It ain't easy
by Doug Brodie
In this blog:
/1. How not to drive into an investment wall
/2. Problem 1
/3. Problem 2
/1. How not to drive into an investment wall.
Photo: Unsplash
In this week’s edition of Investors Chronicle I am quoted in an article about the difference between ‘income and growth’ in retirement – having read that, Mr X sent in an email outlining “I invested fairly successfully for many years for growth but I could do with some help with my current need for regular income.” Aged several years into bus pass eligibility, he has a professional background as a divisional director of an almost-household-name company.
We can help. We will always help even if it's just to say ‘keep your money in the bank, you’re fine’.
Having swapped a couple of emails, Mr X opened up on his investment difficulties, and why he felt he needed to ask for help…
I had been a DIY investor until early in 2021 when I decided to hand things over to a local Wealth Manager, primarily because in the event of my death it would be better for my wife to have someone looking after our financial affairs.
Unfortunately, things have not worked out well with our financial adviser and a few weeks ago I decided to take back our investments to deal with them myself again.
We draw down about 4% a year from our investments which are made up as follows:
We have a general investment account with a value of c£XXXk which is now back with Hargreaves Lansdown. I have recently invested in income-producing funds and investment trusts plus three corporate bond funds, a UK government bond investment and a USD Treasury bond. I have never invested in bonds before but it seemed the right thing to do at the time.
We each have ISAs worth about £XXXk. These are currently not accessible as the wealth manager entrusted a custodian named IBP Markets Ltd with our hard-earned cash/investments. Since being investigated by the FCA IBP have gone into administration. We are hopeful that this will be resolved favourably shortly but this is by no means a certainty.
I have a SIPP in drawdown worth c£XXXk and my wife has a SIPP in drawdown worth c£XXXk. These are both in the process of being transferred to HL in specie (this seems to be taking forever).
I have glanced at your website several times before but yesterday having picked up your name from an article in The Investors Chronicle I spent some time looking in detail about your ideas. They seem to make a lot of sense to me in principle at least and hence we are open to suggestions.
/2. Problem 1
Clearly Mr X had been using Hargreaves Lansdown for some time, and as one of their clients he’d be receiving their regular copy of Investment Times. This is how the HL customers were told about the Woodford funds. It is really important to remember that you have no idea at all about the commercial discussions that have taken place behind closed doors, between a fund manager and a marketing platform like HL, or Interactive Investor.
Hargreaves Lansdown Investment Times Spring 2023:
The article goes on:
3 income fund ideas
Artemis Income
Polar Capital European ex-UK Income
Royal London Corporate Bond
Now HL is able to offer all permitted retail investments, so why these three out of the universe of over 4,000? Arguably the most income-focused investment trust is Merchants Trust, which is managed by Allianz, so a quick income comparison (£100k over the last 10 years) of the three funds pushed in Investment Times beside the trust shows:
Merchants comfortably win, however, that’s not the real point – the three funds written up are all unit trusts. They have no reserves because they are required to pay out all the income they receive. This means that in a bad year their income falls, and the effect of that is easily seen in 2020 when the trust paid 50% more than Artemis, 37% more than Polar Capital and Royal London.
/3. Problem 2
Things did not ‘work out’ with his adviser – the firm had put his SIPP with a company called IBP which has since gone bust – with your pension, always demand a household name. Specialist boutique operators only exist for specialist boutique investments so if that’s not you, do not allow anyone or any advert to divert you away from mainstream (unless the suggestion was Equitable Life of course). As part of this dissatisfaction, Mr X went on to say:
We got burnt very badly during the time that we were with our previous wealth manager. He could see what was coming and in March 2021 he sold all my growth investments…
When an investment adviser tells you ‘I know what’s coming’ that’s generally time for you to move on; don’t get sucked in by false confidence. If the investment markets were that transparent the US Big Banks would own planet Earth outright, but they don’t. What was coming down the line was the correction in interest rates triggered by Lord Cameron’s cabinet appointee – Liz Truss.
“He invested far too heavily in miners, too many individual companies…” This is not a financial planner or financial adviser as they are not permitted to invest client money in individual stocks – this sounds very much like a regional stockbroker that Mr X regarded as a financial adviser. (Chancery Lane has two directors who are qualified and authorised as fund managers, which is why we do use stocks from time to time). “He bought value stocks that went from bad to worse. National Express, Strix and Persimmon spring to mind (I could go on but I won’t).”
