New Sunday Times Feature - Diary of a Private Investor

Colm Fagan

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A few responses to the various postings, which I hope will clear up some misunderstandings about my approach to investing. It's worth stating at the outset that I'm speaking for myself. I can't speak for other private investors.
Most professional fund managers do not beat the market in the long-term;
Yes, the statistics are firmly against active investment. I read recently that there is only a c1% chance that an active fund will beat a passive fund over 10 years. The great investor Warren Buffett advises "normal" investors to buy passive funds. I recommend the same to anyone who asks my opinion. I'll explain below why I prefer an active approach (or what I prefer to call a "passive active" approach) for my own investments.
Keeping a daily watch of market noise is generally a waste of time and one should be encouraged to find other areas of interest like philately or pilates or something
That's probably true too, but it doesn't apply to me. I have a highly concentrated portfolio (five companies account for over 80% of my holdings) and I make only small changes over time. Four of the five top holdings at end May 2019 were also in the top 5 in May 2016. The proportions in different companies within the top five have changed over time as I've become more or less optimistic about their prospects. Those small changes have generally made positive contributions to performance. It's not time-consuming to keep tabs on a highly concentrated portfolio that changes little over time.
There is Noble (sic) Prize winning research that would disagree with the general point that "a larger number of holdings creates a greater risk".
It depends on the definition of risk. It's obvious that the more concentrated the portfolio, the less likely its performance will track the broader market. It's not so obvious that the risk of loss is greater. My most concentrated portfolio ever was when I owned 100% of my own business and had very little else. I was confident the business would succeed. I didn't believe I was running too much risk. I felt much the same about four years ago when I had a sizeable portion of my investment portfolio in Renishaw and its share price was under £20. (It topped £50 last year). I'm sorry now that I didn't have even more in it at the time, even though it would have meant exposing myself to even greater "risk". Over short periods, I have performed abysmally compared to the market. I don't give a fig how my performance compares to the market. All I want is to earn a good return (say inflation plus 5% a year) in the long-term. I'm happy that I'll achieve that goal.
I do believe that Colm has beaten the market
If I have, I don't think it's because of any great skill on my part. I've stuck to a few very simple rules. One is to try to keep costs to a minimum. That's one reason for having a concentrated portfolio and for making relatively few trades. (I haven't checked, but I'd say that the turnover of my portfolio is much lower than average). DIY also helps keep costs down. I'm saved the costs of professional management, which I believe adds nothing to returns, on average. (Some professionals beat the market over long periods, but it's almost impossible to know in advance who they'll be). I'm also a firm believer in the adage that "it's time in the market, not timing the market, that counts". I have practically 100% in equities. I expect to get 3% to 5% a year more (on average) from them than from bonds. Therefore, I can expect to earn 1.2% to 2.0% a year more (on average) than someone who is 60% in equities. It's simple arithmetic and has nothing to do with being a good stock-picker. Also, I believe that keeping a diary of why I'm buying or selling particular companies helps to reduce the incidence of complete turkeys. It doesn't eliminate them entirely: witness Ryanair, which was one of my top five holdings in May 2016 and is still up there, sadly.
Strangely enough, having a concentrated portfolio helps me to sleep at night. As I noted in my "Diary" at the end of December, my portfolio was on the ropes. I lost around 30% in 2018. Yet I wasn't particularly worried at year end, as I was confident that some of my bigger holdings (Phoenix Group in particular) were at ridiculously low prices and would recover, if I could avoid having to sell while they were so grossly undervalued. That belief gave me a lot of comfort. I don't think I would have had the same equanimity if I had been invested in a faceless fund, where I wasn't familiar with the underlying investments.
 
