Trigger warning: Thoughts on Brexit and politics more widely, followed by the week’s good reads.

The few innocents who still believed Jeremy Corbyn could be a Bobby Ewing character to wake the country from its bad Brexit dream have had a nightmare week.

The Euro-sceptic Labour leader wrote to Theresa May setting out a Brexit compromise, and as the FT [search result] puts it:

The letter not only shows how the Labour leader is trying to wriggle away from a second referendum, to the frustration of shadow Brexit secretary Keir Starmer.

It is also a symbolic moment that gives succour to the many Labour MPs who are tempted to back the government because they fear a no-deal exit.

Labour MPs are turning on one another, while the right of the long-fractured Tory party is playing some kind of Keyser Söze move against itself.

As this two-year farce approaches a head, you’d find more trust among slip-sliding latecomers to the Red Wedding.

No wonder the exasperated EU let slip the pretense that it believes it is negotiating with grown-ups who know what they’re doing.

Surely even the most sensible and sober-minded sovereignty-seeking Leave voter must be embarrassed by now.

Yet Remainers can’t gloat.

Two years in and the Brexiteer MP Kate Hoey is still able to label elected MEP Guy Verhofstadt an ‘unelected bureacrat’ to social media applause, with no effective push back from Remainers or the press.

Meanwhile other Brexiteer MPs state nonsense like “no Marshall Plan for us, only for Germany” – when Britain was the chief beneficiary of the Marshall plan – only to get slapped on the back by a dad’s army of Barry Blimps desperate to stockpile cabbages in an old Anderson shelter at the bottom of the garden.

The civil service is paying particular attention in its no-deal contingency planning to those same regions that cheered on Brexit – because those areas will be hardest hit by the no-deal that many of them seem to desire.

And our negotiating strategy? It’s come down to shouting “the EU will sacrifice their politics for economic reasons” whilst defending our Brexit as “more important than economics”.

Honestly, at this point party politics seems irrelevant.

Indeed expressing a view on Brexit nowadays is not so much like revealing something about yourself through a Rorschach test as playing a bookish version of Cards Against Humanity.

We’ve gone beyond parody.

Won’t anyone think of the capitalists?

Negotiating Brexit through Parliament has devolved into constitutional Jenga played by blindfolded drunks over a fire pit.

But when the dust settles we’ll (presumably) still be a functioning capitalist democracy – and then the old questions that helped fuel Brexit will return.

Among the most important: What can be done to bring ‘the people’ back to capitalism, and pronto?

To some Monevator readers over the years, my concerns about, say, income inequality or environmental degradation have sounded excessively socialist.

Which is ironic given that among many of my friends and most my family, I’m caricatured as a Vulcan-like free marketeer who knows no such thing as society and only barely has time for Building Societies.

The truth is – insert cliche – somewhere in-between.

I believe capitalism is a force for good, but it must operate within constantly reworked rules designed to spread the bounty of its golden eggs without killing the goose that laid them.

Whenever you propose a new rule – or even just a rule tweak – the laissez-faire ultras accuse you of being a confused Marxist with a share dealing account.

But I’m pragmatic.

There’s abundant evidence that well-regulated capitalist economies lead to huge wealth creation.

So regulate we must.

In contrast, planned economies lead to surplus tractors and starvation, and unfettered capitalism leads to surplus oligarchs, overpaid CEOs, cronyism, and bad taste.

Nobody except the oligarchs and CEOs want that, but that’s what we seem to be getting more of.

Few true believers

So I think it’s fair to say capitalism has seen better days in the West.

It works for me and it probably works for you.

It works-with-bells-on for the 1%.

But too many feel left behind, and a fair chunk with good reason.

Rising nationalism – Brexit, Trump – and the daily internecine battle that is politics on Twitter are signs of ebbing faith that capitalism is working.

And given capitalism is the greatest economic tool we have for fostering productivity, innovation, and higher living standards, I find that mildly terrifying.

My article How To Be A Capitalist was my own small attempt to win back some of Thatcher’s childish children (and grandchildren) who sneer at markets and vote for Corbyn while jetting around the world taking selfies on iPhones whilst decked out in designer brands.

