- My 'from scratch' Isa has beaten cash but lags multi-asset benchmarks
- Investing emotionally in themes has dragged on performance
Liquidity is usually mentioned in the context of how easy it is to get money out of a fund but in the case of my personal Isa portfolio, the liquidity issue is getting money into it. That’s because like any aspirational, young(ish) investor I don’t always have the spare cash to buy before opportunities get expensive.
One mistake I’ve made is being set on adding some investments and buying at too high a price once I’ve saved up. This has made me vulnerable to interest-rate risk and lessens the margin of safety should holdings face headwinds.
This is exactly what’s happened with Blackrock World Mining Trust (BRWM). Share prices in the sector have tumbled on fears of a fallout from the crisis at Evergrande and potentially other Chinese real estate groups. Compelling as the long-term case for materials is, potential for demand shocks means share prices can pull-back significantly and it’s unnecessary to buy high.
Unfortunately, the same error was made when I bought iShares Global Clean Energy (INRG). The transition to a low carbon future is a trend I believe in strongly, but I was carried away with the story and should have been more patient.
My approach has been to buy what I think will do well over 10 years and build these funds into a strategic asset allocation (the split between shares, bonds, and other assets in my portfolio). I’m confident this will work but not paying enough attention to valuation has exacerbated the mark-to-market losses that all investors must expect from time-to-time.
Themes that have done well for the portfolio are global real estate and battery technology. Other positions have been steady rather than spectacular.
Starting out I wanted big US tech stocks, but for these to be in managed funds such as Allianz Technology Trust (ATT) and Polar Capital Technology (PCT) which weight positions according to analysis not size. Investing in technology companies that aren’t mega-caps but are still large is a hallmark of ATT in particular, and these funds give me a more diversified core tech holding than I’d get in a tracker.
My watchlist and watching out for a ‘pre-endowment’ effect
Anchoring expectations of future performance is a behaviour trait that investors should guard against. So is placing too much importance on what you own and underplaying other opportunities, something known as the endowment effect.
Something I need to manage is my tendency to have an endowment bias even when it comes to ideas. As we’ve seen with mining and green energy, because I believed I must have exposure to long-term growth themes, my focus became myopic. When the timing is bad, I should look elsewhere. Basically, I need a few options on the watchlist so I can go for the one that’s best value.
Long-term, the healthcare and pharmaceutical sectors are on my wish list but having made big gains from the March 2020 market lows they are expensive. These are stocks with natural defensive characteristics, and it wasn’t much of a leap for people to think they’d be good places to invest in a pandemic.
The problem is valuation risk and the potential for it to bite in the coming months. Recently the United States Federal Reserve gave a clear signal it will tighten monetary policy sooner rather than later. Chair Jay Powell and the rest of the Federal Open Markets Committee's (FOMC) comments suggest the Fed may taper bond buying as early as November and interest-rate rises will be next on the cards.
Higher interest rates, and therefore higher yields on less risky assets like government bonds, means investors are prepared to pay less for even the relatively safe cash generation of companies like tech, healthcare, and pharmaceutical firms.
Rate rises could mean the pharma and healthcare shares I covet will become less expensive, although to be better value any reactive share price downgrades would need to be overdone. Investment company Worldwide Healthcare Trust (WWH) has several world-class companies on its roster. I’ll be watching to see if these underlying holdings get cheaper and keeping an eye on the trust’s share price.
Many companies WWH invests in are US-listed but the trust's shares are on the UK market. Discount-widening can be a pretty uncomfortable experience for investment trust investors in a sell-off but in the case of this fund, the share price has historically been quite tight to net asset value (NAV). Should a discount emerge at a time the NAV is getting cheaper, this could be the buy-in opportunity I’ve been waiting for. Hopefully, I’ll have the cash set aside and not miss any windows.
Another expensive holding that I’ve wanted to buy into – and one for the ‘other’ slice of my asset allocation – is private equity (PE). Investment trusts are the ideal vehicle for unlisted assets as their shares trading on a public market provide liquidity that seldom exists in the underlying investments.
A criticism of PE trusts in the past has been the book NAV not accurately reflecting the fair value of assets when they should be written down in a recession. When times are tough the share price of an investment trust with illiquid holdings can plummet. Large widenings in discounts can show up the true risk of the asset class.
Selecting a PE trust to buy into is tough right now. There is a huge amount of money sloshing around for deal making which has inflated NAVs and again this is a massively hyped story. It’s also very easy to get seduced by the build-back better narrative including the chance to buy into exciting fintech businesses that aren’t listed on public markets.
