This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.
Correcting market failure [Members]
Next post: Weekend reading: The risk of ruin
Previous post: The decline and fall of a buy-to-let empire
Comments on this entry are closed.
I’m reminded of Should you swap your shares for an IT at a discount from the dark days of 15 years ago, although the market failure was the GFC rather than a more localised fail.
Interesting angle, and food for thought for those of us favouring income at some stage. Yes, I know. Rationalist say just sell down your capital in a world ETF and be done with it.
Some of us find that really hard to do, whereas using income is easier. ISTR The Greybeard took a huge amount of stick for saying that 😉
I agree that you should be overweight the UK and underweighted US versus global index funds, principally on the basis that the US performance at some point is likely to revert to the mean. I’m 10% UK and 45% US, for what it’s worth.
By the way, “Invidior” should be “Indivior”.
I have been overweight UK (25%) and underweight USA (17%) for years. Probably don’t even hold any of the ‘Magnificent 7’ as my USA holdings are in a factor based ETF (JPLG (previously IFSW)). It’s been the wrong decision obviously, but I’m looking forward to some mean reversion eventually. I’m considering swapping some of my FTSE100 (LCUK) and FTSE250 (VMID) holdings out to some of the Investment Trusts in the table you included. I don’t need the income yet (as I set up a GILT ladder after some of your previous articles) but a narrowing of the discounts would be a nice bonus.
PS I’m happy with whatever word count you choose for your articles. The more the merrier in my case, as there’d be more information for me to try to absorb.
I agree strongly with Gareth Ghost about word count. These are great articles. Please keep them coming.
Likewise, I am more than happy with the word count and, in fact, feel free to increase it, if you so wish. I enjoy the articles and am also happy to contribute to the site’s upkeep, so it’s a very good deal for me, thanks.
I’m much more interested in the quality and fresh information/thinking than wordcount. A sheet of A4 in 12pt is often the right balance, with a 19-word intro!
The UK market’s ongoing (2016 originating) derating v mainland Europe raises some interesting issues (as well as being a fatal blow to BBlimpish arguments); namely are the UK’s small cap &/or value &/or equity income sectors now ‘better’ alternatives to use/overweight to ‘hedge’ against US dominance (@60/65% of global cap now) and underperformance risk, as compared to the alternatives of Euro, Japan or EM small cap, value, or small value?
Ever considered a UK Blend approach? This uses: UK All Companies, UK Smaller Companies and UK Equity Income. Fund selection is just:
– Best 3 funds by total returns (from OEICs/UTs & ITs) from these sectors over last 6 months.
– Each of the 3 funds must be from a different UK sector.
– Hold for 6 months, and repeat.
– Review cycles: May / November, or February / August.
Simples 😉
I feel the need to comment but have nothing helpful to say other than thanks for the articles – I’m just not clever enough to comment and also passive, just pay to support this wonderful site.
Another vote from me, for you making the articles as long as you feel they need to be. I’m aware that I’m not a frequent contributor, in terms of messages. But I do tend to discuss recent articles, with a few friends, more or less every weekend (they are subscribers, too). Which may illustrate that the value of the postings is not shown only by the number of posted comments.
FWIW, I’m not persuaded that there is necessarily going to be some reversion to the historic mean, in terms of relative UK/US equity ratings. Maybe future prospects really have diverged.
Really interesting article. For now I’m keeping it passive – having been active for years – in VWRL for equities, so if UK suddenly becomes very valuable I’ll feel the benefit. VWRL 25% UK atm.
Ian – I also own VWRL, but I think its weighting to the UK is something less than 4%. Have I misunderstood your comment?
@Ian #10 > 25% UK atm
Like JPGR #11 I’d say that was the lifestrategy VGLS100 fund that (roughly totting the UK parts up) is 25% UK.
VWRL by comparison is 64% US and 3.6% UK.
