Should I buy some Bitcoin James?
I’m not the only one who gets asked about Bitcoin from time to time and it is not hard to see why. The peer pressure is immense with everyone talking about it, celebrities tweeting about it and various investment theories abounding.
The popular theory says “Supply is limited and blockchain will change the world”. The profits made were spectacular although we hear rather less from those who have recently suffered huge losses.
My problem is and always has been that I can’t do any Maths, and for those who know me well that really upsets me. I love Maths. While I can see there is not much preventing an infinite supply of crypto coins, I can’t find anything to help me check out the supply and demand theory. And whilst I can see blockchain technology is here, it is like the very early days of the internet. It is way too early to see who the blockchain winners and losers will be.
Fortunately, I’m not alone and in rather good company. Andy Bell CEO of AJ Bell was in the Evening Standard last night blasting celebrity endorsements of cryptos and enthusing about long term investing.
Andy trained as an actuary and is a straight-talking Mancunian, he has done very well for himself and his employees, who all love him. We also like the platform and the firm. They are frustratingly slow to develop sometimes, but the platform works, it is relatively low cost and if things go wrong, they get fixed. I’ve been a client for over 25 years.
The great, and now very old, Warren Buffet has also been public in stating he doesn’t own any crypto currency and won’t be buying anytime soon.
His Berkshire Hathaway team have been doing their Maths and it is not Crypto they are buying with their huge cash pile, but stocks such as Chevron, Citigroup, Apple, and Hewlett Packard to name check a few on their shopping list. Berkshire Hathaway is one of Fidelity American Special Situations fund’s top holdings, which we added to portfolios this year. Like AJ Bell they are considered by some to be dull and boring but have done rather well, to put it mildly.
It appears suitable for the wallet to do Maths and be a long-term investor, but it also seems ideal for your health. A little stress in life is good, but too much can be harmful.
It is good to remember things often won’t be as bad as portrayed in the press and almost certainly not as good as when endorsed by a celebrity. Doing some Maths to underpin your investment positions takes a good deal of stress out of investing, bringing some certainty to what can too easily appear to be a very uncertain world.
Since the announcement of the Covid-19 vaccines in November 2021, we have generally been rewarded by those fund managers who do the Maths and this year where we have made moves it has been towards those managers.
We were very heartened by those managers and our positions overall when we looked this week to see if we should make any more changes. Of course, it is stressful seeing portfolios fall but we are confident the Maths will win out in the long run.
We were looking at our portfolio returns this week and comparing them with the competition, and I was pleased to see both these tables which show some marked outperformance versus our peers and the leading low-cost passive solutions, which of course don’t do Maths, they buy everything.
We always think we could have done better with hindsight but the big conscious decisions not to hold gilts in fixed income and not to go all out for growth in our equity funds are reaping rewards with generally better upside returns and better downside protection. The Maths is working.
Tideway’s Cautious Multi Asset Portfolio Vs Competition
Plus, they are less stressful. When we look through to the underlying holdings, which we constantly monitor, we can see increasing bond and dividend yields and lowering equity valuations relative to earnings. This gives us confidence positive returns will materialise in time.
Fund in Focus: Montanaro Better World
As our weakest performer in 2022 in absolute terms, we thought it would be a good time to provide a reminder of the strategy, including company background, investment philosophy, impact, along with its role in your portfolio.
The popular theory says “Supply is limited and blockchain will change the world”. We would also like to reiterate our conviction despite the year-to-date performance.
Company Background: We like to invest with boutique firms – Allows good access to managers
For those of you who are less familiar, Montanaro Asset Management are an independent boutique focused exclusively on quoted Small & MidCap equities.
Charles Montanaro founded the firm in 1991 to specialise in analysing and investing in quoted European smaller companies. Thirty years later the firm boasts one of the largest research teams dedicated to Small & MidCap in the industry and now manage roughly £5bn on behalf of their clients.
Sustainability is at the heart of both Montanaro’s investment philosophy and is reflected in their own business practices. Montanaro Asset Management is a certified B Corporation, a certification for companies who meet the highest standards of verified environmental and social performance.
