Thursday, 14 December 2017

Finsbury Trust - Final Results

I have held FGT in my ISA for the past 6 years. It continues to deliver year after year and remains one of the top UK Income Trust in terms of net asset value and share price performance over five and ten years, its returns far outstripping those of the FTSE All-Share index. A sum of £1,000 invested 10 yrs ago would now be worth £3,052 compared to a total return of £1,752 from the benchmark FTSE All Share index.

Its aim is capital appreciation and income combined, with a total return in excess of the FTSE All-Share.

Long standing manager Nick Train’s approach is based on that of Warren Buffett’s and involves building a concentrated portfolio of “quality” companies that have strong brands and/or powerful market franchises.

The characteristics that define a quality company for Lindsell and Train are:

·                     durability – companies that can prosper through business cycles for many years to come;
·                     high return on equity – companies with the ability to grow earnings year-in, year-out are favoured over those with rapid short term growth, but uncertain long term prospects; and
·                     low capital intensity/high free cash flow generation – companies that do not have to make heavy balance sheet investment to generate earnings growth.

3 Yr Chart FGT v All Share Index
(click image to enlarge)

He holds shares for the long term regardless of short-term volatility, aiming for them to double or more in value over time. This results in extremely low portfolio turnover, which saves on transaction costs. The trust's total expense ratio remains reasonably low at around 0.7%.

Results

The trust has this week announced 
results for the full year to 30th Sept 2017 (link via Investegate). The trust has outperformed the all share index in each of the past 5 years and once again, this year is no exception. Share price total return is 14.2% compared to 11.9% return for the FTSE All Share.

Top five portfolio holdings are: Unilever 10.1%, Diageo 10.0%, Relx 9.3%, London Stock Exchange 8.6% and Hargreaves Lansdown 7.0%.

Over the past year the dividend has increased by a respectable 8.4% to 14.2p (2016 13.1p). Revenues were 15.8p (2016 15.2p) and therefore there is a surplus after accounting for payments of dividends which will further bolster the dividend reserves.

It is worth noting that Nick Train has made a significant addition to his personal share holding and now holds 1.2m shares in the Company which represents the whole of his personal investment in UK equity and is a significant portion of his total assets.

Commenting on the results, manager Train said  "
We know that currently some shareholders worry about Brexit and other macro-economic or political issues, but we continue to believe that the most rational way to respond to these concerns is to work on the following assumption. “Everything will work out just fine in the end.” This may read as complacency, but the truth is that ever since the FT All Share was first calculated, back in 1962, there has always been something to worry about. The index had a base value of 100 in 1962 and now stands at 4130 – that’s a 7% pa compound return, excluding dividends. Those returns, earned from the compounding profits of well-run UK companies, have accrued despite dramatic political, economic and social changes. We think it sensible to assume steady wealth creation will continue. And this is why I have continued to add to my own holding in Finsbury throughout 2017".

The shares are currently trading at 760p and I have recently reduced my holding by 20% to provide a little more 'income' from the capital appreciation over recent years. I am happy to continue holding the remainder for the coming year and beyond.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Feel free to leave a comment below if you hold this investment trust in your portfolio.

Monday, 4 December 2017

Financial Literacy - A Problem for the Many Not the Few

"There can be little doubt than many ordinary people struggle to deal with issues of personal finance and particularly such matters as pensions and equity investments. On the few occasions I discuss these issues with friends and relations it seems the subject matter quickly moves on to less challenging topics. However, just because personal finance is not widely discussed or understood, does not mean it is not important". 

The opening lines to my book 'DIY Simple Investing'


In March 2014 two American economists, Annemarie Lusardi and Olivia Mitchell published their research (pdf) on the subject of financial literacy.  They conducted a 3 question survey to see how much respondents understood interest, inflation and investment risk.

