The 1990s ‘Lads’ mag’ Loaded1 had a section called Getting Away With It. From memory it comprised photos of the magazine’s titular lads in-country, stumbling over bikini-clad glamour models at press events, or driving a rented Lamborghini into a wall.

Consider this post on mini-bonds in that spirit.

I obviously shouldn’t have gone near mini-bonds. And I don’t just say that with hindsight.

But I got away with it.

Definitely Maybe

In an article in June 2009 entitled Why I’d avoid these unlisted bonds like the plague, I pointed out the problems with these new-fangled mini-bonds.

Scant documentation, unsophisticated buyers, illiquidity, and more.

I wrote:

What would trouble me is if [this early issue] started a craze for unlisted bonds.

One company doing a one-off deal for headlines is one thing, but dozens of companies raising money direct from an always-credulous public would surely end in tears.

I then did what I often do around here, which is the opposite of what I suggest you do.

There’s a reason my doughty co-blogger The Accumulator was brought in to shoulder the passive investing duties years ago. I’m the investing equivalent of a cardiologist who smokes 60 a day.

I began to put money into mini-bonds.

Different Class

Apologies if you just choked on your lockdown lunchtime chardonnay, but this is not a new revelation.

I confessed to my mini-bond portfolio in September 2016.

It was only about 1% of my total net worth. Enough for a nice holiday or two at that point, but not life plan-threatening.

I hadn’t changed my mind about these investments. I didn’t believe mini-bonds had become a stunning opportunity.

On the contrary, I said they could be cynically described as:

…the junkiest of junk bonds – pseudo-corporate bonds issued by companies so risky that professional investors wouldn’t touch them with a barge pole taped to a barge pole.

But I was not quite so cynical, and I had my own reasons for investing in them.

Read that post if you want to know more about mini-bonds – and why and how I assembled my portfolio.

Anyway, the last of my mini-bonds matured in March 2020. This rest of today’s post just signs off this chapter of my investing antics.

(What’s the Story?) Morning Glory

I won’t name the specific mini-bonds I bought.

Last time I didn’t want to be seen to endorse any of these risky and illiquid issues. This time I think the names are too distracting from the big picture.

Here’s a snapshot though of my portfolio in abstract terms:

Company / sector	Yield
Fast casual dining	8%
Coffee chain	8%
Property firm	7.5%
Speciality coffee chain	8%
Craft brewer	6.5%
Fast casual dining	8%
Coffee chain (2x position)	11%
Speciality food retailer	8%
Energy infrastructure	8%
Property firm (5x position)	10%
Average	8.9%

Source: My off-spreadsheet records

As you can see, the high yield was the main draw – even back in 2016, before most people had heard of negative interest rates.

You also got also free coffees, brunches, and various other perks with many of the bonds.

Finally, there was the main reason I did it – for kicks and for experience.

I enjoyed meeting management at special events before investing. I believe I rejected a couple of bonds this way, too.

These meetings also whet my appetite for investing in unlisted equities via crowdfunding. More on that skeleton in the cupboard another day.

So how did my mini-bonds fare?

It’s Great When You’re Straight… Yeah

The majority of the mini-bonds ran for four years before you got the option to rollover for a year or redeem your investment.

In every case I redeemed where I could.

But I couldn’t always redeem as planned!

Firstly, the mini-bonds in the coffee chain where I took ‘two helpings’ – that paid a stonking 11% – were redeemed early. These were in a (fabulous) Australian chain called Daisy Green. I wrote about their redemption here.

There was no problem at Daisy Green. Indeed that was the problem if you were a mini-bond holder.

The company was doing really well! But rather than being rewarded for this as a bondholder, you got refinanced out of the picture and the equity owners enjoyed the future upside.

This brought home something I knew in theory but had never quite experienced in practice: bonds are for pessimists, shares are for optimists.

(Daisy Green did offer former bondholders and others the opportunity to buy its shares at a later date. Perhaps it was inspired by my moaning.)

I was frustrated to lose that lovely 11% yield. But that was far better than what happened at the other mini-bond I was unable to redeem.

The bond – in a ‘speciality food retailer’, with an 8% yield – went bust!

I got a couple of years income before it went to the great graveyard of failed dreams in the sky, but it still represented a more than 80% loss on a single investment.

The beauty of starting with a high portfolio yield though is that the income you earn covers over a lot of pain.

My bust-bond represented 1/15th of my mini-bond portfolio. So even its total wipeout was covered by the annual interest from the rest of the portfolio.

However it clearly did have the affect of bringing down the overall yield I enjoyed from this experiment – as did of course the early redemption.

As I stated in my 2016 post I was fully prepared for one or two bonds to go bust.

Still annoying though, especially given the limited upside for taking this risk.

