The recent few weeks have been enough to give the devil the hot sweats!

Last year Brexit, and this year the election – what a nightmare this has been for your average DIY investor. Politicians and commentators demonstrated, yet again, that they were never going to be stopped by a lack of facts and accurate information. Perhaps, instead of giving politicians the keys to the country, we would be better off changing the locks!

After the unexpected Brexit result, sterling fell by around 15% and this meant any fund with a high proportion of dollar based investments made very nice gains, whilst your sterling based funds fell back. A few months later the U.K. economy started to show improvement on all fronts, and sterling started to stage a recovery. All change again, the ‘UK Smaller Companies’ and ‘UK All Companies’ sectors were on the move forward making handsome gains, until the turmoil of the recent general election campaigns brought that momentum to a halt. Then along comes the election result, and it is a hung parliament where Theresa May`s Tory government is expected to be kept afloat by the Northern Ireland D.U.P.  Unexpectedly, Sterling did not immediately tank, but hiccupped and we all wait with baited breath to see what happens next.

One sector that has been making progress through all this unrest, as we have discussed many times before, is the Technology sector. Until recently we at Saltydog had been looking for those funds that might be investing in the new generation sciences rather than those of the recent ‘Information Age’. Then it dawned on us, that it was those very same companies Amazon, FaceBook, Alphabet, Apple, Microsoft, Alibaba, Netflix and the like, which were hunting down and buying these new technology start–ups. So in fact, the technology funds that we already own were invested into the new sciences, and so were we, but second-hand and by default.

This got me to thinking about how vulnerable we might become in the future. If these enormously wealthy companies can sift through these new tech. businesses, and purchase at will, then are we in danger of seeing them becoming world dominating retail and I.T. monopolies? It would become a similar situation to the Middle Eastern oil countries of the 1970`s who, lacking competition, were able to dictate oil prices to their customers. A take it, or leave it, situation.

Imagine Amazon with another twenty years growth to their warehouses and data centres. They could dominate supply chains across the retail market from food to clothes and everything in-between. They would be able to control prices and freeze any competition out at will. The High Street, and out-of-town, shopping as we know it today will have disappeared. They will have the ability to decide who sells what to whom and at what price. A similar situation could also exist on the Internet where these huge monopolies will decide what we watch and what we learn. I guess this is a bit 1984, but it might take world legislation to prevent it happening.

Back to the real world, and it would seem that those of us at Saltydog who are invested into Technology funds will be able to enjoy the growth of these enormous companies. The p/e. ratios that they carry at the moment may look like bubble prices, but perhaps they are simply reflecting the huge profit opportunity they are creating for the future.

Every time that I am wrong the world makes a little less sense.

I recently read a full-page advertisement from a respected Fund Manager.  They were advocating that as a private investor your money should be placed in the hands of global businesses for the long term. That currently it was far too difficult to anticipate stock market movements with Mr. Trump being President of the U.S.A. Also, as a U.K. citizen with the uncertainty of Brexit, a passive approach with the bedclothes pulled over our heads was probably the best approach for the next few years. In other words, let the finance industry take the strain and “your money”.

Now that is strange, because after the declaration of the Brexit referendum as sterling fell in value it was straightforward to move your money into dollar based funds and reap the gain. Then as the months passed it became obvious that the U.K. economy was not going to hell in a handcart, in fact the reverse was taking place. The economy was strengthening and real inward foreign investment was taking place as exports rose and unemployment continued to fall. So moving your money back into U.K. funds as sterling started to strengthen was not a difficult decision, and those who did have enjoyed further substantial gains. This is not alchemy, but just common-sense if you have the knowledge from up-to-date Saltydog performance numbers, and the desire and ability to trade cheaply on fund supermarket platforms.

Another area of the market that continues to show the opportunity to make gains is of course the technology sector. This is being borne out by the numbers and by logic. Four out of five of the largest companies on the US stock market are technology companies. There are three main things that over millenniums have restricted the progress of human life and these are Energy, Life-span and Intelligence. All three are now under attack as science moves forward at an exponential rate.