Investment Aim: Positive impact without sacrificing financial returns
The Fund will seek to invest in high quality companies whose products, services or behaviour are deemed to make a positive impact on society, and which emphasise sound environmental, social and governance (ESG) practices without sacrificing financial returns.
Investment Philosophy: Quality Growth, small and mid-capitalisation companies
- Only invest in companies you understand
- Stick to Quality (back the “best” management) – Skilled management adds value and helps when engaging.
- Invest in Growth Companies – A stock outperforms by beating existing expectations about the company; often growth is underestimated and therefore a source of returns.
- Don’t Trade – Buy & Hold – Long term time horizon
- You must engage with companies
- Humility goes a long way – Learn from your mistakes.
Performance: Style headwinds to quality growth; result of changing macroeconomic environment
Highlighted in the investment philosophy section, the fund invests exclusively in smaller capitalisation companies with exceptional growth opportunities. As you will know from previous Tideway updates, market sentiment has changed dramatically in 2022 due to a sustained spike in global inflation which has now far exceeded the initial transitory narrative of 2021.
The war in Europe and China’s zero Covid policy, and the resulting lockdowns have not helped. These conditions have stoked fears of interest rate rises and disproportionately hurt long duration assets, notably Growth Small & MidCap equities.
To provide some context, the MSCI World Growth index has underperformed its Value counterpart by over 20% year to date with MSCI World Growth Index down -24.3% versus the MSCI World Value Index which is down just -4%.
This is in stark contrast to prevailing market conditions post Global Financial Crisis in 2008 where returns from Growth have dominated Value in most calendar years. Similarly, Montanaro Better World is down -29.67% versus Schroder Global Equity Income (our core value holding) which has risen 6.84%.
We are confident that the team have not become poor investors overnight (remember they have been running smaller company mandates since 1991 and as a result have seen many different market environments). By sticking to their investment process, they should achieve strong returns for investors over the long term.
In the short term, there is not a lot the manager can do to control market sentiment; we are not paying them to sit on cash (especially with current level of inflation), and we are most certainly not paying them to change their strategy to fit the current environment (we have other managers for that). This would result in an immediate sale of the fund.
Tideway Portfolio Construction: Just one component of a diversified portfolio
- You should not look at individual fund performance in isolation. We have selected our managers to complement each other and work as part of a diversified portfolio.
- We do not want all your investments doing the same thing simultaneously. This would dramatically increase portfolio volatility and result in long periods of both outperformance and underperformance. These periods would be very difficult for a lot of investors to tolerate, especially if drawing upon their capital.
- For those of you who were pre-pandemic clients, you will remember we were writing similar notes, except justifying positioning in our value mandates (Schroder Global Equity Income) in a world dominated by quality growth strategies. Although these were a drag on performance at the time, we are very happy we resisted the temptation to dispose of them.
- Higher Risk, higher return mandate. Sized appropriately in your portfolios; only a 1.25% position in our Multi-Asset Cautious portfolio and a 2% position in our Multi-Asset Balanced portfolio. For comparison Schroder Global Equity Income has a 3.75% and 6% position in these same portfolios.
Impact of a £1m investment: On top of competitive long-term returns
The UN Sustainable Development Goals are the starting point for assessing Impact in the fund. Worked in conjunction with the UN to simplify into six broad investment themes: “Environmental Protection”, “Green Economy”, “Healthcare”, “Innovative Technologies”, “Nutrition” and “Well Being”.
- Economic Development: £2,170 more income generated per person in low-income countries
- Social Good: 48 more people given access to healthcare
- Diversity: 1% closer to UK and EU gender diversity targets
- Carbon: 234,355 miles driven by fossil fuelled cars avoided
- Waste: 2,866 bins of household waste avoided
- Water: 18,195 bathtubs of water saved
Source: Montanaro 2021 Impact Report
Awards: Been investors since 2020 – Not alone in our backing of the strategy
Best ESG Investment Fund 2022: Impact – ESG Investing Awards
Best Impact Fund 2021 – Investment Week Sustainable & ESG Investment Awards
Best Impact Fund 2019 – Investment Week Sustainable & ESG Investment Awards
Best Impact Report 2019 – Pensions for Purpose
- The content of this document is for information purposes only and should not be construed as financial advice
- Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise
- We always recommend that you seek professional regulated financial advice before investing
