio is only down about 0.4% but this includes a couple of dividends received so I am probably broadly in line with the benchmark.

Most of my larger holdings have been resilient. Astrazeneca, GlaxoSmithKline, Imperial Tobacco and British American Tobacco have risen nicely, and Berkshire Hathaway has had a recent spike upwards, Lloyds Banking Group is treading water.

However there have been a few disappointments. Cairn Energy has taken a big hit due to a bout of unsuccessful drilling projects, and also a tax investigation by the Indian Government. I will hold these shares for the time being as I think the bad news is fully priced in, but they are top of my hit list should any better ideas come along.

Polo Resources, another natural resource play, have also been suffering in light of weak commodity prices. They remain priced at a huge discount to net asset value, yet are still growing their asset base. Their latest investment is a purchase of 12.8% of the Tunisian phosphate miner Celamin. Polo only constitutes a very small portion of my portfolio, and I will continue to hold for the time being in the hope of a re-rating to reflect the value of the underlying assets.

My holding in JPMorgan Russian Securities has taken a hammering (-20%) due to the political unrest in Crimea. I think this fund represents fantastic value at these prices, so last week I bought a little more. There is obviously now a substantial amount of political risk in this investment, but hopefully in the long run the issues will be resolved and the fund will re-rate. In the meantime I'll benefit from a generous yield of 3.6%.  

I have also topped up on HSBC, who are also trading at a bargain basement price. Their forward PE is almost single digit and their forecast yield is 5.4%.

The decision to reduce my holdings in Tesco is looking like a good one. They have continued to struggle to hold their market share against discounters such as Lidl and Aldi, and are now in a nascent price war which will undoubtedly lower their net profit. That said, a lot of the bad news is priced in, and the shares are yielding almost 5% so I'll happily hold on to what I have remaining for the time being.

That's it for now. Happy investing all.














   


Thursday, 27 February 2014

FE Alpha Managers


It's a fairly well documented fact that most actively managed funds under perform their passive, index tracking rivals (and charge investors extra for the privilege). 

However there are some managers out there who are well worth their proverbial salt, beating the market consistently over long time frames. Here are five such managers as demonstrated by the FE Alpha Managers list. Below are the current top five performers over a 10 year period, and the respective funds they manage.

1. Harry Nimmo - Standard Life UK Smaller Companies Trust PLC - 438.3%
2. Daniel Nickols - Old Mutual UK Smaller Companies PLC            - 384.1%
3. Martin Lau      - First State Greater China Growth                         - 337.5%
4. Nick Train      - CF Lindsell Train UK Equity                                 - 307.3%
5. David Dudding - Threadneedle European Select                            - 302.5%

source: www.trustnet.com 

Some of these outstanding returns are no doubt attributable to the fact that these funds rate higher than average on the risk spectrum: you would expect smaller company, and emerging market funds to generally outperform the market as payment for taking on the extra risk. It is of little surprise that no income funds made the top five.

Nonetheless these managers have all significantly outperformed their benchmark indexes and deserve consideration as part of the risky portion of an adventurous portfolio. Whilst past performance is no certain guide to the future, there is a reasonable chance that shrewd managers who have made good investment decisions will continue to do so going forward.

For more information on index trackers v managed funds check out the following link.



  