At this point it is worth demonstrating what exponential growth means.

sdiblogOne common textbook example is that of folding a piece of paper that is 0.1mm thick.  Fold it five times and it is 3.2mm thick, ten times and it is 10cm thick and at 25 times you are at several kilometres. At 42 times you are past the moon, and at 50 it’s toast time as you approach the sun! As you can see growth starts slowly and then it goes crazy, and that is what is happening with science at the moment.

We all know about gene editing technology and its potential for re-writing the rules of life, the removal of disease and the possibility of redesigning the human body to prolong life. Again, we have also read about the supercomputer named “Watson” which played and beat two human champions at the game of Jeopardy. What we may not know is that afterwards Watson was uploaded onto the cloud, and its knowledge and logic became available for other computers to use. Artificial Intelligence made yet another step forward; it is not of the future, it is already here.

The arrival of virtually free solar energy is only decades away and the modern lithium battery is going to transform solar into a genuine power option. The battery is to solar what the tanker and pipeline are to oil and gas. The world economies have invested more than £350billion into acquiring renewable energy. Companies like Amazon, Google, Apple and Microsoft are also leading investors. This spells the eventual death of carbon fossils as an energy source. No wonder that the Saudis are starting to dispose of Aracom, their oil company, and are also investing into solar technology. Imagine a world with free electricity, cheap fertilisers and abundant potable water. This is all on the near horizon.

A statistic that I read recently is that we humans consume around 400×10 to the power of 18 joules per annum. The earth however receives this amount of energy every HOUR. We just currently cannot capture it, but in the future who knows?

Three months ago, I discussed the progress of six technology funds all of which had made twelve month gains of between 40% and 50%. They have continued to make good progress in the last three months, although in sterling terms they have been battling with the dollar exchange rate as sterling has strengthened. This is due to the fact that so many technology companies are dollar earners.

 

AXA Framlington Global Technology fund   …12%

L&G Global Technology fund                        …9%

Pictet Robotic fund                                       …12%

Scottish Mortgage Trust fund                      …18%

Polar Capital Technology Trust fund           …16%

Ishares IV plc Automation                           …13%

These funds are of course normally described as high risk and volatile. A question today however might be how true is this description in tomorrow’s world? You must come to your own conclusion, but remember that a conclusion is a place where you get tired of thinking!

 

Investing isn`t about waiting for the storm to pass. It`s about moving to a place with fewer storms.

A Saltydog subscriber has recently asked whether there is potential for investment into Myanmar. I have done some investigation and my conclusion is that it is not there at the present.

Myanmar (formerly Burma) along with Thailand, Vietnam, Cambodia and Laos form the Greater Mekong region and they are all members of the ASEAN Free Trade Area. It has a population of around 50 million. In 2011, the Military Junta relinquished power and President Htin Kyaw was democratically elected – although the Nobel prize winning Aung San Suu Kyi (recently released from house arrest), is said to be the person that rules the country from behind the scenes.

Inward investment has taken place since democracy was re-established, and Singapore and China account for approximately 70% of this inflow. The country is also aided by the Asian Development Bank. Nevertheless, two corporations would seem to influence and dominate most investments and they are the Myanmar Economic Corporation (MEC) and Myanmar Economic Holdings Limited (MEHL). Both of these corporations are linked to the military and would appear to be steeped in corruption. This said, it would appear that health, education and the country`s superstructure are actually improving, as the new government drags the country into the 21st century. In 2016 the USA lifted sanctions, despite there being little evidence of any reduction in the inheritant corruption linking business to the military. In my book, this is not yet a place to risk my money and anyway I could not find a fund representing Myanmar. However, that is not a problem as I feel that there are less stormy places in the Greater Mekong region – Vietnam is one such place.

The population of Vietnam is around 93 million with an average age of thirty-two. Half now live in the cities and have aspirations to live a western life-style including the use of phones and the internet. The country is self-sufficient in oil and rice and supplies their surplice to the rest of the Asian community. China, America and Japan have off-shored manufacturing here for a number of years due to the low wages and the “can do” attitude of a young well-educated people. So when the Chinese and American economies are doing well, then so is the Vietnamese. You can see this from the five year graph of the VinaCapital Vietnam opportunities Investment Trust fund.