The Great Escape

At this point a nerdier more committed blogger would tot up all the income they received from their mini-bonds, account for the loss, and figure out the overall return from this foray into foolishness.

Where is The Details Man when you need him, eh?2

I’m too old and running out of time to bother doing that. All the bonds that lasted for the duration started and ended at different dates. It’d also be non-trivial deciding how to treat the reinvestment of the coupons.

My mini-bond portfolio was mostly for fun. Bond and return maths is not fun!

The return I got (I’d guesstimate around 7%) was okay, but I don’t need a decimal point in a spreadsheet to tell me I probably would have been better off in a global tracker fund – let alone my own actively-run portfolio (which I have unitized and track to the very last penny).

Besides, four years is nothing in statistical terms. If stock markets had slumped for a few years from 2016 then maybe this mini-bond lark would have looked superficially savvy.

But that brings me to the final point – which is that I owe my brush with mini-bond success to a fair dollop of luck.

Because several of my mini-bonds would have suffered in the coronavirus era. And I know at least one of my former investments has gone bust!

Roll the start of my experiment along by just one year – or see somebody getting intimate with a bat in Wuhan a year earlier – and my results would have been far less satisfactory.

Plenty of people have seen their mini-bonds fail, even without a miserable global pandemic to finish them off. Many bust mini-bonds were dubious-looking financial issues that I wouldn’t ever have touched… but not all of them.

I Should Coco

We are never likely to get useful long run mini-bond data over many economic cycles.

Mini-bonds, at least in their UK incarnation, were a product of their time. A moment fostered by low interest rates, a temporary scarcity of bank funding for small businesses, and new Internet-enabled platforms that could market the mini-bonds effectively and cheaply to a wide audience.

However the Financial Conduct Authority permanently banned marketing mini-bonds to retail investors in June 2020.

I qualify as a sophisticated investor, and I could invest again in mini-bonds if I wanted to.

But I’m sufficiently sophisticated to know I shouldn’t!

The best takeaway from this investment fad was probably the fancy coffee.

1. A genuinely innovative magazine, if a creature of its time. Far more so than its insipid rival, Maxim, which did the dirty without even a hint of a knowing wink. [↩]
2. Back at work is where – boo! [↩]

What caught my eye this week.

This week we’ve been served notice that serious hikes to capital gains tax could be coming.

The Guardian reports:

A tax raid on buy-to-let properties and other forms of wealth could raise up to £14bn to help repair the government’s battered finances, after a report commissioned by the chancellor recommended a major overhaul of capital gains tax.

Flagging a tax squeeze on the well-off to help pay for coronavirus, the maximum capital gains tax (CGT) rate of 28% could be raised by Rishi Sunak closer to income tax rates, where the top rates are 40% and 45% in England and Wales.

Under the proposals, there could also be deep cuts in the profits that share investors can make without paying tax, and other technical adjustments that could, in effect, push up inheritance tax bills.

For more on the specifics of the report by the Office for Tax Simplification – which cynics might argue is starting to sound like Orwell’s Ministry of Peace –  check out the deep article over at ThisIsMoney. It goes into many of the potential impacts to capital gains tax rates, inheritance taxes, and more.

Gain stage

It’s the nature of tax hikes that people tend to think they’re fine if they believe they’ll never be hit by them.

Whereas of course those tax changes that paint a target on their backs are seen as grossly unfair…

And I am only human.

A little over a decade ago now, I exited a startup company that I’d co-founded. We had some disagreements about its future direction, and I left with roughly the money I’d put in – a few tens of thousands of pounds.

Sounds like a nice lump sum but keep in mind I was mostly just getting the big proportion of my savings that I’d invested (and risked) back, with any additional money hardly covering the income I’d forgone for two years.

I couldn’t put all this into ISAs at once due to the annual allowance. Pensions were different in those days, and looked unattractive to me.

Perhaps I should have spent it all on wine, women, and song? Or put it all into buying a home to live in where it would grow untroubled by the taxman for life.

That’s something nearly everyone with any money thinks is fair, incidentally, but which makes it even harder to keep up if you’re not a homeowner…

In the end I decided to risk investing it in a bunch of share picks outside of tax shelters. This compounded a paperwork issue I already had from previous investments outside of ISAs, but I thought it was worth the hassle and risk if I could hold for the long-term.

This tranche of investments did very well. We’re talking multi-bagging gains in just a few years. Outside of tax shelters.

I’ve managed to carefully defuse some of the gains over the years, but other holdings have continued to grow.

The result is I still have six-figures in capital gains, should I have to sell.

My plan had been to use my annual CGT allowance every year. The money raised would go towards my ISA allowance. I am not and mostly never have been a super high earner. And since I bought my flat I’ve never been over-blessed with free cash to top my ISA up with.

