The past 16 months have been a whirlwind in markets, something that has taught me a number of lessons during my time at Trustnet.
Since I joined in April 2020; There was the sharpest sell-off in market history, a US presidential election, Brexit trade deal, the UK’s impressive vaccination roll-out, inflation concerns, the value rally and the gradual re-opening of economies.
To mark my six-month anniversary at Trustnet, I wrote about the lessons I had learnt during my first forays into financial journalism and now, as I prepare to leave Trustnet, I am sharing an updated list, with more experience and (hopefully) a little more knowledge.
ESG is currently too convoluted and contradictory
Extreme weather has a way of putting things in perspective. The recent flooding and wildfires across the world has shown how delicate our existence is in the face of climate change.
It has shown that environmental, social and governance (ESG) investment strategies that prioritise and allocate capital towards the industries and solutions that will combat the environmental issues is crucial. However, in its current form, I don’t believe it quite works.
Trying to marry three disparate concepts together is difficult in itself, but the real issue lies in how its categorised and rated, and it is not just me. The European Securities and Markets Authority (ESMA) said the market for ESG ratings and other assessment tools is currently unregulated and unsupervised.
In arriving at an ESG score, data providers compile sustainability analysis into a single measure, which can cause disparities across the universe of providers, as each score could be different depending on their metrics.
But it has other issues: it relies on companies disclosing accurate information and them having the resources to commit to improving ESG scores.
This is before we get into the aims of the individual investor, as ethical and sustainable investments are very different.
While it has issues, the framework is in its infancy and is still a force for good. When it comes to this area of investing, I would choose an actively managed fund, as an index-tracker is, by its definition, restricted in what it can own.
I would also trust the individuals with decades of experience in this space, as opposed to the recent launches over the past year.
Mike Fox, who has overseen the Royal London Sustainable World Trust since its launch in 2009, would get my vote.
Performance of fund vs sector since launch
Source: FE Analytics
Investment trusts over open-ended strategies
I find it hard to believe that the investment company structure is not used worldwide. The closed-ended structure, ability to gear and discount mechanism are three fundamental reasons I have more trusts than open-ended funds in my portfolio.
I bought two on a discount which have since gone to a premium and I’m content to hold them for the long-term. I’ve tried, to no avail, to convince my friends of the benefits of being able to buy in at a discount and therefore gaining exposure to companies at a lower rate than usual.
Discounts aside, a tool like gearing – taking on debt to buy more assets – is especially powerful and over the longer-term, the effect of moderate gearing is the reason why investment trusts have generally outperformed open-ended funds.
As someone with a preference for small-caps, I also worry about the fund size getting too large – limiting the investment opportunities available. This is a problem trusts can avoid given the fixed pool of capital.
Although I’m not currently investing for income, the substantial revenues reserves of trusts are reassuring for when I start keeping an eye on dividends.
As Unicorn’s Peter Walls told me, everything happening in the world can relate to an investment company – and I intend to keep them in healthy abundance in my portfolio.
Assessing value can be difficult, but use as many metrics as possible
Orbis’ Dan Brocklebank told me that people get valuations muddled up with value investing and when people talk about multiples, they don’t always have a solid grounding in why those multiples are relevant.
By its definition, value investing is when investors buy something on a low multiple, be it earnings or book value. However, the ability of companies to rapidly scale and the rise of intangible assets has made some metrics look outdated.
Brocklebank said to think of it like satellite triangulation, which requires a minimum of three satellite locks - the more satellites, the more accurate your position is. Valuation is the same thing, the more metrics you use the better.
Jupiter’s Ian Heslop said during the tech bubble, people would bend valuation metrics to make stocks look cheap or justify wild estimates – even more reason to use as many multiples as possible.
I’m cautious of valuation metrics that seem to overstate a share price based on conjecture, but I’ll always try and cross-reference with as many metrics as possible before I buy a stock of my own.
Trust your convictions, ignore the noise and ditch short-termism
Back in March, I was ready to sell out of Baillie Gifford American after fears over inflation and a tech-sell off raised questions about the strength of returns in the US.
Performance of fund vs sector YTD
Source: FE Analytics
This was a fund I was ready to hold for 20-30 years and yet I was ready to jump ship after a slight wobble. Structurally, nothing had changed for the companies I had exposure to, it was just a cyclical headwind.
Anecdotally, it was around the time of the Bitcoin surge and GameStop short squeeze and while my own portfolio took a hammering, I was guilty of getting carried away with the fervour of quick returns. In the end, calmer heads prevailed and I still own the fund.
Young people are bombarded my misinformation and ‘experts’ continue to infiltrate social media platforms to perpetuate the virtues of ‘investing.’ The rise of the TikTok ‘advice’ is a clear and worrying sign of this.
FX trading or stock punting is not investing, its gambling, but if you know what you’re doing you can do well. Currently, there’s an excess of people with minimal experience, promising wild returns.
Investing isn’t as flashy as trading, but personally, compounding interest is far more attractive than extreme volatility.
Thank you, reader.