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It is evident that although it’s done well, it hasn’t gone up in a straight line. If you invested in 2012 then there are a couple of periods when the performance levelled off and even dropped back. If you had been watching the numbers and enjoying the rise, then this would have been the time to move out, whilst the storm passed over, and put your money to better use. Since the end of 2015 it’s been back on track, and in the last 12 months has gone up by over 40%.

Hopefully in the future, the ASEAN Free trade area will become self-sufficient in its own right.  Should this happen, then Vietnam could be a really good place to be invested on a more permanent basis.

Money Movement Report

On page 8 of the April 2017 newsletter, there’s a piece about some work we’ve started on looking at the movement of money into and out of funds.

Here’s a copy of the article, some further commentary, and links to a couple of other reports.

For some time, we’ve been trying to get a feel for the amount of money flowing into and out of the various Investment Association sectors.

One of the problems with doing any Unit Trust and OEIC analysis is getting hold of the raw data. The funds are not traded on an exchange, in the way that stocks and shares are, and the only way to find out fund details is to ask the fund managers. There are a couple of companies that collate this information, but they are still reliant on the fund managers to update them. Some are better at this than others.

When we started looking at fund flows we thought we could just add up the portfolio values of all the funds in each sector. We soon found out that a lot of data was missing, and so we have tried to concentrate on a ‘representative’ sample.

We have taken the funds that we usually include in our weekly analysis, removed the ones without reliable portfolio size data, sorted them by fund size, and then used the top half.

We have then used the same funds each week and monitored how the values have varied.

There are various factors that affect the overall fund value. These are the change in value of the assets held within the fund, and the amount of money being added to, or taken out of, the fund. The next step is to see how we can split the overall movement into these two different components.

In the newsletter we have shown a summary of the last three months. Here are links to a couple more reports showing the movements over recent weeks.

Money Movement by value

Money Movement by percentage

Investors cannot time the market…..WRONG

During the last year we have seen Brexit, Donald Trump as President of the U.S.A. and far right parties in Europe making headway in the polls. All of this can be described as Populism. This move if carried to a conclusion is intended to shift wealth away from today`s elite back down to the hands of the lower and middle classes. If anything like this was to happen, then it will mean that corporate profits will fall, and this will be accompanied by falls in the value of  already over-priced multi-nationals on the world`s stock markets. This has already taken place with large oil companies who are seeing renewable energies eat their breakfast. It is simply a question of watch this space.

Now, none of the above is breaking news, yet financial institutions are still advocating that private investors should not be active in the market to protect their investments. Instead they should take a passive approach and let their money be eroded during a market collapse in the hope that in the years to come it will recover.

We at “The Saltydog Investor” know that this way of investing makes no sense and is simply WRONG. The financial press will tell you that it is too expensive to trade your funds. Again they are simply WRONG. If you use a fund supermarket platform then the charges for trading your OEICs are virtually negligible. These same people will tell you that you cannot get the information to time the market. WRONG again.

At Saltydog we produce performance numbers for OEICS, Unit Trusts, ITs and ETFs on a weekly basis presented in an understandable fashion. We have been running a real demonstration portfolio for the last six years funded with our own money. It has avoided the market drops and has gained 59%. What is not to like about that?

As a D.I.Y. investor in the U.K. with the Brexit negotiations coming up close and personal; with The Donald making hay whilst the dollar swings one way and the other. You will need to be active not passive. Good luck.

Don’t believe me? Just read here then

Standard Deviation Report – March 2017

On page 8 of the March 2017 newsletter, there’s a piece about looking at out Unit Trust and OEIC data in a slightly different way, and there’s also an excerpt from a table.

Here’s a copy of the article, and a link to download the complete table.

Here at Saltydog we’re always keen to find different ways to look at the data, to try and identify new trends, and to pick funds ‘on the up’, but in a steady way.

In our regular weekly data, the funds are initially sorted into their Groups, to give us an indication of their volatility, and then we calculate the decile rankings of all the funds in each Group to help us analyse their performance.