Obviously my plan may have to change if the CGT allowance is reduced or scrapped altogether, or if the rate is hiked.

Zero logic

Now many of you will say “so what?” This wasn’t money I earned by the sweat of my brow.

That’s a coherent argument.

However it’s not an argument that many people seem to apply to the giant windfalls people get when they inherit.

I do and would hike inheritance tax to the max, because the recipient literally did nothing to earn it. They didn’t even forego consumption or take a risk.

But no need to reply in anger. I know most of you disagree!

Proponents of CGT hikes also tend to muddle different things together. So they will talk about a high-earner with cunningly structured finances paying a far lower tax rate then their cleaner, 10% say, and then argue in the same breath that CGT rates should be hiked and the ‘distorting’ annual allowance should be scrapped.

But that 10% tax rate is due to entrepreneur’s relief, not standard CGT. And enabling somebody to realize a little over £12,000 in capital gains from their investments (which may have taken many years to build up) is hardly what enables the big swinging dicks of Canary Wharf to bring home their millions at a lower tax rate, if that’s the complaint.

As for distorting behaviour – the mooted changes will only make this worse. People will hang on to assets that they might otherwise have disposed of, simply to avoid the tax charge.

Perhaps you believe this is all good if you see longer-term ownership as a virtue in itself (I’m unconvinced) but it’s undeniable that it stops people freely juggling their assets to suit their circumstances, or their views about valuation.

Scrapping CGT altogether – for a 0% capital gains tax rate, as enjoyed by radical countries such as New Zealand and Switzerland1 – would surely make more sense from a simplification perspective.

Finally, you might say I don’t deserve my six-figure capital gain because it doesn’t amount to any social good.

But if that’s true (I’d debate it) then that’s true of all our investments.

What’s more, is a CEO on several million pounds a year contributing to the social good?

Heck, is a software engineer perfecting ever more pernicious Internet advertising doing so?

Why not increase tax rates on all incomes we consider socially useless?

Why not indeed.2

You can pay your own way

There’s no doubt that the Covid-19 pandemic and to some extent our chosen response to it has left the State’s finances in a hole.

(I believe it also means we can expect the low interest rates that make that debt manageable to last for years. Probably decades.)

I’ve been warning about this growing bill from day one, even as some others have retorted that we should lockdown and lockdown again, with apparently scant concern for the consequences, financial or otherwise. (Any debate on Covid over on this thread only please.)

But regardless, the mooted £14bn is neither here nor there in the grand scheme of things – assuming it is even recoverable without people changing their behaviour.

If we are going to reform taxes, let’s do it properly.

It’s high time we created a tax system that makes logical sense across the board. We should scrap fiddly income tax bands and cliffs, get rid of tons of exemptions, simplify and massively expand inheritance taxes (I’d do this by taxing recipients rather than the estate) and much more.

In practice though I’m sure we’ll do what we’ve mostly always done – which is whatever politicians can get through the Overton Window.

Okay, the cat has seen the pigeons. Let’s hear what you think, enjoy the links, and have a great weekend!

[continue reading…]

1. Essentially. Obviously there’s realms of tax minutia here as everywhere with tax. [↩]
2. Plenty of reasons! I am just extending the logic here. [↩]

Another bout of massive stock market volatility. Another day of frustrated private investors glaring at their frozen screens like horny teenagers trying to download a low-res porn MPEG on a dial-up modem in 1994.

When markets get super congested like they did on Monday, retail platforms fall over. It doesn’t matter whether we’re in the midst of a crash like we saw back in March or if shares are going gangbusters as with this week’s vaccine rally. If you’re a private investor trying to buy or sell shares, you’ll be lucky if you can log into your broker, let alone trade.

You’d hope headlines like these would focus minds at the platforms:

• Investors rage as market surge crashes trading platforms – CityWire

• Hargreaves Lansdown suffers system outage amid record trading volumes – FT

• Retail trading hits snags as vaccine news sparks stock scramble – Reuters

But this problem is hardly new, so maybe their strategy is just to grin and bear it…

…until the next day of pandemonium rolls around.

Musical shares

If you’re a dedicated passive investor – good for you – then you may say “so what?” to this kerfuffle.

Passive investors don’t trade like hyperactive card sharps. Passive players buy, sell, and rebalance their holdings according to their long-term plan. Ideally they automate the whole process. They would then be oblivious to the disruption their active brethren endured earlier this week.

At Monevator, we certainly believe most such investors who use broad index funds will do better than those who try to beat the market.

They’ll also sleep better at night!

I tried to tell a friend about Monday’s market mania. My friend has learned his passive investing habits on this very website, from my passively pure co-blogger. My friend was bemused, because his portfolio just appeared to have gently risen a couple of percent since the weekend. And he’d only looked at it because I asked him to.

