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Weekend reading: Deal or no deal we’ll do fine after Brexit says Capital Economics post image

What caught my eye this week.

Now we know that Russian bots were spewing nonsense about Brexit around the time of the EU Referendum, those harrowing days afterwards make a bit more sense.

Okay, so the level of involvement discovered so far seems modest. But wouldn’t it be nicer to believe that one reason most Leave voters found it so hard to articulate their reasoning was because they were native Russian speakers living in Volgograd?

Land of hope and folly

It’s no secret I think the decision to Leave was a huge mistake – especially weighed against the reasons many gave for voting that way.

Returning sole legislative authority to Parliament and reducing immigration were the only logical reasons to vote Leave. Everything else we still hear cited – inequality, the London-centric economy, globalization, the demise of ship building and mining, the bemoaning that there’s too many brown people on the High Street – won’t be solved by Brexit.

Yes, this is probably sour grapes on my part. Looking at the marvel that is the vaunted UK Parliament in action since the Referendum is almost enough to make me wish I’d voted Leave too.

How satisfying it must be to see our unshackled political leaders rally around at this time of great national need! To watch Britain bestride the European negotiations with Churchillian authority! To smirk at the perfidious and weak EU caving as predicted within mere days to our every demand!

Well no, none of that has happened. But we have had a Parliamentary sex scandal – and a nostalgic Carry On Cocking Up film is surely in the works for national release on Brexit Day.

A positive spin on Brexit

Enough of my cynicism. Food may lie rotting in the fields because immigrants are going home, banks may already be leasing office space in Frankfurt, and as a nation we may be clutching a red box containing £100 and a Tory intern’s photocopied mock-up of the new Blue British passport yet still desperately hoping the EU says ‘Deal’ – but not everyone is so gloomy.

Neil Woodford’s fund firm asked Capital Economics to produce a huge and hugely pro-Brexit piece of research entitled: Where Are We Now? and it’s a fairy tale for Brexiteers. A long one, too. It starts as an infographic but you can dig into a ton of sector-by-sector research.

I haven’t read every last page, but from what I’ve seen there isn’t a negative number inside. Except for a potential fall in net migration, of course.

To be fair Capital Economics is mostly looking at things from a ten-year view. As I’ve said before, I agree that on that sort of timescale the UK will appear to be doing okay. The economy will probably be smaller than it might have been – because free trade works – but there will be plenty of other things to blame. Both sides will probably be able to argue they were right.

But both sides won’t have been right.

Right now both sides were wrong. Remainers were wrong that the economy would crash – it hasn’t. Leavers were wrong that leaving would be a doddle – it’s a nightmare.

I hope Capital Economics has split the difference because the scenario it paints as its middle-case outcome is one I think most of us would bite the hand off a banker for right now.

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Painting: Two friends compare their investments.

Working out the best online broker or platform1 to use in your investing can be frustrating.

Just when you have got your head around shares versus funds, corporate bonds versus James Bond, and you’re finally ready to start investing, you discover dozens of different brokers to choose from.

All have their own similar-but-different fee structures.

We have long kept track of the different broker platforms and what they charge via our fee comparison table.

But comparing the charges levied by say Hargreaves Lansdown with those of Interactive Investor can be fiddly work.

Details matter. Some brokers charge lower fees for trading but sting you with high withdrawals fees. Others offer cheap trading, but make additional annual charges for each different kind of account you open with them – once for an ISA and again for a SIPP. There may be entry and exit fees, too.

You also need to compare fixed annual platform fees – for instance £15 a quarter – with the alternative method of levying a percentage fee – say 0.25% year – on your investment pot. Which is more cost effective for you?

What’s more, the winner of this equation will probably change as your nest egg grows! You’ll need to run the numbers every few years to keep your costs as low as possible.

Get tooled up to compare investing platforms

If you find all this fun then you’re in the right place. We’re investing nutters around here.

But most people frankly do not.

Out in the wider world, people use interactive tools to compare things like insurance products and energy bills.

Well, that is now possible with investing platforms, too.

We’re hosting an interactive comparison tool created by our partners at Broker Compare. We hope it will help casual investors get their money onto a suitable investment platform with a lot less hassle.

In fact anyone who wants to hone in fast on the best potential brokers will find it a quick way to generate a shortlist of candidates.

True, if you want to work out precisely what you’ll pay – in your specific situation – you’ll always need to do the sums for yourself.

There are just so many quirks out there, and any tool needs to make a few assumptions. Only you know exactly how you plan to invest and why.

But for many people, getting a good idea of the best platform to use quickly is the most important thing.

They’d rather know approximately what they’re going to be charged than laboriously figure out the exact costs from a dozen or more competitors.

Compare the brokers and save hundreds of pounds

Monevator regulars love to debate the minutia of different platforms with all the passionate enthusiasm of trainspotters arguing about the best non-standard railway gauges found in the wilder mountainous regions of Europe.