In the four week data, we initially sort the funds by their four week decile ranking, and then by the most recent individual weekly decile rankings. We’re looking for funds that have done well over the last four weeks, and that are doing well at the moment.

Here we’ve tried to do something similar, but in a slightly different way.

We’ve looked at all the funds as a big group, and only selected the ones that have gone up by at least 0.8% in the last 10 days. We’re targeting 12% a year, and are allowing for some slippage.

We have then sorted them by their standard deviation over the last 10 days. This is to try and help identify the funds that have been doing well, but with the least volatility.

Finally, we have used colour to highlight where the funds have maintained this rate of growth over four, twelve, and twenty-six weeks.

We’ll keep an eye on the funds that we think look promising from this report, and see how they perform in the coming weeks. If anyone has any suggestions of how we could develop this report please let us know.

Click here for the full report

 

Somewhere a red phone box dies and a little piece of Buckingham Palace breaks off.

Since the declaration of ‘Brexit’, it has become obvious that politicians, House of Lords peers, and BBC reporters have little intention of making our exit a smooth one. None of them were ever going to be kept quiet by a lack of information. Fortunately, there does appear to be a flow of foreign money investing in the UK, taking advantage of cheap sterling and a willing labour force. Let us hope that this continues through the tribulations of the next two years, whilst we re-establish the country as an exporter of technology and manufactured goods – hopefully without losing too much sway in the financial sector. Perhaps then, the media might even start to talk about Great Britain again!

Theresa May has a big enough battle on her hands, both here in the UK and in Europe, if she is to secure an equitable settlement. Then along comes Lord Heseltine, that bastion of free speech and democracy, to say that he believes she is the right person to lead the country, although he is still firmly in the ‘Remain’ camp. To me that sounded a bit like the hangman saying that you have a pretty neck! The kiss of death from the grim reaper if ever there was!

Nevertheless, with all this unpredictability taking place around our heads we still must continue to mentor our investments and pensions. For the moment, the election of President Trump, and to some extent Brexit, would seem to have produced a nice positive bounce in the world stock markets. This can be seen below in our two demonstration portfolios. Some of our funds are still enjoying the strength of the dollar, which is giving their prices a lift when converted back to sterling. This is also contributing to the Global sectors consistently coming out top in our recent analysis.

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tp-1

One of the sectors which in recent times has given a consistently positive performance is the technology sector. This all-embracing term covers pharmaceuticals, bio-technology, energy capture and distribution, nano-sciences, gene manipulation, G.M. foods, robotics, and artificial intelligence. The list goes on and on. The speed of change that these sciences are going to bring to the world is going to be breath-taking and it is underway right now. So, as investors, it is essential that some of our money should be in this sector. I have listed below some unit trusts, investment trusts and ETFs which operate in this arena.

3 month gain. 12 month gain.
Henderson Global Technology fund 15.6% 50.7%
AXA Framlington Global Technology fund 15.8% 47.6%
L & G Global Technology Index fund 16.1% 50.0%
Pictet Robotic Fund 12.4% 51.9%
Scottish Mortgage Trust 13.5% 39.5%
Polar Capital Technology Trust 18.2% 67.0%
iShares Automation & Robotics 14.3% N/A

It is difficult to trace how much money these managers are investing into new technologies, as they still have a majority percentage in the information technologies developed over the last twenty years; companies such as Microsoft, Google, Amazon, and Facebook.

These are the funds that logically will be investing into the firms of the new age and there must be more that I have yet to recognise. Many of the firms are operating in America and so also gain from the strong dollar.

 

I intend to live forever … so far so good!

Stock markets are rising and would seem to be following this philosophy, even through the drama of Brexit, Trump and the Italian Banks insolvency. Those who are against the political classes and the cruelty of rampant capitalism would seem to be in the ascendency, and the establishment is on the back foot.

We are in a strange world where broadcasters, commentators and the like are taking Mr Trump literally, but not seriously; whilst the people, the voting public, are taking him seriously, but not literally. These same broadcasters and commentators are saying that Brexit is going to be a negotiating disaster for the United Kingdom bringing poverty and famine to the masses as our economy shrivels. Yet John Redwood, a previous Single Market Minister, is saying there is no reason to delay, and exit could not be simpler. We simply give the E.U. Ministers the friendly choice of continuing to trade with the U.K. as they do today, or revert to the U.K. having W.T.O. nation status. After a certain amount of “pushing and shoving”, the European Union would conclude that the present status quo is the best for themselves, and they would opt for the existing tariff free version. Can it really be that simple?