In the early days I owned that as a general passive index fund but which it may be a good staged ladder of shifting equity exposure the composition is odd. Not bad in itself, buy idiosyncratically home biased for a UK investor investing in the UK version
First time comment (sorry!) and, like JB, felt the need to comment to say thank you for the articles. These have been brilliant in broadening my thinking in the investment sphere. I’m mostly passive but sprinkled with some naughty active plays occasionally (e.g., Treatt).
Articles are very much read, enjoyed and reflected on. But I’m not a great writer like TI so don’t always join a discussion.
I’d be interested in hearing from other Moguls, their obscure share tips, random theories, or obscure assets hidden away, like Art, vehicles, or woodland etc. So to tap the collective hive mind… Might work to get discussion going.
I think the Moguls articles can be as long or as short as you want them to be, no more and no less. I read all of them avidly (I subscribed specifically to gain access to the Moguls articles) and I really don’t care how many words they contain. In my opinion, you should not worry about the word count. On your blog, you have the editorial freedom to publish however you like, and I’ll read all of your Moguls pieces, no matter how long or short. I would even welcome more than one Moguls piece per month, but I also understand that they must take a considerable amount of time and effort to produce. Keep up the good work!
Thanks all for the generous comments. As I mentioned, the Moguls (and membership in general) feedback has been excellent and the members numbers are still ticking up every month. I think I’ll have to try to chill out.
Perhaps Moguls are more generally reflective busy people, rather than the typical commenters on the site. It’s also true of course that there’s a tiny fraction of people seeing these articles versus a for-everyone Monevator article. In fact on a percentage / ratio basis Moguls are probably relatively chatty haha. 😉
I do get more email replies to these articles too, compared to normal articles. So that’s a factor.
Anyway, I’m going to chill for a few months and keep on keeping on and see how things unfold!
Thanks again for the encouragement (and as always the support!) Besides that, a few specific replies…
@Ermine — If ever the post of Official Keeper of the Monevator Records is initiated, you’re a shoe-in for the job! Even I’d forgotten that post, or I would have linked to it. You’re right it’s a similar situation, and my thinking is similar too. I’ve steadily dwindled down my direct holdings as a % of my portfolio as discounts on trusts of all kinds have emerged. Stock picking can be more lucrative than discount plays, but a discount is a fact not an opinion let alone a hunch. Of course that doesn’t mean they’ll narrow anytime soon…
@JPGR — Thanks for the kind words. Re: my portfolio, I’m similar on US but much more UK. Thanks for the ‘Indivior’ catch. Rather embarrassingly it’s not the first time I’ve made that mistake!
@Gareth Ghost — Yes a mid-cap UK tracker is a nice way to get exposure to what seems to me like UK undervaluation, without taking on discount risk. I use the Invesco accumulating ETF S250 as one of my four portfolio benchmarks and it’s taken a whalloping over the past few years. Used to be quite the competition! 😉 I reckon it’ll have it’s day again sooner or later though.
@Templeton @JB — Thank you so much! I’m aware that more than a few Moguls are actually generously supporting the site as a whole mostly on the passive side by signing up for Moguls, but mostly coming along for the ride with my articles. It’s very much appreciated! No mandatory commenting.
@Onedrew — Well that’d certainly save me a few weekday evenings in front of the laptop… 😉
@Delta Hedge — I’m constitutionally unsuited to any kind of very structured approach to trading and rebalancing. To say the least *cough* *cough*. I’m also wary of backtests. To be frank, I’m not your man for that sort of approach! But I agree it’s interesting to think about whether the UK is a ‘best hedge’ against the US. I see us as having at least a couple of things in our favour. One, as I mentioned in the piece ongoing factor metrics re: the UK market and, two, the UK has been marked-down on idiosyncratic factors to some unknowable but to me undeniable extent. So there could be a bit of what we stockpickers call ‘self help’ in a UK rehabilitation that might move independently from global markets?