Wednesday, 5 February 2014

10 Tips For Stock Market Success


  1. Buy quality businesses at reasonable prices:  look for companies with an enduring competitive advantage, a strong revenue stream, and ideally a good record of dividend payment/growth. Familiarise yourself with valuation measures such as PE ratios, NAV etc and use these to determine whether the business is attractively priced. Resist the temptation to overpay.                                                                                                   
  2. Learn to cut your losses and let your profits run: if the fundamentals of an investment have changed for the worse, then re-evaluate your position and possibly get out. Don't try and hold out until you have recouped your loss, you might be better off making your money back on a different (healthier) horse. On the flip side don't be too quick to bank your profits on good companies.                                                                                                                                                                               
  3. Be tax efficient: make use of your ISA allowance, pension contributions, and other tax reducing investments. The majority of smaller DIY investors can avoid paying tax on their investments if they plan effectively.                                                                                                                                            
  4. Use diversification wisely: diversification is a double edged sword. On one hand holding a large basket of shares does negate much of a portfolio's company specific risk, but on the flip side if you are not allocating enough capital to your best ideas, you're less likely to outperform the market (presuming your best ideas are any good).                                                                                                                                       
  5. Size matters: in theory investors in smaller businesses should be rewarded with higher returns for taking extra risk, and Jim Slater's adage that 'Elephants don't gallop' would appear to have some merit. Yet I don't think it's as straight forward as this. Large boring companies are often undervalued by the market and can produce great returns, with less volatility than smaller companies. The FTSE100 has significantly outperformed the AIM index since it's inception.  Large cap companies may not double in price overnight, but they make up for this by not going to the wall as frequently as their smaller brethren.                                                                                                                                    
  6. Use tactical asset allocation: If the indexes of the world are heavily overbought, and trading on 20+ PE ratios, consider diversifying into other asset classes that may offer you higher returns, or at least protect your capital against a fall in the market. Conversely if stock prices are cheap on a historical basis, consider increasing your exposure to them.                                                                                                                                                                                                                                                                                   
  7. Keep a lid on costs/fees: minimise your costs as much as possible and try not to over trade. A saving of 0.5% a year on fees would make a huge difference to your investments over a lifetime of investing. For examples of the effects of lowering fees check this link.                                                                                                                                                     
  8. Invest for the long term & use cost price averaging: be patient, view your stock market investment as a get rich slowly scheme. Historically equities have outperformed cash 99% of the time over an 18 year period, but you may have to ride out some short/medium term volatility before gains are realised. Buying equities in tranches will help smooth out some of the short term market volatility.                                                                                                                                                                                
  9. Be contrarian: the best value is usually found in equities that other investors fear to touch. Financial & House Builders' shares fell heavily out of favour during the credit crunch and in most cases investment into these sectors would have paid off handsomely. Conversely, if a particular share/sector is getting a lot of positive press and has already significantly rallied, you may do well to keep away from it.                                                                                                           
  10. Read up: like most things in life there is a learning curve to investing, and because there is money involved it makes good sense to learn as much as you can before you commit your hard earned cash to the markets. I recommend reading the Investors Chronicle, Financial Times and Sunday Times Business & Money sections regularly to keep you up to date with matters.            

Friday, 3 January 2014

Happy New Year!! - 2013 Review.


Happy new year everyone! Hope you had a good 2013 and many thanks for reading!

Benchmarking

Last year was a great one for dabbling in stocks, and I'm quite pleased with how things have gone.  Jan 3rd 2013 the FTSE 100 was sitting at 6047 and it has risen to 6725 today, which including dividends received would have given you a total return of around 14.6%.

The FTSE All Share (which is the capitalisation weighted aggregate of the FTSE100, FTSE 250 and FTSE Small Cap indices), did slightly better, rising from 3170 to 3598, which including dividends received has given a total return of 16.78% over the year. I think the All Share will prove a more accurate benchmark going forward as it fits my holdings more closely than the FTSE 100 as shown in the table below.

Over the same period my holdings have risen 27.3%, this figure includes all dividends received and expenses paid, no new money has been added to the portfolio. The current breakdown of holdings is as follows:

Company Market Amount % of Holdings % FTSE 100 % FTSE ALLSHARE
AstraZeneca FTSE 100 £15,227.01 10.61 10.61 10.61
BAE Systems FTSE 100 £7,288.37 5.08 5.08 5.08
Berkshire Hathaway (B) S&P 500 £4,355.55 3.03
British American Tobacco FTSE 100 £11,102.69 7.73 7.73 7.73
BT FTSE 100 £5,302.40 3.69 3.69 3.69
Cairn Energy FTSE 250 £4,050.08 2.82 2.82
F&C Commercial Property Trust FTSE 250 £5,731.22 3.99 3.99
Fidelity China Special Situations FTSE 250 £8,352.80 5.82 5.82
GlaxoSmithKline FTSE 100 £14,987.64 10.44 10.44 10.44
HSBC FTSE 100 £4,617.90 3.22 3.22 3.22
Imperial Tobacco FTSE 100 £9,794.26 6.82 6.82 6.82
JP Morgan Russian Securities FTSE Small Cap £1,892.15 1.32 1.32
Lloyds Banking Group FTSE 100 £18,643.05 12.99 12.99 12.99
Molins FTSE Small Cap £2,236.85 1.56 1.56
Murray International Investm Trust FTSE 250 £8,970.88 6.25 6.25
Oakley Capital Investments AIM £5,973.60 4.16
Polo Resources AIM £1,173.21 0.82
Templeton Emerging Markets FTSE 250 £3,978.00 2.77 2.77
Terrace Hill AIM £2,133.02 1.49
Tesco FTSE 100 £1,663.45 1.16 1.16 1.16
Cash £6,086.79 4.24
Total £143,560.92 100.00 61.74 86.27