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joe sod

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Do you advocate that it is a waste of time to be a DIY investor, and that the best course is to invest indirectly through
products such as ETF's, UT's, IT's etc?
No Im not suggesting that, clearly you (and Colm Fagan) know what you are doing. Its just that there seems to be an implied assumption that if any investor researches a company enough that he will make the correct investment decision, his research and assumptions could just be wrong. For what its worth its probably the case that most shares are not correctly valued and their values are dependant more on trends, fashions, emotions, trading algorithms than on their fundamental value. Look at what happened Neil woodfords funds, he knows more about investing and valuing stocks than any amateur investor.
 

redartbmud

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joe

I am afraid that Mr Woodford has become the most recent professional fund manager who has got things wrong.
At one point in time, he became a star fund manager, and attracted a large following, of investors, who subscribed
vast sums of money into his funds.
I have tried to attach, it would appear very clumsily, a summary of the top 10 holdings in Mr Woodford's fund.
Two house builders, three financial services, two pharma and biotech companies, two non=quoted companies and one company
aligned to the property market is hardly a model portfolio that I would consider to be appropriate for an investor with little
knowledge and understanding of financial markets and investments.
Apologies for the messy attempt to cut and paste.




1Barratt Developments7.51%United KingdomHousehold Goods & Home Construction
2Burford Capital5.97%United KingdomFinancial Services
3Taylor Wimpey5.33%United KingdomHousehold Goods & Home Construction
4Provident Financial4.80%United KingdomFinancial Services
5Theravance Biopharma4.77%United StatesPharmaceuticals & Biotechnology
6BENEVOLENT AI LINK WEIF A4.48%Non-ClassifiedNon-Classified
7IP Group3.30%United KingdomFinancial Services
8Autolus Therapeutics ADS3.18%United KingdomPharmaceuticals & Biotechnology
9Countryside Properties3.16%United KingdomHousehold Goods & Home Construction
10OXFORD NANOPORE TECH ORD2.58%Non-ClassifiedNon-Classified
 

jpd

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That's only 45% of the portfolio. so it's hard to state categorically it's over reliant on a few sectors.

I thought the main problem was that it held a lot of non-quoted and illiquid stocks and so was finding it difficult to meet redemptions
 

redartbmud

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jpd

Yes it is only the Top10, but that is all the fact sheets, issued by the Funds, provide as a matter of course.
Would you not concur that 45%, of the fund, in 10 shares is sufficiently significant to have a major influence.
No 6 Benevolent and No 10 Oxford Nano are unquoted and comprise 7.61% of the fund investments.
They are clearly very illiquid, and can only be sold to a willing buyer, on a matched basis. That doesn't
happen overnight. Placing several millions Euros worth of stock in a private company is tough, and
the buyers can quote fire sale prices, at which they are willing to pay.

Colm has been challenged, over the small spread in his portfolio, and here is a man, who was lauded
as the Rolls Royce, of investment manager, with 45 % of his total portfolio in just 4 sectors of the market.
His fund has a value in the hundreds of millions!!

Sorry, but your argument does not hold water with me.
 

jpd

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I'm not a fan of asset managers, having been burned over 25 years ago and from which time I manage my own portfolio - which has around 20 shares and a few ETFs. My portfolio was setup when I lived in France, so the Exit Tax regime wasn't applicable and while I divested of some of them, the others I have held onto
I don't have a problem, if asset managers hold a concentrated portfolio as long as that is signaled to prospective investors who can them decide to trust the manager or not. But I imagine a lot of people just invested in Woodward's fund because of his past successes - and as we know ....
 

Colm Fagan

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There's an excellent article on Neil Woodford and his woes in today's Irish Times. One aspect not touched on in the article is the difficulty of having unquoted and/or illiquid investments in an open-ended fund. I think this particular problem is going to get a lot of publicity over the next while. It's already causing shock waves in the UK and will surely spread to this country and to wider EU regulation in due course. I plan to start a new thread on the topic.
 

cremeegg

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One aspect not touched on in the article is the difficulty of having unquoted and/or illiquid investments in an open-ended fund.
There is a valuable lesson here, with a reasonably actionable take away.

When I was a young trainee accountant I was told that you should always match the maturity of your financing with the life of your assets. So a vehicle with a 5 year expected life on HP similar over a 5 year period, and a building financed with a mortgage over 20 plus years. Well sort of!