And long may that continue. (You’re among friends here.)

But the average person has little idea of their broker’s fees – or how what they’re paying compares to the competition.

For these people, five minutes with a comparison tool could be a quick way to save hundreds or thousands of pounds.

So what are you waiting for?

Note that just as with the price comparison websites we all use to compare energy bills or mortgages, Monevator may receive a payment from a broker that you visit or sign-up with via the table or tool. This does not affect the fees you pay – it’s made by the company to us for introducing you to their business.

Happy hunting – and let’s save some money!

  1. We tend to use the words ‘broker’ and ‘platform’ interchangeably. A broker is a stock broker – a person or company who trades and holds investments on your behalf. The platform is their website that lets you see and adjust your investments. []
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Weekend reading logo

What caught my eye this week.

When former Chancellor George Osborne announced he was raising stamp duty and reducing tax relief on mortgage interest for landlords, there was some scoffing.

“We’ll just raise rents!” the less sensitive cried. “Generation Rent can pay our taxes!” 

Well it turns out that riding one of the greatest asset price booms the UK has ever known doesn’t make you an economic wizard. Rents are falling across much of the UK. Now there are signs some landlords are selling up.

A graph in today’s Financial Times [search result] shows that:

“… growth in outstanding buy-to-let mortgages is failing to keep pace with new mortgages being granted, in a reversal of the broad relationship between the two over the past decade.

This strongly suggests some buy-to-let mortgages are being redeemed as investors sell rental properties.”

Here’s the graph:

Graph that suggests landlords are beginning to cash out of buy-to-let sector.

Source: FT/Savills

I can add my own anecdotal observations to what this graph seems to be suggesting. One of the several reasons why articles on Monevator have been a bit thin on the ground recently is – wait for it old-timers – I’ve been looking to buy a property!

(What’s that? Oh yes, I agree. If there was ever a sign the bubble is about to burst, the last bear in town turning is surely it. Expect a long post on why I’m embarking on such madness in due course.)

I can confirm landlords are thin on the ground right now. One agent told me that in the area of London where I’m looking, 50% of sales used to go to landlords! Now they’re lesser spotted.

This is good news for first-time buyers, who have struggled for a decade to cope with the landlords’ trifecta of interest-only mortgages, tax relief, and deeper cash reserves.

I’m not someone who thinks landlords are evil (far from it – and mine have all been great) nor that there is no case for tax relief, say.

But I do think owner-occupiers should come first on our property-starved island.

On balance then, I am all for the changes to the attractiveness of buy-to-let, and the impact they seem to be having. Prices will probably stall or fall as the effect of higher taxes kick-in, and the economics of land-lording will be reset at a lower level.

Property has been a great windfall for the forty-plus demographic, but I suspect it’s time to look for new opportunities.

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Weekend Reading: Don’t bother trying to second guess the next move from the Bank of England post image

What caught my eye this week.

Behold! Interest rates have risen from the dead! Excuse the fervent tone, but the Bank of England has not lifted rates for as long as Monevator has been in existence. That’s no mean feat given that my first articles were written in September 2007.

(Curious? The first article on this site explains how to calculate dividend yields. Heady days).

So will rates now steadily rise towards the dizzy heights of 5% or more of yore?

I doubt it. I wouldn’t hold your breath on them being above 1% in a year’s time, personally.

Who knows though? Neither the Bank nor the market expects more than a couple of hikes over the next two years, as the BBC reports, but such forecasts are far from infallible:

Mr Carney told the BBC that the Bank expected the UK economy to grow at about 1.7% for the next few years, which he said would require “about two more interest rate increases over the next three years” […]

The financial markets are indicating two more interest rate increases over the next three years, taking the official rate to 1%.

I had a discussion with a reader in the comments to last week’s Weekend Reading. The reader wondered ahead of the hike whether using an active bond fund might make sense?

His reasoning was that bond market moves were more predictable than the gyrations of equities, and hence the case for passive investing was weaker.

I begged to differ.

It still regularly surprises me how people who have sensibly decided they have no edge in the stock market appear to think they can saunter up to the multi-trillion pound bond market and know better than it – which is really what deciding you can select a market-beating bond fund manager amounts to.

I don’t mean to pick on this thoughtful reader in particular. There have been literally hundreds of people commenting on Monevator articles for the best part of a decade making calls on the bond market. Maybe two or three said they thought government bonds – which have mostly risen throughout – looked like a good buy. Most of the rest proclaimed they were getting out of bond funds, or at most suffering them through gritted teeth, before an imminent crash.

I’d guess at least half these people were self-declared passive investors.

The reader wrote:

If the BoE raises rates next week, the affect on bonds is entirely predicatable. I would have thought just buying a bond fund that re-rates downwards is not a great idea.