Typically the returns from each holding have varied dramatically; Lloyds Banking Group, my biggest holding, gained about 60%. BT also gained 60%, BAE systems up 23%, Fidelity China up 20%, AstraZeneca up 19% plus many of the house builders that I sold earlier in the year made huge gains in the spring. On the down side Tesco have been disappointing (down 5%), as have my natural resource plays which have been stagnant or falling. Also I have been disappointed with the performance of Murray International Trust which has fallen since I purchased, and lost all it's premium to NAV. In hindsight I overpaid for this fund yet I still expect it to perform going forward.

New Holdings

Just before Christmas I sold down some of my holdings in Tesco, AstraZeneca, GlaxoSmithKline, BAT and Imperial to buy Templeton Emerging markets and Oakley Capital Investments.

Templeton Emerging Markets is a popular investment trust run by Dr. Mark Mobius who has a great track record for overseas investing. As I have very limited knowledge of overseas businesses I will be using funds like this, Murray International and Fidelity China to gain exposure to global equities.

My purchase of Oakley Capital was quite speculative. They are a fairly small AIM listed company who recently announced that they will be working in conjunction with Neil Woodford (Invesco Perpetual's star manager) to launch his new solo career in April using their offices and back office functions. It isn't very clear how much this will financially benefit Oakley but Neil is well respected within the industry and will doubtless attract billions in investment funds when he moves. Oakley are trading on par with their NAV so hopefully the potential downside of holding the shares will be limited.

Gold & Bonds

Over the last few years I have been very bearish on long dated bonds and gold, having written a few articles on the subject.

Gold has had a disastrous 2013, its worst in 3 decades in fact, falling almost 30%. Bonds have also had a terrible time, in most cases losing significant amounts.

I'm still bearish on both these asset classes, especially bonds, and think returns are likely to be poor in 2014. Risk averse investors that are heavily exposed to bond markets could be in for a rough year.

Equities

I think global equity markets represent fair value at the moment. I prefer the UK to the US. The All Share is trading on a PE of 14.9 which is more or less it's long term average, and a good bit cheaper than the S&P 500 at 17.38.

The US significantly outperformed the UK in 2013, maybe because the UK market has a higher exposure to mining/natural resource stocks which underperformed in 2013. There are quite a few natural resource stocks that are now looking very cheap on paper; if this remains the case I expect that I will increase my holdings in the sector. My recent purchase of JPMorgan Russian Securities is very much a natural resources play as their market is heavily weighted in miners and oil/gas explorers, which explains why the Russian RTS index is so cheap trading a PE of 5.95.

I also prefer the UK to most of Europe as I believe the risk of economic implosion is lower here, and European valuations are not low enough to warrant the extra risk.

I continue to like China, their market looks very cheap given the growth potential. My Fidelity China fund has massively outperformed the Chinese indexes this year and is still trading at an 8.6% discount to NAV.
Despite Anthony Bolton's impending exit from the helm I think 2014 may prove a bumper year for this fund.

Many investment houses are tipping Japan for 2014, but this is an area I will be keeping away from. The Nikkei has performed admirably in 2013 but it is arguably the dearest developed market in the world, trading on a PE of 23.5. I think that Japan's ultra loose monetary policy is questionable and undoubtedly attracting short term money to their shores. Also they have possibly the worst demographic make up in the world, with increasingly fewer working age people to support their aging society. Their strict immigration policy isn't helping with this.

Oil

It's been a fairly benign year for the black stuff, Brent Crude has risen about 3.54% over the year which has been good for inflation figures and has provided a stable platform on which business could thrive. As previously stated I think that stable energy prices are crucial to long term economic success and hopefully we will see more of the same in 2014.

That's it for now, wishing you all the best in 2014, I hope it's a great year for you all.

Matt.

Saturday, 28 December 2013

Bond Fund Manager: I Hate Bonds.


