A softer set of inflation figures this month stood down the bond vigilantes, for now at least. Government Bond yields retreated in both the UK and US, a number of key bond auctions were well subscribed and with the Trump inauguration show in full swing our equity funds and bond funds are on the march again pushing portfolios to new highs.
As we saw a couple of times in 2024, the last month has seen returns away from just US mega cap tech stocks. Here below is the FTSE 100 (a good proxy for value in the rest of the equity market away from US tech) versus the Nasdaq (a good proxy for US tech). Also included is the Ruffer Diversified Return fund, which we cover later in the piece.
Those who monitor their portfolios closely will note that between the 14th to 20th January (which saw the big rise in the FTSE 100 as seen in the chart above) we also had a big rise in our portfolio values. Whilst we hold the US index, our equity holdings are well diversified across broader equity markets. This short-term relative performance is somewhat counter intuitive – you would expect tech to lead the way when bond yields decline, but value gained the most. Perhaps a sign the great tech rally is getting long in the tooth?
Be careful with what you read or hear
As ever at this time of year, we get to see a whole load of predictions and views on where markets, inflation, interest rates, bitcoin, and geopolitical risks will go next. Is it me or is it getting worse?! With social media, the general increase in noise has become a cacophony and it’s a minefield.
My advice:
- Check the source. Is the issuer qualified to speak at all, and do they have any vested interests?
- Question the data. Is it accurate? Does it really show anything, or is it simply past performance projected onto a future which is unlike anything in the past?
- Be cautious of extremists.There are always commentators forecasting extreme events. Occasionally they are right, but even when they are it often takes a very expensive decade of being wrong for it to eventually come good, by which time it’s too late.
- Ignore virtually everything on social media. If something can be explained in compelling terms in just a few sound bites or a 30 second video clip, it is almost certainly an oversimplification and will most likely fall foul of 1, 2 and 3 above. Particularly point1!
- Consensus views are rarely right. It does happen from time to time, but the investment industry and investors generally are a herd (of lemmings some might say!) with a strong herd instinct.
On this last point, our senior wealth manager Ben Klein pinged me a piece on fund flows yesterday from Calastone, the world’s largest fund network, who process around £250bn of fund transactions every month.
They should have good data and through the rear-view mirror we can see why US markets did so well last year. These two charts tell the tale:
Investors have been pouring money into equities, and it has been pouring into passive index tracking funds which buy the largest companies by market value. It does not take a degree in physics, nor to be legend fund manager like Terry Smith, to work out why US mega cap shares have done so well, and the inherent risks this herd behaviour creates.
Terry does sum it up nicely in his latest letter to investors, some of whom may be getting a little impatient:
“The vast majority of index funds are market capitalisation weighted, like the indices on which they are based. The size of holdings in companies in the index fund is based upon their market value compared with the market value of the index.
So, when there are inflows to index funds, the largest portion goes to the largest companies, and vice versa when there are outflows. The result is that as money flows out of active funds and into index funds, as it has been doing, it drives the performance of the largest companies, which are companies whose shares have already performed well, which is how they came to be the largest companies by market value.
This is a self-reinforcing feedback loop which will operate until it doesn’t.”
Of course, those who are paying attention to my advice will quickly point out that Terry is running an enormous active fund (£22.5bn according to its latest fact sheet) and still getting away with charging his loyal investors 1% p.a. In modern fund management this is at the very top end of active management fees. It is £220m a year from just one fund, for a business which, according to Wikipedia, employs just 59 people, likely has minimal other costs, and with Terry based in Mauritius I’m sure pays very little tax.
There is no question Terry has a big, vested interest in this debate.
I’m pleased to report that, according to FE Analytics, our ‘quality growth’ fund Heriot Global (managed by Dundas Partners based in Edinburgh, which follows a similar strategy and charges us just 0.47%, half the cost of Fundsmith) has outperformed Terry’s fund by 4.6% in the last 6 months, 3.2% over 12 months and by 9.7% over the last 5 years. It turns out, in the words of Monty Python (Life of Brian, 1979), Terry Smith “is not the Messiah, he is a very naughty boy!” and there are an awful lot of would-be Messiahs out there shouting loudly trying to gather their throng!
Of course, we agree with Terry’s analysis, but predicting when a shift away from passive will ever occur is much harder. For now, we will keep our S&P 500 holding.
A word on Bitcoin and Ruffer
I can guarantee you we won’t be buying any Bitcoin in 2025, no matter what the price goes to and no matter how vocal the herd gets. Ursula and I travel to our City office via the ‘drain’ (the Waterloo and City line) and on the way home we have been descending the travellator of late covered by a huge golden advert. With imagery of safes and words stressing security, it took us a while to work out what it was all about. Turns out it is Xapo Bank, established in 2013, and in their words “the safest place to hold your Bitcoin”.
As you get towards the bottom of the travellator there is the smallest of small print that means you nearly trip off the end before being able to read it: “only invest if you are prepared to lose all your money”. That’s all I need to know!
The investment funds we use to invest in are diversified and regulated to the extent that whilst there may be volatility in their values, the risk of losing all our money even in just one fund would be negligible. When you create a portfolio from several of these funds, each investing differently, the risks of any permanent capital loss decline further. There is no place for Bitcoin in this approach.
We will most likely keep our Ruffer holding and I know there are few clients questioning the wisdom of this decision. Ruffer is in our multi-asset portfolios primarily for diversification and a better long-term return than cash.
The table below shows the return made by Ruffer in bad years for equity markets, this is what they are very good at.
They have had a tough couple of years for sure, but as can be seen in the first chart they have made some money in the last month, and their long-term returns have been excellent:
We are confident that:
- If we are patient, they will deliver a decent long-term return
- If we have a down year in equities in 2025, not predicted by the herd, but see point 5 above – we will be glad to own it.
Nick is away this week, but for those with an appetite to read more, our guest writer Stephen O’Sullivan comments on the first few days of Trump 2.0 and I recently published a paper on why I would never buy an annuity with my pension fund.
Some commentators in the press and a few advisers (mostly with annuity broking businesses – see advice point 1!) have checked annuities as a solution to the pensions-will-be-subject-to-inheritance-tax issue. We note on this subject that leaders in the pensions industry are lobbying hard for a change of approach. The changes proposed in the Budget are considered unworkable at scale by these big providers, although these leaders are at pains to point out that they are lobbying not for no tax on death, but a simpler approach in practice.
We will wait to see if anyone in the Government is listening. Expect to see some changes, but no big U-turn.
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.
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