I saw Jacob Taylor, the author of The Rebel Allocator, express a similar view in a Q&A on Abnormal Returns this week:

“Capitalism itself is under attack. I believe this to be a mistake, perhaps even an existential one for those of us in the US.

It’s easy to take for granted the little everyday ways capitalism conspires to make our lives better.

When was the last time you went to the grocery store and all of the shelves were barren? How do we coordinate to make sure we make the right amounts of everything without too much waste and rarely shortage?

I’d call that a miracle hiding in plain sight.”

There’s a disconnect between the system that supports us and how many of us feel about it.

That’s dangerous. Living with an incoherent and economically pointless Brexit could yet be the least of our concerns.

[continue reading…]

What caught my eye this week.

Fancying that you’re living at the end of progress is a recurring human failing. Think of the Roman cartographers who didn’t put anything on their maps west of Britannia, the IBM president who in the 1940s thought the world would need five computers, or the bonce who wrote The End of History.

Investors are no different. How many of us believe we’re marching ever upwards to a future inevitably dominated by index funds?

The secret is out, and money is flowing out of active funds and into trackers. What could possibly stop Vanguard ruling the world? Even I did a victory lap to that end to mark the death of index fund pioneer Jack Bogle last month.

Yet the same technology that makes it so cheap for Vanguard to run its index funds (hint, it has more than five computers) could also be their undoing.

In an op-ed for Investment News, Joshua Levin argues that:

In the next few years, the entire rationale for investing via funds will dissolve.

Advances in technology have transformed industry cost structures. Absent the need to pool assets for volume discounts, advisers and relationship managers can skip the one-size-fits-all cookie-cutter vehicles.

Instead, financial advisers will use software to truly customize portfolios, resulting in a more engaged and loyal client base.

It’s not the first time I’ve heard such talk. For instance robo-adviser platforms are exploring similar tactics in the US to eke out additional returns from tax loss selling.

I have some sympathy for this fund-less vision – and certainly a lot of curiosity.

But it’s notable that the platform Levin works for is focused on socially responsible investing.

Nothing wrong with that. However as a guest post on the Epsilon Theory blog pointed out in an unrelated article this week, ethical investing is being seen by some active managers and advisors as a way to reinvent active management for a new breed of customer.

And a handy side effect is they can keep their jobs and higher fees:

This is an admittedly clever strategy. At least in theory, it moves the conversation away from fees and performance.

Now we’re talking values.

‘Cause if performance is pretty decent, and the fees are reasonably competitive, wouldn’t you rather have a portfolio aligned with your values? Isn’t the alignment of your investment capital and your values worth it?

Don’t you want to make a difference?

Watch this space. And don’t write history off too soon!

[continue reading…]

Updated: As if to underline the confusion caused by discussing different charge estimation regimes, the initial version of this article has been re-edited. Even we and the experts at the AIC got our wires crossed! What’s most important is that you have an accurate reflection of the current situation, so I’ve decided to publish the entire tweaked article again. Apologies for the fuss – The Investor.

Many of us retirement-focused investors have been won over by the charms of income-orientated investment trusts.

And when buying such trusts, in recent months we’ve become accustomed to formally acknowledging – via a tick box at our online broker – that we’ve read each trust’s Key Information Document (KID) at the time of purchase.

Some investors, I’m sure, do assiduously read KIDs.

But many more, I suspect, do not – or have briefly skimmed them once.

Personally, I don’t find them to be particularly useful documents, but maybe that’s just me. Read a KID, though, and it’s not difficult for the eagle-eyed to note that trusts’ costs, as disclosed within the KID, differ from the ongoing charges (or OCF) figure quoted in trusts’ prospectuses and monthly returns, and on popular information services such as Morningstar.

For example, the City of London income-centric investment trust has an OCF of 0.41%, recently reduced from 0.42%.

City of London’s KID, though, lists ‘other charges’ of 0.85%, in addition to ‘portfolio transaction costs’ of 0.03%.

So which costs figure is correct? Why are there two very different figures given for seemingly the same lump of costs? Is some sort of investor rip-off taking place?

Monevator reader Tony B e-mailed us about just such a situation. What was going on, he asked.

Apples and oranges

At which point, let me refer back to a little ancient history.

Many years ago, back in the days of the Total Expense Ratio – the forerunner of today’s OCF – I’d encountered something similar in the context of index trackers.