This video on CNBC reiterates my views on global bond markets, especially long dated bonds as mentioned. Check the link.


http://www.cnbc.com/id/101172899


Wednesday, 27 November 2013

Bitcoins and Tulips



Bitcoin, the online digital currency, has been a topic of great media furore. Since trading began in 2009 the value of one bitcoin has gone up exponentially from a measly $0.0007 to over $900 in recent weeks (i.e. one dollar invested in '09 would now be worth close to $1.3m). Many reputable businesses are signing up to accept them, one of the latest being Richard Branson's Virgin Galactic - the space travel company. This adoption by business is obviously a sign of success/popularity, but is the currency truly sustainable?

The Bitcoin website promises it's users instant peer to peer transactions, worldwide payments and zero or low transaction fees. However due to it's huge volatility against regional currencies, vendors routinely hedge transactions, which must negate ( I assume) some, if not all of the transactional savings. Other problems linked to the currency have been it's usage in illegal trade such as drugs and weapons due to the fact that bitcoin transactions are hard to trace, and also people hacking bitcoin 'wallets' and stealing them. 

The exponential growth in the value of bitcoin can be largely attributed to its relative scarcity. There are currently around 12m bitcoins in circulation and their supply is growing at an ever decreasing rate that is pre designed to cap at 21m bitcoins in a few decades. If the rate of bitcoin adoption continues to outstrip supply it's value is almost certain to increase.

Speculators & Investors have cottoned on to the deflationary properties of bitcoin and have almost certainly exacerbated its volatility. But does their bet/investment make any sense? Currencies do fluctuate in value against one another but these movements are usually nowhere near the scale we are seeing between dollar/bitcoin. For a currency to be a successful medium of trade surely it must be less volatile, and probably mildly inflationary in character. Also expected returns for a currency should be relatively low as it is essentially a non productive asset. A currency that is designed to appreciate in value against all others seems destined for problems and potentially may have been deliberately designed as a Ponzi scheme. If this is the case it is little wonder that its pseudonymous creator, Satoshi Nakamoto, kept his/her real name a secret.

I see some faint parallels between the exponential growth of bitcoin and the tulip mania experienced in Holland in the 1630s. In that scenario the newly introduced tulip took Holland by storm due to its vibrant colours, and because of its relative value and scarcity it quickly became a status symbol.
As a tulip takes around 7-12 years to grow from seed to flowering bulb the stock of them (like bitcoin) was essentially fixed. Speculators entered the market and traded futures contracts which drove the finite stock of tulips to extraordinarily high prices. At the peak of the mania single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. Of course the bubble eventually imploded and many of the speculators involved towards the end met financial ruin.

What does fate hold for bitcoin? Nobody can say for sure, but currencies don't last forever, the world has seen thousands come and go. Speculating on it might be fun and potentially profitable but punters should be wary that the intrinsic value of bitcoin is significantly less than a tulip bulb. They won't produce a nice flower for you to gaze at when you're skint ;)

Sources: Wikipedia & bitcoin.org



Thursday, 21 November 2013

Pension Vs ISA (UK)


This post is to highlight the pros and cons of these two popular tax free savings vehicles, not to single out which one is better, as that would depend on individual circumstance & preference.


ISA PROS

  • Investments within an ISA will grow free of income & capital gains tax (aside from the 10% tax credit on dividends within stocks & share ISAs).
  • ISA funds are usually readily accessible: there may be exit charges and short waiting periods but in most cases you can get your hands on your money fairly quickly. This makes them a much more flexible method of saving than a pension, especially to meet pre retirement savings goals.
  • This accessibility means that ISA funds could be easily drawn upon in times of emergency. Cash ISAs would be especially useful for emergency fund purposes.
  • Any money taken from an ISA is received tax free, unlike pension proceeds which are subject to income tax at the recipients prevailing rate.

ISA CONS

  • Unlike pensions, ISAs do not receive income tax relief on contributions.
  • ISAs have fairly low yearly contribution limits (£5,760 - Cash, £11,520 - Stocks & Shares 2013/14), this could pose a problem for those trying to save a large sum for retirement purposes.
  • The flexibility of withdrawal could also be a hindrance to long term savings goals if the temptation is there to draw on savings for other purposes.
  • ISA savings could affect entitlement to certain means-tested state benefits.
  • On death ISA savings will form part of an estate; if this exceeds the nil rate band of the deceased any beneficiaries would be liable to inheritance tax, although with good tax planning this scenario can be largely avoided.