The normal reason investors walk into this type of difficulty is because the objective has not been made crystal clear to the adviser (you hear us banging on about your objectives all the time), and in turn, the ‘adviser’ in this case has not sought to clarify his/her regulatory position. I don’t know but I suspect the adviser was limiting advice to stock selection only and was not actually providing holistic financial planning – he/she was probably treating Mr X as a sophisticated investor because of his wealth and commercial background, which is a very wrong assumption to make.
There’s a retiring equity partner of a Big 4 accounting/consulting firm reading this newsletter, who stopped me in our meeting saying “You’ll need to explain what you mean by corporate bonds” – my bad assumption, assuming everyone knows all the investment terms. They don’t.
“He put too much emphasis on yield/dividends/income”. Hmmm, the investment mandate was clearly garbled – this is a person who wants income yet he thinks he should have growth investments – that is probably because he is comfortable with those, having run his own portfolio at HL over the years.
The biggest difficulty we have regarding client understanding is the disconnect between income and capital value. Dividends are paid ‘per share’, irrespective of the value of that share – the more shares you have, the more dividends you collect, so it's always best to buy the shares when their share price is trashed – it means that £1 of income is cheaper.
“…when I look at the past performance of the list of investment trusts included for analysis some of them make me feel nervous.” Shares don’t have accumulation units so the only value you will ever see quoted is the share price less the income. If you are investing for natural income, the share price has no impact whatsoever on your income. Investment trust shares are close to a hybrid fixed income – with bonds the income is legally ‘fixed’ (known as the coupon) yet the income is forced by the market to be a yield relevant to current interest rates.
In September 2010 Lloyds Bank issued borrowed £1 bn from the market packaged as a corporate bond (fixed interest) with a contractual coupon of 6.5%, meaning each holder of a £100 bond gets a fixed £6.50 per year. To buy that today costs £111.85, not the £100 Lloyds will repay, so the fixed £6.50 coupon is (6.5/111.85) = 5.81% yield.
Yield and income are not the same thing – yield is the % rate that is the £sd cash income over the price you paid for that income. The Lloyds bond is fixed until July 2040, throughout that time Lloyds will pay £6.50 once per year, every year for the next seventeen years to the holder of each £100 bond (‘normal’ bonds are always issued and redeemed in £100 notes).
I’ve yet to chat to Mr X, however, it’s been fairly easy to read between the lines; in a nutshell, the person handling his money has never explained to him what he will do, how it will meet his needs and what to expect. This is why – on average – it takes 3 to 6 months on talking, reporting, explaining and meeting with clients before a penny is moved. We’re not worried about clients’ awareness now, we are concerned that when the next big crash comes (and come it will) our clients do not suffer emotional reactions, and simply go back to the golf course.
By way of example, he did not buy Schroder Oriental Income but instead bought Henderson Far East Income which had a 10% yield but we lost 30% of our capital value.
This is the dividend record of Henderson Far Income:
And equally important, this is the record of its dividend growth rates compared to the unit trust sector and compared to the FTSE 100:
I think it does exactly what it says on the tin, I think it just needs to be explained to Mr X.
Mr X’s overriding error is that he has ignored his objective and got involved in debating the detail – the market moves every minute the markets are open, so that is a certain hiding to nothing. Daily/weekly/monthly fluctuations are guaranteed, amateur keyboard investors try to fight back – don’t do it, you’ll lose, you’ll get frustrated and then you’ll make emotional, irrational decisions and lose money.
Like Mr X.
The moral of this investment car crash (I have no idea how much he lost, or how much he has) is:
Be crystal clear with yourself about the primary objective of the investment
Take advice, don’t cut corners, that’s a very false economy
When you don’t understand, you must always stop, and ask for explanations
Don’t do boutique and exotic when you are ‘widows & orphans’
It’s not easy: the advisory industry exists for a reason
As Ziggy Stardust told us:
When you climb to the top of the mountain
Look out over the sea
Think about the places perhaps, where a young man could be
Then you jump back down to the rooftops
Look out over the town
Think about all of the strange things circulating round
It ain't easy,
It ain't easy
It ain't easy to get to heaven…