Much as I subscribe to the idea fintech companies, blockchain technology and trends like decentralised finance (DeFi) will be revolutionary, it’s important to take a reality check. Easy money conditions are about to abate and that could have an impact on valuations across the PE industry. That could shake out some of the weaker opportunities and may create issues for investee companies and private equity partnerships alike if they have taken on a lot of debt.
There are very good PE investment trusts that have some great businesses in their portfolios, but in many cases premiums to NAV have widened. For my portfolio, I’d be happy to own any of the higher-quality investment trusts such as Chysalis Investments (CHRYS) or Augmentum Fintech (AUGM), but they are too expensive for me right now.
Because I worry about companies with snake oil stories getting through funding rounds thanks to the availability of easy money and taking on excessive leverage, I want to know that a good fund manager is analysing what to buy. I wouldn’t go outside of managers that I trust, so I’ll be waiting for a pull-back in valuations. If there is a reduction in some of the froth around PE and the quality names get dragged down too, then I will buy.
Could the biggest theme be emotional bias?
My investing philosophy has been to focus on themes, which means the equity risk is concentrated and I have timed my entry points badly. Having reviewed my portfolio with Dr Greg Davies of Oxford Risk, he pointed out the way I pick holdings is influenced by emotional factors.
Thematic investing is risky and expensive and sometimes I have bought because I have an attachment to an idea, like green energy, and this gives me comfort. I was also late to the party with many of these investments but a combination of their success in 2020 (and a decade of shares just getting more expensive) and my faith in the narrative for the future made me jump on the bandwagon without waiting for better entry points.
Buying a global equities tracker as a core holding for shares would have served me better. Then I could add thematic satellite positions when the valuations make sense. This would be cheaper and reduce the chance of taking mental short-cuts and buying on a fear of missing out.
The trouble is that psychologically that’s a hard action for me to take. I’ve convinced myself that I can build an equites exposure that only includes shares in the sectors and companies I believe will rule the future. What makes investing enjoyable for me is this process, so I don’t mind underperforming in the short-term as I build up my positions.
This could turn out to be foolish but that’s because it goes deeper than just a set of investing biases. As Dr Davies pointed out to me: my way of thinking is part of how I like to see myself.
As it stands, BRWM and INRG are the two worst blots on my portfolio performance. Schroder AsiaPacific Fund (SDP) has also made a loss. The fund is an investment trust and both its net asset value and share price have fallen the latter by more, so the discount has widened.
Although SDP has 17.8 per cent weighting in China (as at 31.08.2021), this is considerably less than its benchmark, which has 39 per cent. This is exactly why l prefer active fund management in the region. Chinese internet companies are held but the crackdown on data and payments business by the Communist Party, not to mention the Evergrande fallout, weighs less than it might have tracking an index fund.
So, straying from an index can have its advantages but whether the rest of my investing approach can eventually do better than a global tracker remains to be seen.
|Isa builder portfolio 28.01.2021 to 27.09.2021|
|Holding (Ticker/SEDOL)||Asset Class (Sub asset class/style)||Date added||Total return||Weight at 27.09.2021|
|Schroder Global Cities Real Estate Fund Z Acc GBP (B1VPTY7)||Global real estate||26.03.2021||14.7%||13.66%|
|HAN ETF Digital Infrastructure and Connectivity (PIGI)||Equities (Developed markets/growth)||28.01.2021||5.0%||12.51%|
|iShares $ TIPS (ITPS)||Fixed Income (U.S. Treasuries inflation linked)||28.01.2021||2.5%||12.08%|
|iShares Global Clean Energy (INRG)||Equities (Developed markets/growth)||01.02.2021||-26.5%||4.35%|
|Legal & General Battery Value Chain (BATG)||Equities (Developed markets/growth)||28.01.2021||10.7%||13.19%|
|HAN ETF Royal Mint Physical Gold ETC (RMAP)||Commodities (gold)||26.02.2021||-2.2%||2.95%|
|Allianz Technology Trust (ATT)||Equities (Developed markets/growth)||28.01.2021||6.4%||12.65%|
|Blackrock World Mining Trust (BRWM)||Equities (Developed markets)||04.05.2021||-17.7%||4.94%|
|Murray International Trust (MYI)||Equities (Developed markets)||28.01.2021||2.7%||12.25%|
|Polar Capital Technology Trust (PCT)||Equities (Developed markets/growth)||15.02.2021||1.2%||5.90%|
|Schroder AsiaPacific Fund (SDP)||Equities (Emerging markets/growth)||01.02.2021||-8.1%||5.52%|
|Total return (net of all fees)||1.8%|
|Source: Investors' Chronicle, Barclays Smart Investor|
See also: Psychoanalysis for portfolio complexes