PENSION PROS

  • Perhaps the biggest pro exclusive to pensions is that contributions receive income tax relief e.g. for a basic rate tax payer, every £80 you pay in is topped up to £100. Higher rate taxpayers would also be able to claim a further £20 back via self assessment.
  • Pensions like ISAs also grow free of income & capital gains tax (aside from the 10% tax credit on dividends).
  • New pension auto-enrolment laws require employers to contribute to employees' pension plans subject to employee status. These contributory requirements are currently being phased in by order of company size.
  •  Pension savings will not affect entitlement to state benefits if you are unemployed or made redundant.
  • When you crystallise your pension you are currently aloud to take up to 25% out as a tax free lump sum. 

PENSION CONS

  •  Pension proceeds are taxed as income at the recipients prevailing rate. Thus the tax relief given at contribution stage is more of a tax deferral. However pension savers do benefit from gross roll up of the boosted contribution, and are usually in a lower tax bracket when drawing their pension funds than when they were contributing.
  •    You cannot access your pension savings until you are 55; in this regard they are far less flexible than ISAs which give savers greater control over their funds.
  •  The government has frequently meddled with pension rules, sometimes drastically changing the goalposts for pension savers. Changes in recent past have included: increasing the minimum pension age from 50 to 55; scrapping of the 20% dividend tax credit on pensions; reducing maximum yearly contributions from £255,000 to just £50,000 and also capping maximum pension size to £1.5m (2013/14 tax year).
  • On death if you have purchased a single life annuity your pension savings are kept by the provider. If you opt for drawdown any remaining proceeds will be taxed at 55% before reaching beneficiaries.


For both of these savings options, the tax relief positives largely outweigh the negative points. As pensions offer the possibility of larger amounts of tax relief, they should be more attractive to the majority of people saving for retirement. However ISAs also have a place too, especially if the savings goal is before age 55. Ideally both tax free wrappers should be fully utilized.


  



Wednesday, 20 November 2013

Warren Buffett: stocks in 'zone of reasonableness'.

Check out this link to a Warren Buffett interview on the CNBC website. He voices his opinion that equities are currently in a 'zone of reasonableness' despite headline indices like the Dow Jones hitting all time highs of over 16,000 points.

You must scroll down the page and click the video window to view.



 

Wednesday, 23 October 2013

Royal Mail Sale - Berkshire Buy


Unfortunately I didn't get the full amount of Royal Mail shares that I subscribed for, instead getting £750.00 worth, which I believe is what every retail investor who subscribed actually received.

The shares shot straight up to about £4.50 (from £3.30) at commencement of trading, and have drifted up quickly since then on the back of huge demand. I sold today at £5.26 banking about £400.00 profit after expenses. At £3.30 the shares were obviously undervalued, but I'm not sure they are worth a great deal more than their current value, and am hoping I will do better invested elsewhere.

I have bought two new holdings. Firstly about 3% of my portfolio has gone into Berkshire Hathaway, the American conglomerate chaired by the sage of Omaha himself, Warren Buffett. I wish I'd bought this stock a long time ago, but hopefully the 'better late than never' mantra will apply. At 83 years of age Buffett is getting on a bit, but as well as being a great manager himself he is also a magnet for talent. I believe that succession won't be an issue when he finally throws in the towel.

Note I bought the B listed shares at $117.00, the A shares being slightly out of my price range at $175,000.00 a pop! The trading costs involved in purchasing the US shares were over double that I normally pay for buying UK stock; not too much of an issue in this case as I do intend holding long term.

As this investment is priced in dollars there will be some exchange rate risk, but luckily because of all the debt commotion caused by the US congress, the value of the pound against the dollar is close to it's 52 week high so it's been a favourable time to buy in that regard.

My second move was to invest about 1.5% of the portfolio into JPMorgan Russian Securities Investment Trust. This is a purely contrarian play as Russia is about the second most unpopular country in the world with investors, with the RTS index trading on a PE of 3.5. Only Argentina is more unpopular with their headline index trading at a PE of 2, although their economy is in terrible shape with inflation figures running into double digits.

Russia has a bad reputation with investors largely because of inconsistent regulation and a generally absent rule of law, yet Putin's government has pledged to tackle these issues. Furthermore the country benefits from a younger demographic than many of its European peers and its growing consumer class should prove a positive factor going forward.