@Johathan H — You have multiple *friends* who read and subscribe to Monevator? Even I can only just boast that… 😉 Watch this space for something fun for folk like you to come in the next couple of months. Yours cryptically, @TI…
@Ian — Cheers! Re: the query by @JPGR perhaps you mean the Vanguard LifeStrategy fund? It’s share allocation to the UK is very close to 20% from memory.
Oh, I see @ermine has stepped in. Good work, Monevator Librarian! 😉
@Tractor Boy — Cheers! I have held Treatt in the past and indeed years ago got an email from the CEO on account of something I wrote about them somewhere saying I understood what the company was trying to do very well. Alas, at that point I didn’t own the shares. Oops, they had a great run afterwards. Perhaps I should take another look. It was all about China when I last did, and I am typically wary of that market and its politics too.
@KISS @Mirror Man — Thank you for your vote! Yes they take at least a couple of days and sometimes several days (spread out over several-plus days) depending on how much research I need to do (and how much I dither haha). I very much enjoy writing them though — I set up Monevator to write about this kind of thing, but overtime I was wary of confusing the passive message so I toned it down.
Moguls is really a bit of a passion project for me. That people are enjoying my articles is the cherry on top! 🙂
@TI: on backtests, UK Blended using only OEICs/UTs with a May/Nov Six-month cycle gives following over 01/05/2000 to 31/10/2021 (only period I’ve data for):
Total return (dividend reinvested, nominal) 1,607% versus 146% for FTSE 100, 14.1% p.a. v 4.3% p.a. (so excess over FTSE 100 of 9.8% p a.), worst month minus 16.3% versus minus 13.4% for index, worst year minus 33.8% versus minus 28.3% for index, over individual 6 month periods since 2000 outperformed the FTSE 100 69.8% of time, with an average outperformance over the index in any 6 months of 9.2%.
Data from FundExpert.
The past is a poor guide to the future, and certainly no guarantee, and the map isn’t the landscape here.
Still, if the UK really is especially and idiosyncratically cheap (at least versus the US market, if not also, to a lesser extent, our Euro brethren) then the last 20 years or so look promising, and combining mean reversion (i.e. the UK being a value play) with momentum might turn out to be interesting (momentum often working better when cheap is getting less cheap, as compared to expensive getting more expensive).
p.s.: just seen that Woodford today agrees with you on the undervalued & poised to perform potential of the UK market 😉
https://www.woodfordviews.com/post/the-uk-stockmarket-not-damaged-goods
I would say No of words is somewhat of a factor – Attention span has shortened for many in this new world of “Shorts” and videos-focussed, so long read is a lost art(science ? :)) – to provide important information as well as hold the user attention in a story/flow.
However, I have liked your articles very much to read, understand and would only say “Keep going”.
Apologies All, I was looking at my total portfolio weighting which included VGOV
I’m a new Mogul and I wanted to say how much I’m enjoying the quality of both the articles and the comments – thoughtful, nuanced and laced with a refreshing degree of humility.
@JPGR — Welcome and thanks very much for signing up! The support is very much appreciated, as are the nice words.
Regarding humility, I’d say if someone is an investor and isn’t expressing a bit of humility then they’ve even not been investing very long or they’re the next Bernie Maddoff. The market reflex is to make us humble! 😉
Love the website and specifically signed up as a Mogul for these articles, though I felt a bit of an imposter doing so. I run three portfolios, one passive (equal VUSA, VWRL, VHYL, Vgd Dev Wld ex UK), one active chasing discounts on ITs and one UK dividend portfolio introduced in the last year. I’ve started investing after retirement as a hobby after finding your site something of an inspiration, after having been put off by my first ever and only PEP in 2000 which was in European shares, which seemed meander in and out of the red for years. You’ve taught me a lot, for which many thanks. Guess which portfolio does the best though! Grateful for however many words you can muster.
Make them as long as needed, as long as the length is there to add nuance or some extra discussions I’m more than happy to read longer posts. I’ve not commented as I don’t always feel I have a lot to add but I do love reading the comments.
