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Collecting My Thoughts

With two young kids at home for a week already, this blog is going to be a lot more sporadic over the next few months. But I wanted to set out some thoughts on how the bear market has impacted me so far and what I’m planning to do.

Some personal stuff first before I get into the investing details (and apologies if this post is a little more slapdash than usual).

The health of my family and friends is taking top priority at the moment.

One of our kids has had a cough (she has mild asthma) but seems a lot better now. And we have three parents in their 70s, all fortunately in reasonable health.

Video calls are being pencilled into the diary to keep in touch and their school has been great, sending out a variety of educational resources. The Body Coach’s kid routines look like they will become a regular fixture and some of the clubs my kids attend are also planning video lessons.

I don’t think we’ll get bored as keeping the kids occupied will be a full-time job. We’re lucky enough to have a garden and with the forecast looking bright for the next few days, they can burn off some energy outside.

I’m glad this is all happening now as the days get longer and warmer. Imagine if it was November and we were heading into the depths of winter.

And with advances in everything digital, it’s easier to ever before to stay at home and keep working, keep entertained, and get so much delivered to our doors.

The local “We Are From …” Facebook groups have been a great way of seeing what’s happening and helping out those in most need. We have had a WhatsApp group for our road for a while now and that’s been another great resource.

I’ve been careful not to read too much on social media, especially of the more hysterical variety. I’ve tried to stick to the official sources and just catch up with summaries of the nightly Boris and Rishi show.

I’ve got relatives in lockdown in Madrid and southern Spain. Apparently there are police patrols everywhere, enforcing the rule of only one person out at a time and then only for essential trips.

However, an uncle in China has just finished a 7-week lockdown, which is more encouraging. Obviously, there are concerns that cases could start to increase again as measures are relaxed, but their experience should give us a much better idea of what we might face in future.

I’ve been pleased to see the more stringent measures in the UK, the US, and Europe introduced this past week, as it finally seems the vast majority of countries are taking this seriously.

There have been encouraging noises about more testing, some progress on vaccines, and increases in vital equipment like respirators.

Hopefully, the panic buying will subside here in the UK and the shelves will no longer empty as quickly as they can be filled. I think that will help morale considerably.

Assessing the damage

Like pretty much everyone, my portfolio has taken a big hit. However, in many ways, because this crisis has affected our real lives so dramatically, these falls haven’t affected me quite as much as they might have done.

I wrote an article last September called ‘Tackling My Third Financial Crisis‘ trying to think about how the next crash/bear market might feel.

In the dot-com crash and the global financial crisis, I didn’t sell to any great extent and kept on investing as and when I had money available. So I felt that would help me to do the same time come crisis #3.

My main doubt was the fact my net worth was now a lot higher and that I had fewer years to recover any losses. But I haven’t felt majorly concerned so far although it’s certainly been uncomfortable at times.

Having an emergency fund has definitely helped. I’m not sure if it will get tapped, but it’s reassuring to know I shouldn’t have to sell anything at what seems like a depressed level.

And there’s been some great content produced these past few weeks from the likes Monevator, Maven Adviser, DIY Investor UK, and The Escape Artist here in the UK, and the likes of Morgan Housel, Michael Batnick, Ben Carlson, and Nick Maggiulli in the US.

The worst bear market I’ve faced?

The jury is still out on this one. We may have seen the bottom or there could be further to fall.

I’ve seen the UK stock market decline 50% twice in the last twenty years. The low point of the FTSE 100 so far this year was 34% below its peak.

And looking at this list of stock market crashes, the slump in the early 1970s in the UK was even greater (73% peak to trough).

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The speed of this crash has taken everyone by surprise. The dot com bubble took over three years to fully deflate and the global financial crisis saw prices dropping for just over 18 months.

The 2020 crash is only a month old and certainly has the potential to be the worst I’ve faced.

A wild and crazy ride

As of 20 March, I reckon I’m down 20.9% this year.