Here are the questions :

Question 1
Suppose you have $100 in a savings account and the interest rate was 2%  per year. After five years, how much do you think you would have in the account if you left the money to grow?
A. More than $102
B. Exactly $102
C. Less than $102
D. I don't know

Question 2

Imagine that the interest rate on your savings account was 1%  per year and inflation was 2%  per year. After one year, how much would you be able to buy with the money in this account?
A. More than today
B. Exactly the same as today
C. Less than today
D. I don't know

Question 3

Do you think the following statement is true or false: Buying a single company stock usually provides a safer return than a stock mutual fund?

This was a global survey and the results revealed a surprising level of financial illiteracy all around the world.

Only 3 out of 10 people answered all three questions correctly in the US. In Europe, the best performing respondents were the Germans (53% got a perfect score) and the Swiss (50%), but this still leaves almost half of each country’s population without a basic understanding of very basic financial matters. In countries with relatively strong economies, the numbers are sobering: 79% of Swedes, 75% of Italians, 73% of Japanese, and 69% of French could not respond correctly to all three questions. The score for Russia was a 96% fail rate! Unfortunately the study does not provide results for the UK.

Whilst men outperformed women on the finance quiz, greater numbers of women responded that they “don’t know,” a result that held true all over the world. The upshot is that women, more conscious of their limitations, are more likely to be interested in financial-education programs.

This lack of education appears to be taking a toll - half of all Americans have nothing saved for retirement, just one third of all adults in the U.S. have only several hundred dollars in a savings account and 61% report that they don't have sufficient rainy day savings to cover six months' worth of essential expenses.

Interesting but Does It Matter?

Financial literacy involves the ability to make informed decisions which are integral to our everyday lives - how a bank account works, how to save, how a mortgage works and how to avoid debt. People who lack the basic ability to negotiate the basic financial landscape will be at much higher risk of falling prey to the unscrupulous system which snares the unwary into a spiral of unsuitable financial transactions and which result in high levels of unaffordable debt.

People with low levels of financial literacy are likely to borrow more on credit, and tend to pay off the minimum each month. They are unlikely to save let alone invest and will have little or no provision by way of pension for retirement.

This is increasingly what we are seeing not just here but in all parts of the world. In a study undertaken by the OECD in 2016 (pdf).

Financial knowledge is an important component of financial literacy for individuals, to help them compare financial products and services and make appropriate, well-informed financial decisions. A basic knowledge of financial concepts, and the ability to apply numeracy skills in a financial context, ensures that consumers can act autonomously to manage their financial matters and react to news and events that may have implications for their financial well-being. The literature indicates that higher levels of financial knowledge are associated with positive outcomes, such as stock market participation and planning for retirement, as well as a reduction in negative outcomes such as debt accumulation.

Thirty countries and economies, including 17 OECD countries, participated in this international survey of financial literacy; In total, 51,650 adults aged 18 to 79 were interviewed using the same core questions.

The UK came 15th overall, just ahead of Thailand and Albania and below the average for all countries in the study.

The survey results indicate that :

The average score across all participating countries is just 13.2 out of a possible 21 (a combination of a maximum of 7 for knowledge, 9 for behaviour and 5 for attitudes), and 13.7 across participating OECD countries, showing significant room for improvement.

On average, just 56% of adults across participating countries and economies achieved a score of at least five out of seven (considered to be the minimum target score)

Fewer than one in two achieved such a score in 11 of the participating countries (South Africa, Malaysia, British Virgin Islands, Belarus, Thailand, Albania, Russian Federation, Croatia, Jordan, United Kingdom and Brazil). However, in stark contrast, over four out of every five (84%) adults in Hong Kong, China achieved the minimum target score.
Across all participating countries and economies, two in five respondents had not saved in the last 12 months.

The weakest areas of financial behaviour across these measures appear to be related to budgeting, planning ahead, choosing products and using independent advice.
Interestingly, relatively few people are choosing new financial products with the aid of independent information or advice – including best buy tables – indicating that more could be done to guide consumers towards unbiased sources of information.

Financial resilience and long-term planning could be further promoted through
user-friendly budgeting tools and ways of monitoring income and expenditure which could encourage more adults to create a household budget and use realtime data to make necessary changes before falling into difficulty

People may also need education and guidance to identify realistic alternatives to borrowing when income is insufficient to make ends meet.