While financing an illiquid asset with retail investment money is foolish, investing in short term assets with long term money can be very profitable.
 

redartbmud

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creme

You are correct but:
Under normal operating conditions, there would be an assumption that withdrawals could be managed by the orderly realization of liquid assets. eg. Income from dividends and disposals is needed to fund dividends, in the normal course of events. There are always reasons why investors need the cash in their chips. New investors come along, encouraged by the prospect of good returns.
Illiquid assets would be realized, over time, as appropriate to provide returns to the fund, as their value is enhanced. Maybe the company will float, in the longer term and become a liquid asset within the fund.
There are many alternative ways of protecting the capital value, of a fund, by the use of, for example, a put ETF. If the value of investments increases, the cost is covered, if values fall, the increased value of the ETF compensates.

(The building society model is based on the understanding the money for mortgages is lent on a long term basis, from deposits taken from investors, whose timeline is significantly shorter. A different vehicle, but similar principles.)

In this case, the under-performance of the assets has reached a point, where advisors have sold discretionary client holdings, and concerned direct investors have also sold up. Negative recommendations from analysts have only served to increase momentum, creating significant cash shortages. within the fund. The values of individual shares, in the portfolio, have fallen as the number of sales has far exceeded the number of purchases. That results in an overhang of shares and price reductions. Forced realizations, by the Woodford fund, may even be made at a capital loss.

Sadly Mr Woodford is one person in a long line of fund managers that have fallen from grace. He will not be the last.
 

EmmDee

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The issue for the fund in question (or any fund holding illiquid shares) is not necessarily a liquidity issue. It is the requirement to be equitable to all shareholders.

If, for example, 50% of a fund portfolio is illiquid assets and 50% cash and a significant portion of shareholders wish to exit the fund, it is not equitable to fund those withdrawals from cash and leave the remaining shareholders with a portfolio which is now 100% illiquid. So the manager / fund is obliged to freeze withdrawals until they can rebalance the portfolio (or decide that it is actually better to wind down).

There isn't an issue with an illiquid fund if that is fully disclosed and understood by investors. I'm not sure if this particular fund altered it's investment strategy which would be an issue
 

cremeegg

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It all looks like liquidity to me.

Under normal operating conditions,
And when difficult circumstances arose he hadn't the liquidity to protect his position.

I tell anyone that will listen that borrowing to invest does not increase risk. But you must be sure that you are liquid, and not just under normal conditions.

If, for example, 50% of a fund portfolio is illiquid assets and 50% cash and a significant portion of shareholders wish to exit the fund, it is not equitable to fund those withdrawals from cash and leave the remaining shareholders with a portfolio which is now 100% illiquid. So the manager / fund is obliged to freeze withdrawals until they can rebalance the portfolio (or decide that it is actually better to wind down).
Purely a liquidity issue. This is an example of a fund that hasn't the liquidity to meet its regulatory obligations, rather than the usual cause of illiquidity.

Neil Woodford's unquoted investments may turn out to be wonderful, and his asset allocation pure genius, but it doesn't matter to him, he ran out of liquidity.
 

EmmDee

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It all looks like liquidity to me.



And when difficult circumstances arose he hadn't the liquidity to protect his position.

I tell anyone that will listen that borrowing to invest does not increase risk. But you must be sure that you are liquid, and not just under normal conditions.



Purely a liquidity issue. This is an example of a fund that hasn't the liquidity to meet its regulatory obligations, rather than the usual cause of illiquidity.

Neil Woodford's unquoted investments may turn out to be wonderful, and his asset allocation pure genius, but it doesn't matter to him, he ran out of liquidity.
I'm not sure what you mean when you say liquidity. I assume you don't mean cash - very few funds maintain cash in any significant amount. It wouldn't make sense. However, funds need the ability to liquidate positions quickly enough to fund shareholder withdrawals. In this case, the fund had redemption requests for many months followed by a very significant single redemption request. If there is a constant flow of redemptions, at some point the fund has to decide whether continued selling of liquid positions will be unfair on the remaining shareholders as they would be left with a portfolio significantly made up of the illiquid holdings and/or whether forced "fire sales" of less liquid positions would also not be in shareholders' interests.

So was there a liquidity issue - no more so than any fund facing similar outflows. Even some Money Market Funds (which hold the most liquid asset types) were forced to "gate" (i.e. restrict redemptions) in the financial crisis. Which actually is a lot more crazy than an equity fund having to do that.