Wednesday, 9 October 2013

Portfolio Update - October


Two days ago I had a clear out of some of my weaker positions. I sold all my holdings in BG Group, all my holdings in Vodafone and half my holdings in Tesco.

BG Group & Tesco were sold for just below purchase price, although including dividends received I'm probably at break even overall. Vodafone has made about a 20% capital gain and also paid me a 5% dividend for a couple of years so that has been a more solid but not spectacular investment. These three companies have all performed poorly in a rising market and they are all facing their own headwinds that make me think the substandard performance might continue, at least for the short/medium term. I think my money will be better off elsewhere.

Some of the proceeds have been used to top up existing holdings in AstraZeneca, GlaxoSmithKline, Imperial Tobacco, and Murray International Investment Trust.

Of the remainder, some has been invested in Molins, a small cap company who make specialist machinery for consumer goods markets, mainly tobacco and food. They are very cheap on paper with a P/E of around 8, a decent dividend of 3% and good growth prospects in the form of potential new contracts in the near future.

Also despite saying I wouldn't get involved in the post office IPO I had a last minute change of heart yesterday and put my name down for a few shares, am not sure if I will actually get them as they have been over subscribed and I was very late to take action. It will be interesting to see how the IPO plays out.




  

 

Friday, 4 October 2013

Royal Mail - First Class?


When I first heard about the Royal Mail flotation I must say I wasn't that interested. The company faces its fair share of adversity, with issues ranging from the rise of the email, strong competition in parcel delivery, and also employee turmoil. Things won't be easy going forward and some serious restructuring is probably in order.

However the figures are very appealing. The price range cited at initial offering is 260-330p, which would put their PE ratio at around a very reasonable 10. Also the dividend is forecast to be 6-7%, a phenomenal income stream in times of ultra low savings rates.

In 2012 the business made a decent pre-tax profit of £201m, a huge improvement over the -£118m loss in 2011, this probably due to the huge increase in the price of stamps etc. The figures for 2013 look like they will be even better!

There is huge public interest in this flotation, personal anecdotal evidence points to the shares hitting the higher end of the 260-330p range. I won't be getting involved in the initial offering but I will be keeping a close eye on them.




      

Tuesday, 24 September 2013

Vodafone


Following the recent deal Vodafone struck with Verizon Wireless to sell their stake in the company, I am left wondering if I still want to hold their shares.

Verizon is a fantastic business and was one of the biggest reasons for holding Vodafone in the first instance. They will definitely be a far smaller and weaker company as a result of the sale.

Their plan is to reinvest some of the sale proceeds but return the lion's share back to shareholders via a special dividend.

There is a chance that the smaller resulting company might be a target for a merger/takeover, which could provide a boost to the share price but relying on this would be a bit of a gamble.

Last week two of Vodafone's directors (Andy Halford & Stephen Pusey) sold £4m worth of shares between them, there could be many reasons for the sale but I'm guessing they aren't expecting the recent events to bode well for the share price otherwise they might have held out for longer. With this in mind I may offload these shares in the near future.



 


Wednesday, 7 August 2013

Take AIM - Trading Update


Two days ago (Monday 5th August) I sold 30% of my holdings in Lloyds Banking Group for 76.43p, cementing a gain of around 146% on the initial average purchase price of 31p.
I've split the proceeds (unequally) between two new holdings: HSBC and Terrace Hill Homes.

The majority of the funds went into HSBC, I feel that this has taken some more risk off the table as they are unquestionably in a better position than Lloyds. They also have a forward dividend yield of 4.5% which further boosts the income stream of the portfolio. Furthermore they're trading on a forward PE ratio of 11 which I think represents good value.

The other new holding: AIM listed Terrace Hill Homes, represents a plunge back into the house building industry. They are trading well below a net asset value of about 29p per share and have a forward PE of about 6. Also trading conditions seem to be improving. This very cheap company should prove a good investment.

On Monday the rules changed allowing you to hold AIM shares within an ISA wrapper - previously they were ineligible. On that basis I was hoping to buy Terrace Hill using part of my ISA allowance. Unfortunately my ISA provider (HSBC) have not yet decided whether they intend to allow this on their system due to all the extra information requirements etc. This meant I had to buy them somewhere else which was a bit of a pain. If HSBC don't get their act together before next April I may look at moving elsewhere for next year's allocation.




Friday, 2 August 2013

UK Residential House Prices - Blowing Another Bubble?