I’m not looking for income in my portfolio (tax disadvantages as I can’t make use of ISAs – I’ve left the UK for the EU) but if I was it looks a good time to pick up some of these trusts, so still enjoyed reading the post for the theory. I did sell 1/4 of my MSTR position after your meme stocks post though (and it’s down 25% or so since then so that went well)
If we’re going to be investing within the UK, then it may be noteworthy that industry lobbying for further incentives for (and an accelerated implementation of) a ‘Brit ISA’ continues, and can be expected to persist under a new government. This just in today from Proactive Investor, via Investing.com:
“British individual savings accounts (ISA) could pump up to £4 billion into UK companies each year, Peel Hunt (LON:PEEL) analysts have said.
Having been introduced by chancellor Jeremy Hunt in April’s Spring Budget, Peel Hunt said a boost could indeed be dealt to British companies if many switched from other accounts.
This is if the majority of those who max out stocks and shares ISAs did the same with the British-focused alternative, alongside almost a third of those fully utilising cash ISAs.
Jeremy Hunt had introduced the British ISA in a bid to incentivise investment in UK-listed companies, with such accounts offering an extra £5,000 tax free allowance at £25,000.
“The UK equity market has a systematic issue, with negative fund flows driving low valuations,” Peel Hunt said.
“A UK ISA is not a silver bullet, but an important element in resuscitating the equity market.”
Peel Hunt warned the British ISA may need to include further incentives to be successful though.
This includes allowing investment in all companies with a UK-listing, rather than basing choices on where firms are headed, according to the bank.
Exclusion from inheritance tax could also boost use of the British ISA, Peel Hunt suggested, alongside ensuring there is no market cap limit on companies included”.
More on the UK equity market’s prospects from our ever optimistic CHX: “Jeremy Hunt dismissed claims London’s stock market is in crisis and said reports of its demise are “massively overstated”. Speaking at a summit organised by the WSJ the Chancellor said at least 7 tech giants will be listed in London over the next decade. Referencing the ‘Magnificent Seven’ he said their performance was the main difference in valuation between the LSE and New York: “I predict that in a decade we’ll have seven UK tech stocks of our own, and that will pull up the London stock market exactly the same way that tech stocks are doing in the US at the moment. Why? Because we are Europe’s technology hub and we have that pipeline of great companies. I think London’s stock market demise is massively overstated. We do have challenges, and we’re addressing those challenges.” Hunt added that changes to listing rules proposed for London would reverse this trend: “London needs to be competitive on two things. First of all, we need to make sure you can access that wall of money here, which is why we’re doing the big pension fund reforms. Secondly, what we need to do for tech in particular is to demonstrate that actually, you can go all the way from a startup to a successful IPO here in London.”
@TI: One area I’d very much like Part 2 of this Mogul piece to cover please is why the UK IT sector specifically is cheap (P/E, CAPE, P/TBV, P/S) on a relative basis to other deep value contenders.
I totally buy that the UK is cheap.
I find it plausible there could be near term catalysts for mean reversion (trusts buying back shares to close discounts, Private Equity acquiring companies held by UK ITs at a discount and taking them private).
I don’t need persuading of either of those things per se (although I’m much more confident of the first).
But the question that I’d like to see addressed in Part 2 is why the UK stands apart on cheapness from the alternatives, because there are an awful lot of cheap (in some cases really cheap) equity markets and sectors out there globally on an absolute and a relative basis.
Small cap is cheap compared to Large
Emerging Markets are cheap compared to Developed ones
European stocks as a whole are cheap, compared to US shares and European Quality Growth style stocks are cheap to US equivalents
Eastern European stocks are cheap compared to North West European
Value Stocks are cheap compared to basically all other other factor tilts and investment styles, esp. to Growth stocks
Emerging market, European and Japanese Small cap, Value, and Small Cap Value in particular look cheap compared to their US equivalents
Perhaps, above all other possibilities, it’s Japanese micro and nano cap value stocks which have claim to be the cheapest equity assets in the world just now. See these posts from Substack as examples.
https://open.substack.com/pub/ideabrunch/p/idea-brunch-with-altay-capital
https://altaycap.substack.com/p/japanese-reforms-slowly-kicking-in
https://open.substack.com/pub/altaycap/p/okayamaken-freight-transportation
I think that if we’re looking at and into the UK IT sector then we’ve also got to consider the main alternatives globally at the same time, because allocation is always a choice between options with both varying and similar drawbacks and advantages.