That compares to -21.5% for the Vanguard Global tracker fund, -23.1% for Vanguard LifeStrategy 100, and -31.4% for the Vanguard UK tracker fund.

With prices moving around so quickly, I’m not going to get hung up on the precise numbers too much. In the space of a week or so, I’ve been five percentage points ahead of the global tracker and then three behind (note to self: stop checking your investments so often).

Most of my portfolio is in investment trusts but I have a couple of funds and an ETF on the side. For the purpose of my calculations, the funds get priced at noon, the trusts at 4:30 pm, and the global indices at 9 pm. A lot can happen to prices even in that short period.

The majority of the trusts are invested solely in listed shares, although some of them have some fixed-income exposure, private equity holdings, or infrastructure assets.

There’s a wide range of individual performances. UK Smaller Companies have been the hardest hit, down some 40-50%, whereas the problem child in my portfolio, Baronsmead Venture Trust, is actually the best performer with an 8% decline!

I knew that the small-cap trusts I own would prove volatile, but hoped that would provide good opportunities to top them up over time.

Well, there’s volatile and there’s stomach-churning. However, with the government announcing a range of support measures in the past week, they might regain a little poise.

What I thought were fairly conservative global trusts — RIT Capital Partners, Caledonia, and Murray International — are all down some 30%. That’s disappointing. The first two only publish their net asset value monthly, so I suspect some investors are shooting first and asking questions later.

HGCapital deserves a special mention. It was holding up OK until it released what I thought were pretty decent results on 9 March. Then it slumped alarmingly. On Friday it rose by 35%! That’s not a typo. Answers on a postcard please if you know what’s been going on with this one.

The renewable energy/infrastructure positions I own have declined much less than the market, so far anyway. And Fundsmith Equity and Lindsell Train Global are down 11% and 13% respectively.

Discounts now widening significantly

Trust discounts seem to have widened significantly this past week.

Across the global sector, where net asset values are mostly updated daily, the average weighted discount has widened from 5% at the end of February to 14.5% as of 19 March.

And the sector stood at a 1% premium at the end of 2019.

Many of my trusts only update their net asset values every month or quarter, so we’ll have to see how those shake out. A lot of them are based on subjective assumptions like discount rates and profit multiples, so they might take a while longer to fully adjust.

I would treat any published discounts you see on data websites with a large pinch of salt at the moment and make sure you know how up-to-date any figures are.

Dividends are being cut

Many UK companies are now cancelling their latest dividend payments. The FCA has also asked companies to delay reporting their figures, so that could delay payouts from well-funded companies.

It makes sense to preserve cash, especially while the full extent of any government support is being trashed out.

It’s tough to gauge the knock-on effect this might have on investment trust dividend but I’m definitely expecting some cuts.

Many trusts held back some of the income they received in previous years and so have revenue reserves to fall back on. But they might still want to reduce their payouts a little.

And many trusts now base their dividends on a fixed percentage of net asset value at a fixed point each year. This practice hasn’t been battle-tested yet but it will be in the coming months.

JPMorgan Global Growth & Income, one of my holdings, aims to pay a 4% yield and would cut its dividend by 20% from this October if it sticks to this policy (assuming its net asset value remained at its current level).

The pound is being battered

Against the US dollar, the pound is down from $1.33 to $1.165 this year — a fall of 12.5%.

This has helped some of my global trusts and funds. The S&P 500 is down just over 28% in dollar terms but much less measured in pounds.

This effect could unwind at some point with the gap with global and UK indices narrowing as a result.

What happens with Brexit could impact the pound as well. You would hope discussions and deadlines are put on ice where necessary.

Sticking to the plan

My basic strategy remains the same. I see myself as a lifelong investor that continues to add money to my portfolio as and when it becomes available.

I aim to keep a cash balance — generally a fixed sum rather than a percentage of my portfolio — that can act as an emergency fund if I do need some cash.

I don’t practice market timing (being spectacularly rubbish at it) and I don’t muck around with complicated hedging strategies that I don’t understand.

