What caught my eye this week.

I think my favourite Shakespeare play is Coriolanus. It’s certainly not the best Shakespeare play, but it’s shot through with a bitter edge that appeals to my inner cynic.

You can keep your Danish snowflakes, your passive-aggressive wizards, and your talking walls – it’s this Roman riches-to-rags-to-dead-in-a-ditch story of what happens when you court the mob that ticks my boxes.

No, I’m not (yet/only) referring to Brexit.

I’m not even thinking about the Extinction Rebellion protestor who was mildly lynched this week for interrupting a horde of London commuters.

I’m talking about the spectacular fall from grace of formerly famed fund manager Neil Woodford.

Told you so

Now, you might think this would be the perfect opportunity for a passive-championing blog like Monevator to cough politely and say: “Ahem, we told you so.”

And obviously we did.

Not that Woodford would fail, particularly, nobody could know that for sure. But we’ve written many times that you can achieve everything you need to by investing in index funds and getting on with the rest of your life.

Recap: There’s always a few winning fund managers at any one time. Mostly they don’t win forever, and even if they do you’re very unlikely to invest all your money with them throughout. Mathematically you’re better off in index funds.

Or, as The Evidence-based Investor writes:

I don’t mean to sound smug or clever. I had no reason to believe that Woodford would perform quite as badly as he did.

I was just pointing out that the odds were heavily stacked against him beating the market on a cost- and risk-adjusted basis over any meaningful period of time.

And that is all very well.

But ploughing through outraged article after outraged article this week, I started to feel almost sorry for the bloke.

Why oh why did he have to do different?

Woodford’s flagship fund is to be wound down, his second fund frozen, and his company is to be shut down.

Winding up the big Woodford fund wasn’t his choice, but to be honest it’s a bit late for that. His investment trust is trading at a ginormous discount because his reputation is trashed. The man who was lauded by the masses is now feeling their wrath.

They feel like they were scammed, they say. How does Woodford sleep at night? He has his millions, they’ve lost thousands. It’s not fair. They blame the platforms, too. And the media! The same media that now reports on him like he’s been discovered with 40 barrels of nuclear waste in his wine cellar that was only to happy to gush about his new company five years ago.

It might sound like sour grapes, but of course that’s not it. Because we can be sure (can’t we?) that had Woodford lived up to the hype and outperformed the markets by as much as he actually lagged them, then there would have been equal outrage from the same people.

Wouldn’t there?

It’s not right, they’d shout! Woodford’s winning gains came at someone else’s expense! Also he cheated by including all that illiquid and unlisted stuff in his funds – so it wasn’t a fair fight. In fact, they’d like to give their winnings back!

What’s that? You think people wouldn’t have said such things if he’d actually outperformed? You believe the way Scottish Mortgage – the UK’s largest investment trust – is praised for its private equity holdings shows nobody cares as long as you’re winning?1 You think the fact that the masses still invest in open-ended property funds shows they only care about inappropriate investment vehicles if they get bitten on the ass?

Well well, I guess you might be right.

Own it

Look, I agree with UK Value Investor that there are lessons to be learned from the fall of Neil Woodford. When things go this badly wrong, Questions Must Be Asked.

And I don’t enjoy seeing ordinary people lose money. Quite the opposite – I write this blog to try to help ordinary people end up wealthier.

But at the end of the day, the story is pretty simple. People let him do what he wanted – and applauded it – when they believed he could beat the market. As he faltered they began to withdraw their money, and this induced a doom loop that ultimately trashed the wealth of everyone involved.

Woodford certainly cannot escape the lion’s share of the blame – in retrospect at least he created a doomsday device. Full transparency, hot retail money, massive funds under management, Brexit, a contrarian position, and a series of off-piste investments all exploded when they met the catalyst of poor returns.

But people didn’t need to buy into his fund. This shouldn’t come as a newsflash. We’ve been writing about passive investing since 2007.

If you want to fly closer to the sun – if you must try to do better than the market – then sometimes you’re going to get burned. End of.