At least a bond manager should have been able to foresee and mitigate the affect of a rate hike (not entirely, but just so that the damage is less than in a simple tracker)?

Views appreciated.

But as I replied, things are not so clear cut:

The short answer is that the affect of a rate rise is NOT entirely predictable.

First-level thinking that says ‘rates have gone up so bond fund will go down’ will get a person nowhere in active investing. You need to be thinking second or third level (and be lucky!) and for years on end to beat the market as an active investor.

To give just a couple of counter examples, if rates rise but the BOE attaches commentary that’s more bearish than expected about the prospect of further rises, UK bonds and bond funds could easily rally.

If the rate rise spooks the stock market or drives the pound higher and there’s a mini equity crash, again bonds could rally.

Perhaps most obviously of all, since the BOE has been hinting at a rate rise for months, it could all be baked into the price by now and the actual rise be a non-event

These are just three of many dozens of possible scenarios.

Equally, rates could certainly rise and bond funds could fall — it’s totally possible. But in active investing (and I speak as one) you have to get these calls right again and again — so that you’re mostly right more than you’re wrong, and with the right-sized positions. Not once or twice to talk about at dinner parties. 🙂

Secondly, there’s the risk/reward of predicting and positioning for a rate rise, as an active bond fund manager. Pundits and commentators to this blog have been saying rates will rise and bonds crash for nearly a decade. Even I threw the towel in — after years of warning readers not to be so sure — and asked if a bond crash might finally be upon us back in June 2015.

Luckily, humility won the day and I concluded it looked that way but I wasn’t sure, and that pure passive investors should probably do nothing to change their strategy, or alternatively only tweak it.

As things turned out yields fell even further (i.e. Bond prices rose and there was no crash). The US 10-year yield has only this month finally gotten back to where it was that summer of 2015 — having nearly halved along the way! The UK 10-year gilt yield is still below where it was then, even after months of talk about an imminent Bank Rate rise.

Also — the US Federal Reserve raised rates for the first time in December 2015 and a second time in December 2016. Did bond funds fall as was “entirely predictable”? 🙂

No, yields rose (i.e. bond prices fell!) after the first rate rise. They then rallied with the Trump election, before sliding again after the second rate rise in December 2016.

See: https://www.bloomberg.com/quote/USGG10YR:IND

But let’s leave aside the fact that bonds did the opposite of what they would supposedly obviously do. At some point I am sure rates will rise and yields will indeed rise too (i.e. bond prices and bond funds will fall for a while).

The point is an active bond fund manager has to get these bets right with the right amount of money at the right times to outperform. If a bond manager had decided it was ‘obvious’ yields would rise after those rate cuts I mentioned above, positioned accordingly, and were wrong, then they were now down say 20% over a few months versus the benchmark. They now have to make that back by being right later, and more again to start to outperform.

This stuff is hard. 🙂

Active bond managers are about as expensive as active fund managers, and in corporate bond investing at least they take as much research oomph behind them too. Yet expected bond returns are lower than equities, and right now they are very low. This means the higher fees for active bond management eat up even more of your return.

Oh, and none of this is to even get into the mathematics of reinvestment — rising yields are bad for bond funds in the short term, but in the long-term they can boost returns (due to reinvesting higher yields) which means someone who only looks at their portfolio every five years say might not even notice there’d been much of a correction unless it was truly catastrophic.

So there we have it — bond price moves are not entirely predictable, the consensus about the direction of even central bank rates has been wrong for a decade, passive investors reinvesting their bond income might even welcome rate rises over the medium to long term, and in the meantime with active bond funds yielding maybe 3-4%, TERs of say 1+% are monstrously expensive.

I don’t see going active with bonds is an obvious decision. 🙂

Incidentally I’ve noticed that for some reason, even people who accept the logic of passive investing in shares seem to think bonds are no-brainers. They are not!

The bond market is an even bigger, deeper, harder, and even more competitive market. Perhaps only currencies are bigger/harder (bordering on random in my view over anything other than the multi-decade view, and perhaps even then.)

Oh, and as a coda, UK government bond yields fell and prices rose in the immediate wake of the Bank of England rate rise. Things clearly aren’t quite so predictable…

I didn’t know that would happen. And again I want to stress I have no problem (just far too little time) with readers finding their own way and asking questions. After 15 years as an investing obsessive, I’m still learning new things every day. If anything I’m less confident about what I do know than a decade ago.

I need to be uncertain, because for my sins I’m an active investor. My returns live and die by my speculations. My uncertainty has been hard won. Spend a few years honestly tracking your returns and you’ll discover nothing is “entirely predictable” in investing.

Happily, most readers are, like my co-blogger, passive investors. And if you’re going to be a passive investor, then be a passive investor. Whether in bonds or equities or anything else.

Embrace it! In most cases it will be better for your returns than being almost passive. And you will certainly have a lot more free time and less hassle in your life.

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