The business secretary Vince Cable warned that the government's Help to Buy scheme may trigger a new house price bubble when he appeared on the Andrew Marr show last Sunday. The man may have a point.

It is easy to understand why the government are meddling: they're trying to provide liquidity to a mortgage market that is being choked off while lenders struggle with new capitalization targets.

Their attempts to stimulate the demand side are typical of an incumbent government trying to curry favour with voters. Rising house prices can inject a feel good factor into the economy. Homeowners feel wealthier and are more likely to spend, hopefully boosting GDP numbers along the way, thus enabling George Osborne to set his face to extremely smug.

Hopefully Mr Osborne won't have forgotten that it was an unbridled housing market that helped get us into this mess in the first place. Whilst some amount of government intervention might be productive, the last thing we need is for house prices to start increasing at rates above wage inflation.

The graph below shows how house prices have fallen in relation to earnings in the years following the financial crisis. This pullback has been healthy; ideally we need this graph to fall further until house prices reach their long run average of 4X earnings. This would set the economy in good stead for interest rate normalization. Arguably the government should be doing more to help increase housing supply, thus easing the chronic housing shortage that we have in the UK, whilst putting more downward pressure on prices relative to earnings. I think the ideal scenario is probably for house prices to remain constant nominally but continue to fall in real terms against wages and inflation.




As an aside I found an interesting graph on www.housepricecrash.co.uk  showing the life cycle of a bubble (see below). What stage do you think our housing market is at now? I think maybe we are at the Return to ''normal'' stage, with interest rate normalization eventually pushing us into the fear and capitulation stages. Just a guess.






Lifecycle of a bubble


Source: Jean-Paul Rodrigue - Hofstra University





Wednesday, 3 July 2013

July 2013 Portfolio Update

It's been six months to the day (Jan 3rd) since I last did a proper portfolio review. On that day the FTSE100 was sitting at 6047.3, this morning it's reading 6233.87: a gain of 3.1% over 6 months.

In the same time my portfolio has risen from £112,800 to £131,363.84 a gain of around 16.5% over that same six month period.
No new money has been invested into the portfolio, but dividends have been re-invested and trading fees have been paid so the 16.5% is the total net return. To compare on a like for like basis the FTSE has probably paid out just under 2% in dividends over the period so we should round the 3.1% up to 5%. 

The lion's share of the out-performance has come from house building companies, that I have now sold, and also from Lloyds Banking Group which I still own.

Barring a few holdings (Lloyds, Fidelity China, Polo) the majority of the portfolio is now positioned as an income fund. Hopefully this will have taken some volatility off the table, but at the same time the chances of large out-performances such as seen in the first 6 months will probably be reduced. 


This is a breakdown of holdings as of today:

Holdings Amount %
Cash £4,146.45 3.16
     
AstraZeneca £12,874.43 9.80
BAE Systems £6,744.91 5.13
BG Group £4,206.07 3.20
British American Tobacco £13,989.32 10.65
BT £4,410.99 3.36
Cairn Energy £3,817.80 2.91
F&C Commercial Property Trust £5,430.08 4.13
Fidelity China Special Situations £6,800.44 5.18
GlaxoSmithKline £14,557.36 11.08
Imperial Tobacco £9,034.79 6.88
Lloyds Banking Group £20,599.13 15.68
Murray International Investment Trust £7,743.34 5.89
Polo Resources £1,104.20 0.84
Tesco £8,411.08 6.40
Vodaphone £7,493.45 5.70
     
Total £131,363.84 100.00

Friday, 7 June 2013

Why Compound Interest Is Glorious And Investment Fees Are Hideous


Albert Einstein reputedly said that ''Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't, pays it.''

Whether these words came from his mouth or that of another, they are certainly true.

A quick example can demonstrate this. Take David Smith, a 25 year old who invests a £10,000 inheritance sum in a pension fund with a view to retire at 65. He makes no further contributions.

The fund performs admirably, averaging a 15% per annum gain over the term. After 40 years of investment, David's £10,000 has grown to a pot of £2,678,635.46.  Very impressive!

Unfortunately, in the real world David wouldn't have made anywhere near this amount, because fees would have taken their toll on his investment, substantially reducing his returns. If compound interest is the eighth wonder, investment charges are the seventh circle of hell.