P.S. So Boris Johnson has negotiated a slightly new withdrawal agreement, giving us a second chance at an orderly escape from the best deal we’ll ever have – the one we’ve already got. Hands up, I didn’t think he’d bother, so some credit is due. But I doubt he’ll get it through Parliament (the FT’s maths suggests he’ll miss by three votes) and I don’t think he’ll mind. A wet sock would jump at the chance of taking on Jeremy Corbyn in a General Election, with or without a dangerously populist rallying cry of Parliament versus the People at its back. Ultra Brexiteers will see another chance for a no-deal Brexit, everyone else will weep into the ballot box. As things stand I believe a super-soft Brexit best reflects the very close 2016 advisory vote, but on balance I also think we’ve all learned enough since then to justify a second chance. Hence I’ll be marching in London on Saturday for a new, informed Referendum. See some of you there!

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1. I own a few shares in Scottish Mortgage. And before you say anything, I fully agree it’s a more appropriate way to invest in unlisted holdings. But it’s not hard to imagine that if these had failed then people would ask why a mainstream investment trust had put money into such ‘exotic’ fare. [↩]

This post is one of a series looking at returns in the decade after the financial crisis.

Commodities were hot in the early noughties. Prices boomed, they became easily accessible through the invention of Exchange Traded Commodities (ETCs), and the broad commodities story was amazing:

• Long-term returns approaching equities.
• Low to zero correlation with equities and bonds.
• High correlation with unexpected inflation.

That list of selling points made broad commodities the dream diversifier.

Unfortunately it really was a dream, at least so far as the past ten years is concerned. Trustnet provides the chart that tells our story1:

Subsequent research has poured hot and cold hogwash over the claims of equity like returns and reliable inflation hedging from commodities.

Meanwhile anyone living the dream woke up to high volatility and a decade of losing returns: -2% annualised over the last decade, or a -5% real return (see lime line C).

I looked at the ETFS Energy ETC due to its exposure to oil and gas (cyan line B). Oil’s boom during the 1970s was used as evidence that it’s a strong hedge against stagflationary recessions.

The oil price hit nosebleed territory in 2008 and despite the 2009 pullback, the rise of those energy-hungry emerging markets meant the oil price could only go one way, right?

That’s right, it went down. Subsequently the ETFS Energy ETC lost -9.5% annualised (-12.5% real), the worst performer of all in this review.

Goldie lots

Maybe the gold bugs were right along? Physical gold had a tremendous Global Financial Crisis returning 90% between November 2007 and February 2009. Since then it’s brought in a 7% annualised return (4% real).

Not bad for an asset with an expected real return of zero.

Gold is meant to be valuable because of its low correlation with other assets and that bears out in the chart above. Compare the pink line D (gold) with the black line A (MSCI World).

I’ve stayed out of gold in my accumulation years due to its lack of expected return and dividends but there’s a case for it in a deaccumulation portfolio.

Note that in our last 10-year retrospective recap we discussed in some detail getting gold exposure via the gold miners. That’s as opposed to owning the metal itself, which is what we’re talking about here.

Are any readers keeping their faith with broad commodities as an asset class over the next ten years? Let us know in the comments below.

Take it steady,

The Accumulator

We’ll continue to gaze back 10 years to see how several other passive-friendly strategies have fared. Subscribe to get all the posts.

1. Trustnet provides annualised and cumulative return data for periods of up to 10 years. The results below are quoted in nominal £ returns, with dividends reinvested from 14th September 2009 to 13th September 2019. [↩]

What caught my eye this week.

I am away from my (home) office again today, so it’s another premature round of Weekend Reading links.

When I go early with these I sometimes miss good stories. If you do see anything others should read, please add it in the comments below.

A few people have said they’d prefer to always get the links by early Friday afternoon. Apparently these paragons slackers are done with their working week by then. I admire the spirit, but when we publish early we don’t really see much of an uptick in views or comments so it seems to be a minority who can start the weekend early.

If you are reading this before 6pm on Friday and you wish you always could – at the cost of some missing links – let me know below. It will all be evaluated and taken into consideration, Sir/Madam.

Have a great weekend! 🙂

p.s. If we do get a Brexit resolution where Northern Ireland is in the single market but not the customs union – with an ocean border with mainland Britain and no physical checks on the border with the Republic of Ireland – then I suspect there may be a case for buying investment property in Belfast before the boom! There will surely be arbitrage opportunities in such a scenario.

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