No fund maintains cash reserves to cover "difficult circumstances" on an on-going basis. Also - you stated the fund hadn't the liquidity to meet its regulatory obligations. Could you clarify? I don't believe there was any question of the fund breaching "regulatory liquidity requirements".
 

cremeegg

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Liquidity is the ability to meet any cash call however it arises.

The strategy employed to meet your liquidity requirement might be cautious I.e. hold lots of cash or some more risky approach.

I have no doubt Neil Woodford thought his approach was a reasonable one. But he couldn’t meet the cash requirements that he faced.

A fund that is exposed to redemption requests needs to manage that risk. Redemption requests are not going to arise frequently when the fund is doing well.

I understand that the Woodford fund could even be shorted by its own investors who could then redeem their investments so driving the collapse they had bet on through the short.

As for regulatory obligations, I was merely referring to the need to rebalance the portfolio you mentioned previously.
 

joe sod

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Neil Woodford's unquoted investments may turn out to be wonderful, and his asset allocation pure genius, but it doesn't matter to him, he ran out of liquidity.
I think it will be shown that those investments will perform if they were left alone and if the investors in his funds held their nerve. Afterall he did avoid completely the dot com crash and faced substantial criticism at that time for not believing in the "new economy" investments. He also came out of the financial crash unscathed, the worst crash since the 1930s, very few people avoided that.
 

Sarenco

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I think it will be shown that those investments will perform if they were left alone and if the investors in his funds held their nerve.
Seriously:oops:. How could you possibly know that? Do you even know anything about these companies?
 

Sunny

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Liquidity is the ability to meet any cash call however it arises.

The strategy employed to meet your liquidity requirement might be cautious I.e. hold lots of cash or some more risky approach.

I have no doubt Neil Woodford thought his approach was a reasonable one. But he couldn’t meet the cash requirements that he faced.

A fund that is exposed to redemption requests needs to manage that risk. Redemption requests are not going to arise frequently when the fund is doing well.

I understand that the Woodford fund could even be shorted by its own investors who could then redeem their investments so driving the collapse they had bet on through the short.

As for regulatory obligations, I was merely referring to the need to rebalance the portfolio you mentioned previously.
There is no fund in the world that can meet massive redemption requests without having to take steps to protect other investors. That's not how funds work. As EmmDee says, there are money market funds that had to use gating during the financial crisis. Indeed money market reforms are now in place that allows liquidity fees to be charged and increased use of gating. Indeed some money market funds will now have floating NAV's which is unheard of not getting your money back. And these funds are supposedly as close to cash as you can get.

A lot of funds will have illiquid or at least less liquid assets in their funds. It is the nature of investing and can be hard to avoid. The percentage of these shares in a portfolio is usually regulated and limited to around 10% of the portfolio so shouldn't cause a issue. The issue with Woodford is there appears to be some questionable decisions including listing shares on the Guernsney Exchange and claiming that as liquid where there wasn't a market. That and his rubbish stock selection based on his 'Britain is great and Brexit will be fine' outlook.

Once again, this story will come back to bad practices by a fund manager who probably believed his own a PR and a regulator who despite everything that has happened, still seems intent on regulating based on reports submitted every month/quarter and ticking some boxes.
 

elacsaplau

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Sunny don't go away. Apologies - liquid lunch - admittedly on vacation! Good post though.

.....a fund manager who probably believed his own a PR
Yep - investment guys who know best worry me...…..of course, it happens but the odds ain't good


….a regulator who despite everything that has happened, still seems intent on regulating based on reports submitted every month/quarter and ticking some boxes
Personally, not familiar with the UK Regulator but if it's like its Oirish cousin, mindless box-ticking sounds very apt.
 

cremeegg

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There is no fund in the world that can meet massive redemption requests without having to take steps to protect other investors. That's not how funds work.
This is closed funds. My point is that there is a liquidity risk in such investments.

Traded funds have no such issue.

My point is that there is a liquidity risk in such investments.
 

MangoJoe

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Interesting thread - May I ask a question please?

Is it within the bounds of possibility that one could invest in shares and then discuss related companies in flattering terms in print and social media thus creating ones own good fortune to an extent?

….I presume that the more prominent 'A list' Investors could potentially manipulate this effect at will? Though perhaps not in a sustainable manner.
 
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