The world may look very different after this crisis has subsided but I’m not really thinking about that too deeply when it comes to my investments. Not yet anyway. For now, I’m leaving that to the managers who run the trusts I hold.

My portfolio is almost entirely in equities or unquoted companies but my total net worth includes some residential and commercial property interests as well. Nothing overly fancy or extensive, but enough to provide some diversification against most market swings.

One of the things I was guilty of in the last two big 50% bears was rushing in a bit. I’m an optimist by nature I suppose.

This time I’m being a little more circumspect. I added some more Smithson earlier in the year (oh well) and then again earlier this week when I realised the usual premium of a few per cent had become a 14% discount.

I’ve got a little more cash earmarked for investment that I’ll probably use before the end of the tax year.

More by good fortune than I anything else, I sold a large chunk of the last individual quoted share I had in early February. The plan here was to use up some of my capital gains allowance and recycle the cash into my ISA for 2020/21.

Another thing to be aware of is that bid-offer spreads have ballooned. Acorn Income, one of smaller-company trusts, is being quoted at 180p-255p this morning, which seems insane. So watch out for this if you are buying or selling. You may want to consider limit orders to prevent any unnecessary surprises.

When I look at my portfolio for top-up opportunities there are normally only a couple of contenders. But right now there’s very little in my portfolio I wouldn’t consider buying a little more of.

It’s very easy to get hung up on picking the bottom in markets like this, either not doing anything just in case the market falls further or thinking that any up day represents the turning point. But in a year or two we probably won’t remember the exact times and prices we bought, hence my preference for investing smaller amounts on a regular basis.

With the kids rattling around the house, the two weeks until I can start to deploy that ISA cash might seem like quite a long time, but you have to stick to the plan…

I hope everyone out there is coping with this difficult time. I’m firmly in the “this too shall pass” camp however cruddy it feels at the time.

Keep safe and shop sensibly!


Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!

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5 Replies to “Collecting My Thoughts”

  1. Good article, I’ve topped up my holdings in Henderson Far East and Murray International today. Also thinking about Topping up Merchants and Finsbury in due course

  2. Thanks Griff. Re: the watchlist question you sent in, pretty much most trusts already in my portfolio I suspect, subject to what seem to me to be sensible position sizes. I’m not sure I’ll be adding any new positions, as I’m going to be quite time-constrained, although I may take a closer look at IBT again.

  3. In the long term now will likely prove to be a good time to buy. One of my holdings has fallen 50% in a month, so a monthly investor would get twice as many shares in March compared to February. It’s a pity I’m short on cash.

  4. I think the only way is to attempt to drip in. Some thinks it’s the bottom! Others don’t. Who knows!

    All we do know is that things are cheaper than they were, and more importantly, some directors are buying, which makes me think it’s not a terrible time to start buying.

    The widening of discounts has been brutal for those who’ve bought in the last few years, even knowing that they’re back to more normal historical levels. However it does arguably provide a bit more ‘margin of safety’ compared with open-ended funds, especially where there are mirrors e.g. PAC or ATR.

    It’s also been good to see LTI and SSON at discounts.

    CGT has been a disappointment – I’d hoped it would hold up better. I think the property hasn’t helped – not something you could foresee. I look forward to their next update.

    RICA is interesting – if their ‘protection strategies’ don’t work now, when will they? The NAV’s held up well so far, though not the share price. Director’s buying. But will they go up like they did in ’08.

    BHMG – fascinating. It has done crazily well this year, yet it’s at a bigger discount than ever. I am mystified by this. They also have form from ’08, though arguably much of the team must be different from then. Perhaps people just are wary of something so ‘black box’.

    Some thoughts to chew over while stuck at home!

  5. Thanks Tom. Yes, no shortage of stuff to buy that looks attractive right now. I think the discount situation will be very volatile for a while longer, at least until the end of March NAVs are announced.

    RCP was still over £20 three weeks ago but slumped to £12.50 and has since rebounded to £17. Crazy times!

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