Education that applies behavioural insights, such as encouraging people to set goals and commit to them, could also help people to behave in more financially literate ways, including active savings behaviour and longer-term planning.

Conclusion

Maybe it's not such a big problem if most of us cannot work out the better value between a 4 pack and nine pack of loo rolls in the supermarket. Some people who are not so good with finances will be good at other aspects of life and can get by with a little help from their partner or friends.

However it matters a lot if people are conned out of life savings because they lacked a basic understanding of how the system works, or end up borrowing more than they can afford to pay back because they cannot understand APR, or opted out of a workplace pension because some guy down the pub gave them dodgy advice.

This year, personal consumer credit lending passed £200 billion in the UK.

I have been writing this blog for close on five years and I have written and self-published four books. I suspect that, whilst aiming to reach a broad audience of would-be investors, in reality I am just scratching the surface or finding a small audience of readers who are already well versed in the dark arts of personal finance. There may well be a very large section of the general public, probably well over 50% who cannot understand simple personal finances and therefore cannot access the basic information. They may never be in a position to implement a savings plan or monitor their income and expenses let alone set up a basic DIY investment portfolio.

Leave a comment below if you have any thoughts on the state of financial literacy.

Wednesday, 22 November 2017

The Autumn Budget

The Chancellor's credibility was severely dented after his first budget in March when he had to backtrack on national insurance rises for the self employed which were at odds with a manifesto pledge not  to increase NIC levels.

Shortly afterwards, the PM called a snap election which failed to deliver the increased majority and left the Government without a majority and now relying on the DUP. Added to this is the well-documented Tory in-fighting over Brexit which is creating a very unsettled feel at the top table.

Against this difficult backdrop, Hammond has to balance the books and continue the efforts to reduce the borrowing deficit whilst trying to counter the allure of Labour's borrow & spend strategy which seemed to be popular at the general election, particularly with the younger voters.

Debt

Our borrowing is still not under control. Net PSBR now stands at £1.8 trillion which is almost 4x the figure for 2007 (~£500bn). Admitedly  the annual deficit has been gradually coming down year on year since 2009 when we borrowed £152bn but the fact remains we continue to borrow each year - estimates for this year are £60bn.

Last month alone, the government paid £6m in debt interest - the highest amount for a single month on record.

The more we borrow, the more we pay in interest which is linked to inflation rates and this means less to spend on welfare and essential public services, housing and infrastructure. At some point we have to grasp the nettle and start to live within our means.


Budget

Unfortunately, the chancellor's scope for big changes has been curtailed by the OBRs forecast for productivity and growth. Whilst employment has risen to near record levels in the UK , productivity growth has averaged just  0.1% since 2008, compared to 2.1% in the previous decade. The OBR has revised down its forecast for GDP growth in 2017 to 1.5%.

The OBR forecast debt will peak at 86.5 % of GDP in 2017-18 the highest it has been in 50 years.

On Brexit, the government have set aside a further £3bn of new money to prepare for the possibility of a 'no deal' which looks to be a prudent provision given the way negotiations are shaping up.

On a more positive note, I am pleased to see that pensions and savings have been left alone. The relevant changes are few :
The starting rate for savings income that is subject to the 0% starting rate will be kept at its current level of £5,000 for 2018-19. 
After a big jump last year, the ISA limit for 2018-19 will remain unchanged at £20,000. The annual subscription limit for Junior ISAs and Child Trust Funds for 2018-19 will be uprated in line with CPI to £4,260. 
The lifetime allowance for pension savings will increase in line with CPI, rising to £1,030,000 for 2018-19. 
From next April, personal allowances will increase from £11,500 to £11,850 (up 3% in line with inflation) and HR tax allowance up to £46,350.

Housing

As widely forecast, there was a focus on the housing situation. There was an extra £15bn of new money bringing the total to £44bn over the next 5 years combined with a reform of planning laws to free up available land for more houses. The target is for 300,000 new homes per year by the mid 2020s.