To prove I wasn’t an overly sensitive soul, I sent him some commentary on the market rally, such as this snippet quoted by Bloomberg:

Based on historical data, the book-to-market [factor] enjoyed a 12x standard deviation rally, while price momentum and short-term growth factors suffered from 20x and 25x sigma sell-offs, respectively, on November 9.

That’s a lot of sigmas.

Most of the indices just marched higher. But I own technology shares that fell 20-25% over Monday and Tuesday, as well as value stocks that gained that much and more.

This churn is what market wonks (guilty as charged) call ‘internal rotation’.

Partly it’s reflective of a change in sentiment among investors about the earnings outlook for different sectors.

This time around we saw ‘stay at home’ tech stocks made less appealing by the positive vaccine news, and concurrently more appetite for burned-out ‘physical economy’ firms that need boots on the ground to make money.

Yields on safe government bonds ticked higher, too. If that continues it would be bad for high-multiple shares priced on their long-term earning potential, as I explained a few years ago. At the same time certain beaten-up value shares such as banks could profit from higher rate expectations.

Yet another driver of internal rotation is when traders sell one sector as a source of funds to buy shares in another.

Even if an investor has spare cash, using it to buy the suddenly more appealing airlines, hotels, and cinema chains would mean increasing overall equity risk. Whereas selling other shares at the same time tamps down your overall exposure.

Well, it does if you’re actually able to access the market via your platform.

Going for broke

I use multiple brokers and they nearly all gave me trouble on Monday.

For a while I couldn’t even log into one. Others would let me in, but then they wouldn’t let me trade.

For example, I got into Freetrade instantly with my thumbprint and it showed me my holdings without breaking a sweat. I was all set to sing the praises of its shiny modern tech stack – until I tried to actually buy some shares. Multiple attempts left me waiting for a buy confirmation that never came – the trades were never executed.

Other brokers appeared to execute my live trades but then, after a long timeout, they admitted that really they couldn’t even get a quote from the market.

Far worse, there are reports of investors on some platforms buying more shares with phantom cash that was never deducted from their balances after earlier trades executed, and even of big negative cash balances once the dust had settled.

The platforms should have been able to uncross all this – but not without infuriating customers, and possibly dinging their potential profits.

Interactive Investor appears to have held up best among the major platforms, judging from social media. That’s interesting given it has not always received the most sparkling marks for customer service. Perhaps it’s been investing in technical capacity instead of phone lines?

Price sensitive punters

Should we care that so many platforms fell over when the market went crazy? Should we be angry customers?

I think you can be miffed about it while still acknowledging the platforms have a difficult job.

People always say that Internet-enabled businesses should be more ready for any sudden surge in demand – online grocers, video aggregators, and share platforms alike.

And of course they mostly are prepared. But what level of extraordinary extra demand is it reasonable to cater for?

You can be ready for a market that’s 10-times busier than average. But then it will be the 11-times busier market that will get you every time.

I do think these platforms are different from other sites that fail with demand surges, though. It doesn’t really matter if you order your granola from an online supermarket with a 15-minute delay. In contrast share prices change constantly, and access to those prices is exactly what you’re paying for.

You could also argue a very active stock market is clearly one that many investors want to be, by definition, given all the activity. So if a platform fails to enable you to get involved, is it even fit for purpose?

To reiterate, at Monevator we think most people should be passive investors. They should turn off their PCs and smartphones on a day like Monday and go for a walk. Try to pick short-term winners and losers during such a feeding frenzy and you’re liable to lose a limb. Or at least a few quid.

Even so, it’s not very credible to argue that a platform failing on a very busy day is protecting small investors from themselves.

You could equally well say a wine producer watering down its alcohol or a cigarette maker stuffing its fags with parsley is doing consumers a favour.

Good luck getting that past Trading Standards!

Play to play

Set against all this moaning, owning a DIY portfolio has never been cheaper or easier. Low-cost platforms are a huge reason why.

We might clamour for a quant-fund’s fat pipe plugged into a market that’s gurning like a clubber in 1980s Ibiza, but would we pay for it?

The very biggest platforms are making decent profits, so you might argue they can afford to upgrade their infrastructure.

But it’s also true that the last time the regulator looked deeply into this sector a few years ago, the rest of the platforms were making diddly-squat.

There’s been consolidation since then, so the situation may have improved. But it would be counter to investors’ interests if pressure for bombproof platforms – perhaps even from the authorities – led to more mergers, less competition, and with that higher prices. Be careful what you wish for!

Did you try to buy or sell shares earlier this week? How did you get on?

Note: We both get a free share if you sign-up via my link to Freetrade. The Interactive Investor link is an affiliate link, too. The author owns shares in Hargreaves Lansdown.