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Don’t be scared by a share split

by The Accumulator on July 30, 2019

Christ I’ve been robbed! That was my first thought as I stared at the 80% loss. Eyes on stalks, stomach in knots – I felt the panic rise like mercury in a heatwave.

This wasn’t 2008. This was last Friday1.

I had logged into my portfolio tracking account hoping for a shot of dopamine. Instead I got a stab in the amygdala. The ‘safest’ ETF in my portfolio was bleeding red.

An 80% loss. In one day. WTF?

It’s a short duration UK gilt ETF – Lyxor’s GIL5. It’s not supposed to do this. It’s supposed to be as volatile as a Care Bear.

What happened? Had the Bank Of England raised interest rates 30% while I was napping? Is the country on fire? Had Boris accidentally nuked London?

I tapped the screen like it was a faulty watch. Surely some mistake. I logged into my platform – AJ Bell. God. It showed the same thing. 80% down. The share price just fell off a cliff.

This can’t be. I needed a rational explanation like a drowning man needs a life belt. Could Lyxor throw me one?

Its chart said everything’s fine, but the chart ended on Wednesday the 24th. The trouble started on the 25th but it doesn’t have a 25th. Why?

Lyxor's ETF performance graph says everything is fine.

At the bottom of GIL5’s web page – beyond the Passporting Information twilight zone – sits a Corporate News & Events link. There I saw a Notice To The Shareholders. Is this where Lyxor buries bad news?

Dear Shareholder…

It’s a share split. A share split!

I’ve been up to my elbows in ETF minutiae for over a decade yet I didn’t know ETFs split.

Relief at last:

The share split will only lead to a change of the number of the shares you hold but will be without any impact on your investment in the Company.

Every old share was split into five new shares. That was the explanation I needed: 1 / 5 = 20%. Hence the 80% apparent loss madness. My accounts haven’t yet updated the number of shares I own, and each new share is only worth 20% of an old share.

The notice continues:

Indeed, as of the day of the share split, the amount of your investment will only be expressed by a greater amount of shares.

So Lyxor is saying my pie is cut into more pieces but I’ve still got the same amount overall. Still, I’d be happier if everyone’s graphs didn’t show an 80% loss. Wherever I looked – Yahoo Finance, the London Stock Exchange – GIL5 jumps off the ledge.

A specialist site had the explanation. Portfolio Advisor confirms the split and say it’s down to my own platform, AJ Bell:

The Lyxor Core FTSE Actuaries UK Gilt 0-5Y (DR) Ucits ETF has temporarily suspended trading as it splits each stock into five new shares firstly on the primary market on Wednesday and then on the secondary market on Thursday.

The price on the ETF on Wednesday was £92 meaning its price would reduce to around £18 after the stock split.

AJ Bell had pushed for the changes to the ETF, which sits in its MPS [Managed Portfolio Service] range across risk levels one to three and in its lowest risk portfolio in its income range, because it makes it easier for smaller pots to invest.

A little more searching turns up an AJ Bell press release featuring its chief investment officer and Lyxor’s head of UK wealth congratulating each other on how the split shows they’re listening to their clients and small investors.

It’s a pity neither firm thought to clearly communicate to their small investors that the imminent 80% drop in their holding was nothing to worry about.

How hard can it be to write your customers a prominent, jargon-free message saying that contrary to appearances you haven’t been taken to the cleaners?

Quite hard it seems. AJ Bell did send a brief corporate action note but forgot to mention that a split leaves the value of your investment unmolested. How many small investors understand what a share split is and how it works?

That’s clueless customer service but Hargreaves Lansdown didn’t even reach that low bar. Their graph shows an 80% loss but they didn’t send so much as a customer message – or at least I didn’t get one.

If there are Monevator readers out there holding GIL5 (AKA Lyxor Core FTSE Actuaries UK Gilts 0-5Y ETF) please don’t worry. Everyone’s systems should soon update and you shouldn’t be left out of pocket.

To the industry: how about thinking about your customer’s needs and communicating to them in plain English?

Everybody hurts sometimes

For me, it was a reminder not to get too cocky. I’ve previously watched my portfolio sink over 20% and barely felt a thing, but this time was different.

My overall portfolio loss was minor but two things spiked my personal fear index:

Any 80% loss in one day is shocking.
I couldn’t explain it. There was no story about volatile equities to hang on to. This just shouldn’t be happening to a short duration government bond fund.

I couldn’t believe it and didn’t want to believe it. Without an explanation my imagination could run wild. I put a stop to that by searching my sources but for a moment it felt like having a dizzy spell, googling the symptoms and reading you might have ebola.

This time it was just a drill, but it’s a reminder that the worst that can happen is like nothing I’ve ever experienced.

Which is the reason I have those boring short-duration bonds in my portfolio, of course…

Take it steady,

The Accumulator

July 26 2019 in case you’re reading this in 2031 or whenever. [↩]

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Weekend reading: Pride, prejudice, and passive income

by The Investor on July 26, 2019

What caught my eye this week.

A bookish child – more wannabe poet than would-be Buffett – I first learned that some people could live off their capital from the novels of Austen, the Brontes, and Dickens.

So I was glad to stumble across this piece from April, where the author explores the context of the “£10,000 a year” passive income enjoyed by Jane Austen’s Mr Darcy.