Let us assume that David's investment has incurred the following annual fees:

- 1.5% Fund Charge
- 0.5% Platform Charge
- 1.0% Adviser charge

Total charges of 3% don't sound too onerous, but lets look at the impact these have over the 40 year term of his investment (charges taken at the start of every year).

After 40 years of 15% returns his initial £10,000 now becomes only £792,105.41. Granted he still hasn't done badly, but Investment charges have reduced his final pension pot by over two thirds which is massively significant.

Now let's assume David went to see a financial adviser with more reasonable charges, who found him a similarly performing fund with a lower fund charge, and put it on a cheaper platform. Total annual charges are now 1.5%

- 0.7% Fund Charge
- 0.3% Platform Charge
- 0.5% Adviser Charge

Now after 40 years of 15% returns his initial £10,000 becomes £1,463,399.27, the 1.5% reduction in fees has almost doubled his pension pot. David can now upgrade his Volvo to a Rolls Royce Phantom.

Joking aside I hope that this post has highlighted the power of compound interest but has also shown the devastating effects that excessive fees can have on your investments.




Wednesday, 5 June 2013

Residential Vs Commercial Property



The intention of this post is not really to prove that residential property investment is better than commercial or vice versa, it's rather to provide an independent comparison between the two. Both methods of investment can be highly profitable if carried out sensibly, but both are very different, and as such might suit different types of investor.
 
Firstly It must be noted that commercial property is inherently more expensive than residential; to build a well diversified commercial property portfolio directly, you would need a few million pounds spare. Luckily smaller investors can still get involved through collective investment schemes/funds such as the F&C commercial property trust, that I have mentioned in recent posts and have some personal exposure to.

Commercial properties can be harder to value due to the uniqueness of the buildings involved. When a residential property is for sale you can generally find out what a similar property sold for recently in the same area, this is not always possible for commercial property, so extra care and professional advice is needed. A good agent can prove invaluable. This issue is obviously avoided by taking the more passive approach and investing in funds, as you will be paying for professional experience via the fund management fees.

Commercial property can be held directly in a pension fund, whereas residential cannot, this benefit could be very significant for investors wishing to capitalize on the generous tax treatment of pension plans.

Letting time-frames vary considerably between commercial and residential. A residential tenancy agreement usually lasts a year, whereas a commercial lease usually lasts 5+ years. The shorter lease agreements on a residential property can lead to larger void periods, thus negatively affecting returns. However, although void periods on commercial property are shorter on aggregate, it can be quite difficult to find new tenants, and in a subdued climate (such as we are currently) rent free periods are sometimes offered as an enticement, which obviously affect net return.

With residential property, the responsibility of repairs and maintenance falls on the landlord. These costs are often overlooked, and can absorb much of the rental income (30% in some cases). With commercial property the tenant is usually responsible, thus saving the landlord time and expense. One exception of this is office blocks, where some tenants do expect periodic upgrades to the premises at the expense of the landlord.

Commercial rents are generally higher than residential. Between the period 2002-2007 commercial rental yields were 50% higher than that of residential property. I would say that this still holds true now with residential yielding about 5% and commercial around 7.5%
On the flip side of the coin, capital growth has been much higher in the residential market, which has led to superior total returns over a prolonged period.   

Over the 30 years between 1981 and 2011, residential property has proved the better investment, returning an average total annual growth of 11.2% p.a. Commercial returns were significantly lower at 9.1% p.a.
It could be argued that government policy has given residential property a helping hand over this period. The Thatcher government implemented policies that incentivised home-ownership, and every government since has tried to capitalize on the 'feel good' factor caused by rising house prices. Have these policies been pushed to the brink? Will residential continue to outperform?

What is clear is that commercial property has taken a considerable beating of late. While residential property fell on average about 15-25% during the credit crisis, the commercial property market plummeted 40-50%, and hasn't made much progress since.
There are many reasons for this; the high street is undergoing a structural change as more business is being done on the internet via remote locations. Business rates are also high and making things more difficult for businesses in the current low growth environment. Also there are an increasing amount of people choosing to work from home which obviously decreases demand for commercial floor space.
All these factors paint a bleak picture for commercial, yet because of them we are seeing the lowest asking prices for many years, and double digit rental yields are common place for those willing to dabble in the more risky end of the market place.  The contrarian in me thinks that commercial could be the more profitable choice over the next decade or so.




  sources:  www.hearthstone.co.uk
                 www.property-guide.reita.org