As private investors, and by private investors, I include anybody who directly puts money into stocks, funds and investment trusts, following the recent frightening publicity with the demise of a once high flying fund manager, should funds/OEICs or maybe even for that matter ITs be avoided?
Well as Arthur Scargill would say “that’s an interesting question but the one you should be asking is….”. I feel the real question is “should you abdicate your sanity when investing in anything”. Let me explain: many investors are sadly poor investors with purchases based on little or flawed research and sadly if you try to walk across a busy road without cautiously looking each way, the outcome may not be the one you planned for. Just maybe a touch more consideration and research is needed rather than “I bought this share because it was tipped in Petite Company Stalker” or “some bloke on Twitter who has a great reputation said…etc”.
To my mind, many an investor takes the same ill-researched approach with the selection of a fund or investment trust and sadly that culture may also apply to some advisors who make a living from their professional guidance where maybe their own wealth creation distorts advice. How did Kent County Council seek their advice regarding the investment for some of their pension funds? I don’t know but would be fascinated to find out.
Now the point of this article is really to say that with a little research you can select some quality OEICs or Investment Trusts to invest in but, and it’s a real but, you have to take a peek under the bonnet.
Of course, you want to keep an eye on exorbitant management fees but at the same time, if a fund manager can make me 15% to 20% a year whilst he resides on some Indian Ocean island, why the heck should I care? Should I really let my social ethics force me to invest in “Frugal Fred’s from Macclesfield” Fund that can on a good year maybe beat the FTSE? Sorry, I am easily bought, I am here to make money, stay in Macclesfield Frugal Fred, I am off to the Maldives.
There is also another consideration and that revolves around the structural merits of an OEIC compared to an Investment Trust. Structurally, I have to say that I by far prefer Investment Trusts but I don’t allow that bias from precluding my investing in what I consider to be high-quality OEICs. In broad terms, if an OEIC needs to fund investors cash coming in or being withdrawn, then it has to either buy or sell some of its holdings: the value of the fund will broadly be the composite value of the components. With an IT you are simply investing in a company that holds a number of stocks and the share price of that IT will be like any other listed company i.e. it will be valued at whatever Mr Market values it at and not the composite value of the basket of shares that it holds; hence the premium/discount to NAV that you will see quoted for an IT.
So, how does this impact my investment universe? Well, I write the Voyager RNS Log which covers the great bulk of my investing universe; that’s the majority of stocks that I purchase directly into my accounts. I rarely write anything about my “lazy portfolio” which whilst being very significant in value is rather dwarfed by my dealing and ISA investments; maybe not that surprising as I go back to the days of PEPs, remember them? Well, I currently only hold four holdings in this Funds/ITs portfolio and each has been selected with some degree of care and looking under the bonnet to see what stocks each have invested in. What I am personally looking for is at least some global diversification and above all, the selection of high-quality profit-making businesses; I am not really interested in something that “might one day make a profit”.
So, how do I do that? Well, I simply gauge a feel for the quality of the management, past performance and take a look at the top ten investments in each. Dead easy to do and a number of ways of accessing this data; by preference, I use SharePad as they make that first look so easy.
Does it work? Well, the performance of my Funds/IT portfolio is up by over 20% so far in 2019 (to mid-June 2019 compared to FTSE AS TR @ 12%) and for the difficult year of FY 2018/19 three of the investments averaged 19.9% with Smithson which was only launched in October 2018 returning 18% to the end of FY 2019 compared to the FTSE AS TR @ 7.5%. Not a bad performance and all achieved with just a little care in terms of selecting quality. The messages therefore are:
So let’s have a quick look under the bonnet at the top ten holdings for each of the four investments in my Funds & ITs portfolio (these details are from SharePad):
Fundsmith: Manager: Terry Smith
Blue Whale Growth Fund: Manager: Stephen Yiu
Finsbury Growth & Income Trust: Manager: Nick Train
Smithson Investment Trust: Manager: Simon Barnard (Under the Terry Smith umbrella)
In my view, all four hold quality stocks, have a good manager and track record.
To conclude, there is quality out there in the world of OEICs and ITs but you will have to take care with your selection and look at the basket of stocks within an instrument and take a judgement on the overall quality.
You may ask why do I have such a portfolio when I invest directly myself for the bulk of my portfolios? Well, two reasons. Firstly a loose benchmark for Voyager and secondly the realisation that one day hopefully in the distant future, any investor may become less qualitative in their thinking ( a polite way of saying aged incompetence) and need to move to a trusted and respected manager to look after their hard-earned dosh. So, why not develop that expertise along the investment journey whilst you still have all of your marbles!
Welcome to my Blog Page - I hope you find my whittling on to be of some interest. I am a private investor who is happy to share thoughts on the market and individual stocks. Please remember that I am definitely not offering tips or investment advice.