Well, so far so good, but who can foretell with any certainty where the world will be at the end of 2017. One thing is certain however, and that is the “establishment” and those in power who own and control the “assets” have the most to lose from these political changes, and they will fight back. The Trump voters, the Brexiteers, these people from the lower and middle classes of the developed world who missed out on the benefits of globalisation are not going to find the path back to any sort of prosperity a smooth one. However morally, and practically, there does need to be a rebalancing of wealth, and I for one say good luck to them!

So what does this mean for 2017? Probably more uncertainty. Critical elections in Holland, France and Germany pose questions on the longevity of the European Union and the Euro. A potential stand-off between the U.S.A. and China would be uncomfortable. New technologies are arriving at a fast and furious pace, and the changes they bring along will be disruptive and difficult to digest. All or any of these might be sufficient to produce a major market correction. Look at the “Three Peaks” graph and see this as an opportunity to gain as opposed to losing. If such an event was to re-occur then it is necessary to be on top of the numbers and riding the wave and not at the bottom enjoying the dubious joys of a “wipe-out”.

iitlfe_1I know from experience that sitting through a serious market crash with no plan for dealing with it, is extremely disconcerting. Equally, watching a bull run from the sidelines is an equally frustrating experience. That`s why trend investing is so satisfying and rewarding. Whether it is about protecting your money from the downturns, or skilfully moving your assets into a booming sector, trend investing allows you to react and make the right moves at the right time.

So how did the Saltydog portfolios perform last year? The Tugboat completely avoided the 16% drop in the market from July 2015 to February 2016. (This portfolio is designed to avoid the drops.) However this more cautious approach meant that it didn`t match the FTSE`s subsequent recovery in the second half of 2016, although it has picked up at the beginning of 2017.

iitlfe_2

Turning to our more adventurous Ocean Liner portfolio, things look more exciting- as they should! Here you can see that our trend investing approach really took advantage of the markets up-turn from June last year, making a sharp jump upwards of 10%. So here we really came up trumps, avoiding the big downturn and reaping the benefits of the subsequent upturn.

iitlfe_3

Don’t ask directions from somebody who hasn`t been where you are going.

I do not know about the rest of you, but I feel that we are entering totally unknown territory in regard to politics, religious unrest, and the world`s economic stability. It all seems to be unravelling at the same time and where is the steadying organisation which can put its hand on the tiller and steer us through the oncoming turmoil? I just cannot see the likes of Trump/Clinton aligned with Putin and the European Union improving the situation in the Developed World. I can maybe envisage China, India and the Emerging Far Eastern countries forming a “go it alone” economic block, but who knows what will happen? Today we are just spectators who will eventually become participants in the possible forthcoming accident.

I have to say I feel ashamed for feeling so pessimistic about the future. After all, science and technology is about to gift us with free clean solar energy and sufficient supplies of potable water. Medicine is about to extend our life span and eradicate many of the nastier illnesses. Agricultural developments will mean we can feed ourselves and limit the number of people who go hungry. Robotics and Artificial Intelligence should allow the world`s population to decline rather than increase, as dangerous and repetitive mundane work is handed over to machines. Good as all of this might sound; the unanswered question is still, how will we get to this Promised Land? Where is Moses?

The above is all relevant to the view that we take on our personal finances. Recently a subscriber, who has had a remarkably good run in the last six months, making in excess of 27% on his ISA portfolio, asked me what he should do as he was alarmed for the near future and could no longer see any rising sector opportunities. I suggested that he could not do worse than examine two of Jesse Livermore sayings;

  • The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even amongst the professionals.
  • It is enough for the experienced trader to perceive that something is wrong. He must not expect the tape to become a lecturer. His job is to listen for it to say “Get out!” and not wait for it to submit a legal brief for approval.