@Delta Hedge — I can see why you’d ask that, and I agree with you that many areas of the world look cheap. I’ve referred a few times to US growth vs US value or large vs Small, though perhaps not in this article.
However I don’t want to mislead anyone. 🙂
a) I am not a quant. I am not combing every one of the gazillion of risk/reward opportunities in the world across all assets and sectors and computing expected returns and saying “this is cheapest”
b) This is not a recommendation service saying “here’s the best opportunity this month” or anything like that at all. People definitely shouldn’t think that it is.
I own all sorts. I have exposed to US small cap value for example. 🙂
I’m sure interesting writing/colour may drift into saying “the UK looks like on of the best opportunities to me” and I wouldn’t write that if I didn’t mean it, but it shouldn’t be taken as quantitatively definitive.
Really need to be clear about this. Moguls is a “here’s an interesting thing I’ve been thinking about” service, not a “I’m surveying the entire globe and offering up the best opportunities” one.
You write:
This is true, but realistically at the level your question implies, this is a Bridgewater class/resource style problem. I could bluff but it’s not my style. Certainly looking at a few P/E ratios or even earnings yields (so one could bring in fixed income etc) hardly touches the sides.
Thanks for the long comment and hope this doesn’t sound too negative. But this service is in part about communicating realism to members! 😉
We are stainless steel rats, scurrying among the boots of the big boys/robots, and should curb our enthusiasms accordingly. 🙂
@Delta Hedge: Regarding Hunt‘s comments, I am skeptical that tech giants – even if they came into existence- would get listed in the UK in large numbers. At least in my field most companies would still consider access to US capital as more important.
Personally I have been underweight US stocks for probably a decade. Like the proverbial stopped clock, I am sure I will be right eventually. (Underweighting was partially driven by valuations, but more so to move closer to global GDP weightings.)
@TI +1 for the fraction who became Moguls primarily to support the site, really no preference on article length as long as they are interesting.
@White Sheep. Agreed. It seems a stretch. ARM Holdings’ move to the US last year looks like it was bad omen in light of the more recent departures. Mr Hunt didn’t say what he actually proposed doing to steady the LSE ship, other than a Captain Mainwaring style “don’t panic”.
@TI. Thanks and understood 🙂 The 9 Feb 2023 MV piece (inspired by GMO’s 10 year forecast) for a DIY portfolio of the world’s cheap assets had been sticking in my mind: https://monevator.com/a-cheap-portfolio-of-cheap-assets/
UK equities weren’t in there then, but some might perhaps have come under the Euro Small Value heading if they had been included.
If anything, UK IT discounts are typically wider now than back in Feb 2023, making the UK ITs sector’s inclusion in a global cheap assets list more persuasive.
Now that the US weighting in Vanguard’s Global All Cap Fund has hit 64%, and is right up to 70% in developed market large cap trackers, the case – based on mean reversion – for slightly overweighting cheaper sectors (small), styles (value) and geographies (ex-US) looks strong and maybe UK ITs could have an outsized role to play both because of the discounts and also due to the underlying assets often being rather cheap (compared to history & alternatives).
It could be different this time (paradigm shifts do happen), but a fairly reasonable starting assumption would be that the odds favour mean reversion eventually waking from its long slumber.
Then again, GMO’s past forecasts for where different asset classes & geographic markets would sit above or below the Capital Market Line seems to have been off for as long as I can recall reading them.