The culprit? A Financial Services Authority-mandated formula for calculating costs, which had specified the inclusion of some costs that the tracker industry had traditionally excluded from its calculations.

Nothing underhand was happening, and the differences between the two calculations showed up in each tracker’s tracking error.

It was possible that something very similar was going on here, I reasoned. But I couldn’t know for sure that this was the case.

For valuable readers like Tony B, we like to go the extra mile to get to the facts.

Call the experts

So I picked up the phone and called the Association of Investment Companies (AIC), which is the trade association representing investment trusts.

I knew it had been running a vociferous media campaign, arguing against the unthinking imposition of KIDs on the investment trust industry.

Where do KIDs come from? Imposed Europe-wide on the collective investment industry at the start of 2018, KIDs caused a number of difficulties, specifically in terms of the measurement of risk and performance. So much so, that open-ended investment funds (OEICS) have now been exempted from the requirement until 2022, by which time it is hoped that the problems with them can be fixed. But closed-end funds – investment trusts, in other words – haven’t been granted equal exemption.

Ever helpful, the AIC provided me with chapter and verse.

Here, thanks to Ian Sayers, the AIC’s chief executive, and Annabel Brodie‑Smith, the AIC’s communications director, is the low-down on what Monevator readers need to know about charges and KIDs.

The facts, and just the facts

• Every investment company1 KID follows a standardised cost disclosure, showing a projection of the impact of costs over the next one, three, and five years. The ‘other ongoing charges’ section of the KID shows the costs of the investment company managing its investments and the costs of running the company, such as accounting charges, but it also includes the costs of borrowing and stock lending.

• On the other hand, the standard AIC-defined methodology used by the industry calculates ongoing charges based on the expenses levied by an investment company over the last financial year. The ongoing charge includes the costs which investors can expect to reoccur each year, so it includes an investment company’s investment management charge and the costs incurred running the company such as directors’ fees and auditors’ fees.

• Importantly, the AIC says the ‘other charges’ figure quoted on the KID already includes the OCF. The two charges are not additive. In the case of City of London, for example, the KID methodology suggests overall costs of 0.88%, made up of ‘other charges’ of 0.85% (which includes the OCF of 0.41%) and ‘portfolio transaction costs’ of 0.03%.

• To compare investment companies and OEICs, investors should use the ongoing charge because this is the same methodology currently being used by open‑ended funds. When comparing investment companies, the traditional OCF will provide a consistent basis of comparison, but KID-derived figure may not, because the KID rules allow for different interpretations and can lead to different outcomes.

• The KID cost figure is best thought of as a set of costs, projected into the future, based on certain assumptions regarding investment company performance. The traditional OCF is best thought of as a set of (mostly different) actual costs incurred in the most recent financial year.

What to make of it all?

The AIC and the investment company managers that it represents are in no doubt: KIDs are flawed, and must go.

“The AIC has argued strongly for KIDs to be suspended as their flawed methodology for calculating risk and potential returns could be dangerously misleading to investors,” its chief executive Ian Sayers told me. “We have repeatedly called on the FCA to protect consumers by warning them not to rely on KIDs when making investment decisions.”

“The implementation of KIDs for UCITS funds has recently been delayed by two years to January 2022. We believe the KIDs rules should be suspended because they are systematically flawed due to their reliance on past performance as a basis for future projections. We need time so the rules can be fixed once and for all: if KIDs are not good enough for open‑ended investors, then they are not good enough for purchasers of investment companies.”

My take? Not for the first time, we see – doubtless well-meaning – financial regulators muddy the waters.

Whatever fix eventually emerges the likely impact will be deleterious.

With an investment industry repeatedly and loudly calling for KIDs to be fixed — and to be dumped until they are fixed — the result is that the KID brand is in danger of being irreversibly tarnished.

That’s not good for investment trust investors. It’s not good for the investment trust industry, either.

Read all of The Greybeard’s previous posts on deaccumulation and retirement.

1. The AIC talks about investment companies, and I have retained that usage here. For most purposes, and most investors, investment trusts and investment companies can be thought of as being the same thing. All investment trusts are investment companies; not all investment companies are investment trusts. And although this isn’t the only difference between the two, investment trusts are UK-domiciled, while investment companies need not be UK domiciled. [↩]