In addition stamp duty has been abolished for first time buyers of properties up to £300,000. So, likely to push up prices - particularly in London and the SE, which will make buying a house even more unaffordable.

Of course there are many other provisions in the budget - help for those on Universal Credit, an increase in the national living wage, more money for the NHS etc. but notably there is nothing on the thorny issue of funding for long-term care which became a big issue at the last election. Here's the Budget from HM Treasury in full.

The chancellor has been under pressure from many quarters in recent months and the relationship with the PM is strained. I suspect he has bought himself a little more time with this relatively 'safe' budget...time will tell.


What do you make of it all? Were there any benefits for you? Feel free to leave a comment below.

Friday, 3 November 2017

Scottish Mortgage - Interim Results

Scottish Mortgage is an actively managed, low cost investment trust, investing in a high conviction, global portfolio of companies with the aim of maximising its total return to its shareholders over the long term. The managers aim to achieve a greater return than the FTSE All World Index (in sterling terms) over a five year rolling period.

It joined my SIPP portfolio at the start of the year at my initial purchase price of 338p. The share price has advanced 35% over the year to currently 457p which is naturally very pleasing.

The trust has today issued results for the halfyear to end September 2017 (link via Investegate). Share price total return is up 15.4% compared to 1% for the benchmark FTSE All-World index.  

Scottish Mortgage has increased total net assets to more than £6 bn making it one of the UK's largest investment trusts. It was promoted earlier this year to become the only investment trust in the FTSE 100 which provided a boost to the share price as it now has to be held by all the FTSE 100 index funds.

The managers, James Anderson and Tom Slater run a conviction portfolio of around 75 shares. The result is a portfolio dominated by big holdings in some of the companies involved in the new world of social media, the internet, healthcare, eco-friendly energy and gene therapy.

The top ten holdings account for 49% of the portfolio and include Amazon 7.7%, Baidu 5.4% (China's equivalent of Google), Alibaba 6.8%, Facebook 4.7%, Tesla Motors 6.8% and Alphabet (Google) 4.2%.

Some 13% of the portfolio is invested in unquoted companies - online music provider Spotify, Dropbox, peer-to-peer lender Funding Circle and airbnb to name a few I am familiar with.
  

“These are truly global businesses, significantly impacting their large publicly-listed competitors, but as yet they remain private companies,” said the statement.

“This makes it hard for most innovators (professional or individual) to benefit from the capital creation of their growth.”

Largest holding Amazon has become a giant in global retail. Over just 10 years it has grown more than 25-fold from a market cap of  $20bn to currently over $500bn.

Many of these network businesses now seem to have reached a critical tipping point, whereby their sheer dominance and scale become a reinforcing competitive advantage. This stems from the developments within machine learning and artificial intelligence (AI). The increased level of global connectivity, through the combination of the relatively new infrastructure of the mobile internet, social media and smart devices, has produced an explosion in the proliferation of data. The volume of this is now so great that no human could hope to curate the content. It will require machine learning and AI to process it. The leaders in these fields need access to the best data sets, produced by the largest networks. It is no accident that Baidu, Alphabet, and Facebook are leaders in this area.

Scottish Mortgage offers a clear, consistent and simple proposition: a portfolio of long term investments in what the managers believe to be the best growth businesses, operating in any industry and anywhere around the world.

Over the past ten years, the trust has delivered a return of 300%  (second only to Linsell Train). Although this is essentially a global growth trust, it is worth noting it has increased its dividend every year for the past 33 years. Whereas the likes of my UK income trusts such as City of London provide a steady 4% or so natural yield, I am hoping to take my required 'income' from the sale of shares at some opportune future point. Were I to sell today, the profit from the appreciation in the share price since purchase would provide my 4% 'income' for the next 9 years.

3 Yr Chart  SMT v City of London
(click to enlarge)
Obviously I am pleased with progress since my purchase and hope to add to my initial holding when there is the inevitable pull-back down the line but for now the current holding will return to the bottom drawer.


As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!