@Delta Hedge — Ah, that was a fun article to write, I’d forgotten about it! Anyway yeah, with that one I was trying to replicate GMO’s proposed own ‘cheap assets’ portfolio, which didn’t have a specific UK allocation. I’m not sure it would today either, to be honest, it was painting with broader strokes.
You can always go deeper and deeper into these things. Some area of UK ITs will prove in retrospect to have been particularly cheap. One of those will have been the cheapest.
Somewhere on the UK/European market is a neglected small cap company on a P/E less than 10 that is going to 50-bag over the next 10-20 years. Finding it is the trick, and realistically not going to happen to most people more than 0-1 times in their life, unless they buy big baskets. (Hence — track indices etc 🙂 )
Many thanks @TI, and thanks also for the GMO piece last year. Because it’s always impossible to know what happens next, I’ve only scaled back my US large cap exposure from 65% ish to ~50% using the swaps based SPXP for the US as @Finumus mentioned in his ‘investing costs how low can they go’ article last year.
(NB: ultimately I want to move from SPXP to the WTEF returned stacked S&P 500 ETF, as mentioned by @Finumus in his first leveraged ETF piece for Moguls, but the AUM is still pitifully small after it launched last year, so I want to see how it fares first).
This has given me leeway to try and tilt away from the S&P 500 risk whilst also not straying too far from the market cap weights for Europe, Japan, Pacific ex-Japan and EM.
I’ve used that to get some multifactor ETFs with HWWA, FSWD (as mentioned before by @TA) and JPLG; and also with a 5% express tilt towards Small Cap Value.
I’ve found that in the UK space for SCV it’s basically a case of TINA for active approaches as although there’s:
– a Developed Market SCV ETF ‘suite’ both for Europe in ZPRX (Euro denominated – with DFEP giving a £ denominated SC HY ‘equivalent’) and for the US in USSC ($ denominated); and,
– for EM SCV there’s DEM (albeit that’s also really just a SC HY ETF);
there’s no country by country UCITS SCV trackers as such available for non-US SCV.
As UK ITs sit on big discounts (albeit ones that are becoming somewhat worryingly persistent IMO, as were 2 years in now), it would seem to me to make sense to try and access specifically UK orientated value, small cap and SCV by looking at ITs listed on the LSE sitting on abnormal discounts with high ‘factor loading’ in those 3 areas.
You’re onto something @TI 😉 “There has been a remarkable change in the outlook for the UK in just the past month.” Kepler Trust Intelligence, 30 May 2024: https://www.trustintelligence.co.uk/investor/articles/strategy-investor-it-s-a-small-world-after-all-retail-may-2024#
And, further to my comments #7 & #17 above, these are the updated performance numbers for the FundExpert Dynamic (i.e. 6 month lookback, 6 month hold, top fund momentum) UK Smaller Companies’ portfolio (which is drawn from a much narrower canvass than the UK Dynamic Blend approach, which I previously referenced) from October 1999 (which, as FE rightly note, was a “quite terrible time to begin investing”) through to now:
Dynamic UK Smaller Companies portfolio: 2,224%
FTSE Small Cap ex ITs: 340%
FTSE 100: 232%
Which is a return 6.5x better than the arguably equivalent index, and 9.6x the FTSE 100 index for the same period (income re-invested, after fund charges).
Re: “There were 160 companies in the FTSE Small Cap index in 2018. That was 114 at the end of 2023…Broker Peel Hunt warns the UK small cap market could disappear by 2028”: Interesting take on the prospects for UK micro caps v UK small caps when investing via ITs (from May/Jun 24):
https://www.trustintelligence.co.uk/investor/articles/guides-investing-in-uk-micro-caps-with-investment-trusts-may-2024
Very much echoing the view in the MV Mogul piece here in May, this just out from Kepler Trust Intelligence on the evolving UK picture following the HL buyout by PE and SWFs:
https://www.trustintelligence.co.uk/investor/articles/opinion-investor-another-one-bites-the-dust-aug-2024
FGT and IPU ITs get a mention.