From Pride and Prejudice:

“Mr. Darcy soon drew the attention of the room by his fine, tall person, handsome features, noble mien, and the report which was in general circulation within five minutes after his entrance, of his having ten thousand a year.

The gentlemen pronounced him to be a fine figure of a man, the ladies declared he was much handsomer than Mr. Bingley…”

Even the leanest pursuer of financial freedom wouldn’t consider £10,000 to be a sustainable income these days. I’m not sure it impressed me much as a kid, either, although I’d now respect it as suggesting Darcy boasted a pot of at least £250,000 (presuming he had a flexible withdrawal rate in play).

But 200 years ago, a passive £10,000 a year meant you were fabulously rich.

A previous piece by the same author, Joakim Book, estimated Darcy’s wealth might have a purchasing power of as much as £400m in today’s money!

Consol yourselves

Joakim’s newer article is a wonderfully geeky dive into the history of a particular kind of UK government debt – Consols.

These perpetual bonds were central to the financial planning of well-off families, such as the Bennets in Pride and Prejudice:

Once the Bennet parents pass away, the £5,000 of Consols could be divided equally among her children; Lizzy’s share would be a thousand pounds, which earns her an annual 4% interest return, or £40 (although maybe several year’s earnings for a regular worker, this was a rather small sum for such rich families – in contemplating Lizzy’s sister Lydia’s imprudent marriage, we learn that Mr. Bennet spent almost £100/year on Lydia’s purchases and pocket money alone).

Being liquid financial assets, dividing up the Consols among children was very easy, and their steady income stream ensured that they would have at least some income.

Bar Napoleonic conquest, the interest payment on the Consols would reliably show up year after year.

It was ever nice to be rich, eh?

Still, a 100% allocation to bonds? You won’t find that in any model passive portfolios today…

p.s. Thanks to The Details Man and The Accumulator for covering me for the past two weeks. Even if it was at the cost of their discovering how many hours Weekend Reading takes to compile and edit, and vowing never to do it again!

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Weekend reading: should retirement be retired?

by The Details Man on July 20, 2019

https://monevator.com/wp-content/uploads/2009/06/weekend-reading.png

What caught The Detail Man’s eye this week.

I have long thought that the traditional concept of retirement needs to be put to bed. So I was heartened to read a thoughtful discussion in the Financial Times on what it means to be retired in today’s world:

If ever there was a word that needed to be retired it’s retirement.

What kind of mental picture does this word conjure up for you — sunny beaches and no longer having to set an alarm clock? Or a stressful feeling about how much longer you will need to work to afford such a lifestyle?

Just as our working lives have changed immeasurably over the decades, so has our concept of retirement — not to mention how our long-term savings are structured. So in my own (very happy) retirement, I have been working hard to try and redefine it.

Retirement has an image problem…

I remember as a young(er) lad following my mother around as she visited old lady’s homes to do their perms. Many, at least in the area I grew up in, lived spartan lives. No central heating, old gas stoves, furniture and furnishings from before the moon landings. And they were better off than the poor folks in the run-down retirement homes…

So growing up, my image of people in retirement was one of poor health, poverty and often loneliness. It seemed like a miserable existence.

This image is hard to shift.

…Our memories are stuck in the past

I see a similarity to the late, great Hans Rosling’s arguments that our world view needs updating.

Extreme poverty has fallen by half in the past 20 years, but my mind’s eye clings to the vivid images of famines in East Africa and civil war in Sierra Leone. Sierra Leone has enjoyed three back-to-back democratic transitions since 2007. My view needs updating.

Updating our view on retirement

Hans Rosling’s catch-phrase could have been: “Let My Dataset Change Your Mindset”

So what does the data tell us about retirement?

It’s good news. Those aged 65 to 79 are the happiest in society and pensioner poverty has fallen dramatically:

I accept it’s not all sunshine and rainbows. There are still many retirees in poverty and large levels of inequality. Especially between those nearing retirement (and on drastically lower benefits) than the actually retired.

But overall, the financial picture is relatively healthy for Britain’s senior citizens. Back to Don Ezra in the FT:

For starters, few people I know of traditional “retirement age” want to stop working completely. They might want to spend less time working, or do a different kind of work, but they still want to be active.

While more specific, the phrase “life after full-time work” is a mouthful. So I created an acronym for it, using the first letters: (l)ife (a)fter (f)ull-(t)ime (wo)rk, and it came out as LAFTWO. Aha, I thought, that’s how my Texan friends would say “Life Two”. And suddenly three years of assembling thoughts fell into place, and acquired a structure, purpose and much more.

Life One is our grown-up working life. Life Two is what follows. It’s the best part of life, so much so that Life One is just the long prologue that finally gives way to the main event, when enjoyment, happiness and fulfilment peak.

I think Life Two is quite catchy. What do you think?

P.S. Normal service will resume next week with The Investor back in the seat – so look forward to more Brexit rants and fewer tenuous links…

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Weekend reading: the death of active management will be long and slow

by The Details Man on July 13, 2019

What caught my eye this week.

Surprise! For reasons still not clear to me, The Investor has handed me his beloved babe – Weekend reading – for a special guest edition.

Before you collectively drop your monocle in your soup, have no fear. I’ll have a little joyride before safely parking back at Monevator Towers.

That old skool reference leads me to what caught my eye this week: the trends that may end with the baby boomers.

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