Making money make money
by Doug Brodie
/1. Annuities vs bonds
This is a snippet from our tracking sheet.
This is the 10 year gilt yield (from Trading Economics).
Annuities are invested in gilts, among other things, and the 10 year gilt is normally something of a yardstick here. The media is full of headlines talking of record yields, yet the table above shows that annuities have gone the other way. Things are not always what they might appear to be.
/2. Why fund prices are (probably) a red herring, used as sales tools for retail.
This is a chart of the FTSE 100 for last year; it is showing the movements up and down on a daily basis. The orange lines are each of the 252 trading days results, the blue line is the cumulative movement of the index price over time.
The data is better seen for relevance when tabulated:
The majority of the time any investor in the index had a daily fluctuation of 0.25% or more. That’s daily fluctuation.
We see many queries in the retail media about the costs of products, and in this commoditised world, platform fees are virtually all in the range of 20bps to 30bps, with ii as an outlier with its flat fees. That’s a fee per annum.
What this table shows is that the actual movement of the actual investment renders the impact of a slightly cheaper/more expensive product redundant. Note, it also shows that slightly more than 36% of the trading days had a change in price of more than 0.5% - equivalent to 2.5% in a week, or around 130% in a whole year (apologies for ersatz extrapolated maths). In practice, an investor can make 100% of the cost of the product by investing in the single correct day, with the obvious problem you’ll only find out after the fact.
Media commentators love to use simple compounding to say that if one saves 0.5% per year for 30 years then you’ll be £squillions better off – however, that’s because of the basic kindergarten error of assuming an investment is a commodity, identical to every investor from every manager. That comparison would only apply to investors making identical investments on identical days for identical periods. In the same way, the cheapest house you could buy would also save you £squillions, however, you and I are in no doubt that houses are not commoditised.
So when you see an advert-orial whose message is “Look how much money we save you by being cheap”, you’ll know there’s a slight whiff of snake oil.
/3. Who’s paying the bill? Net contributions to the EU budget.
/4. The Passive Ponzi, aka, all rivers run to the sea.
"The index was totally different when passives were first launched," said Fricker.
"It is funnelling capital into the same place in this self-perpetuating cycle, with more money flowing in that is completely valuation agnostic," he added.
Illingworth concurred, noting:
You would not put three-quarters of your money in any country, and you certainly would not have half of that all in correlated, expensive stocks.
This is an excerpt from an interview with Charlie Fricker and Alex Illingworth, talking about the potential risk embedded in index investing. A point made is that if a fund manager is benchmarked against the index, then the riskiest strategy would be to run 100% cash, as that is guaranteed to (almost) never hit the benchmark.
The flipside is that passive investing is price and value agnostic: irrespective of the price of a stock, the index will buy it and keep on buying it. The passive index tracker will seek to replicate the market cap of the stocks and so will buy in as needed – which leads to the problem that as all the trackers buy, so they push up the price as they outnumber the sellers. And as the price rises so does the market cap, leading the passive trackers to keep buying.
The converse is also true, unfortunately. If the price falls, the market cap falls - meaning all the passive trackers have to divest by selling, and as they sell so they push the price down, reducing the market cap meaning they have to…..you get the message? And like the popping balloon below, you just know it’ll end in tears.