I believe that if Jesse Livermore was alive today he would be out of the market and in cash. He would be relaxed and sleeping at night whilst waiting for the market correction to take place. As a matter of interest if the subscriber that I referred to above took his portfolio into cash for the next twelve months he would still be making an 18% annualised return. I would not mind some of that! In these circumstances cash can be regarded as a genuine sector.

On a lighter note, you may be aware that the Bank of England has released £430 billion of Quantative Easing into the U.K. economy. These numbers are just mind blowing and I find them difficult to envisage so I have turned them into something that I can imagine. A £1 coin is 2.5mm thick and the distance to the moon is 384,400 kilometres. By my calculation that means Mr Carney`s £430 billion represents 1,075,000 kilometres and is 2.8 times the distance to the moon. It might have been nicer if he had taken the £430 billion and used it as “helicopter money” and given every man, woman and child in the country £6615! These are numbers and thoughts with which to conjure.  Please point out any errors in these calculations and I will issue a correction.

A lesson learnt the hard way

Commercial Property funds such as M&G, Threadneedle, Kames, Aberdeen, and Standard Life have for the last few years been the stabilising feature of both of the Saltydog portfolios. They have been producing a very nice small regular monthly uplift and we have used these funds as an alternative to cash, with the safer Tugboat carrying a greater percentage than the more adventurous Ocean Liner. Up until the Brexit referendum all appeared to be smooth sailing, but then upon the announcement of a vote to leave all hell was let loose. We have witnessed a mass exodus of money as professional investors overseeing large holdings have reduced the money held in these funds. To defend themselves, the fund managers have been forced to make dramatic reductions in the fund price to discourage these sales (the largest for the moment being 17% made by Aberdeen) with most of the others dramatically closing the door on any further encashment.

This turmoil is the evidence justifying those analysts who have long said that open-ended funds and unit trusts are badly designed to deal with property investments since they provide daily liquidity for an asset that isn`t liquid on a daily basis. Normally unit trusts invest in shares. There is no problem then if investors want to sell units; the fund manager simply sells some shares and the investor gets his money back within a couple of days. However where the fund is invested in property such as office blocks, shopping malls, government buildings, banks and the like, it can take months to achieve a sale and hurrying up this process results in fire-sale prices. This is the reason that the funds carry large sums of cash to cover the normal daily transactions. This time it would seem that Brexit has conjured up in the minds of some investors a vision of the country`s city centres being reduced to ghost towns as the UKs economy exits to the Continent! Under these circumstances it is not surprising that these property funds have had to use extreme measures to protect themselves while commonsense and sanity returns to the market.

What is to be done now with these investments when the sale restriction is eventually removed? We can expect the prices to be lower as the result of property surveys and valuations carried out in the light of Brexit. On the other hand the property tenancy agreements are still in place and rent will still have to be paid. There is therefore no reason for a major reduction in the historical 3% to 4% these funds yield which is still very attractive when compared with the present “soon to be negative” interest rates. Maybe having taken the knock, it will pay to stay invested but with a smaller percentage of your portfolio.

On the other hand perhaps this money could be better invested elsewhere. It is worth looking at what this actually means. Let us say that you had 25% of your portfolio in these property funds and they have taken a 20% hit. This means you have suffered a reduction of 5% on your total portfolio. Not a great outcome, but not one that merits reaching for the poison tablets. It means that you need the remainder of your portfolio to earn you an additional 5.3% to keep the status-quo.

The same Brexit fever that has produced this property “annus horribilis” has produced a 10% fall in the value of Sterling and also contributed to a significant rise in the value of gold. All funds which are earning their money overseas and especially in dollars, have therefore received a rise in value of 10%. If you were also to be invested into the gold mining funds you would be receiving a double whammy. It is however a question for each individual to decide as to whether these conditions will continue whilst the terms for the UK exiting the European Union are hammered out. Also if Mr Carney continues to talk the value of Sterling down and Mrs Yellen in America continues to talk the value of the dollar up, then the Ocean Liner graph below is demonstrating a portfolio that has the right sort of mix to make the most out of the situation.

This is the stuff that goose pimples are made of!

Ocean Liner 160713