When The Accumulator opened his Investing Confession Booth a few years ago, I didn’t know where to look.

Having started my investing journey as a more or less passive investor, I’ve sinned, sinned, and sinned again.

Still, it’s all relative. My active investing exploits make sense to me, and whether or not they’d find my decisions advisable, investors like Warren Buffett or Neil Woodford would recognize what I was doing, were they unluckily enough to be trapped in a lift with me and my laptop.

However, I’ve also got what we might call ‘off-spreadsheet items’.

These assets are part of my net worth, but for various reasons I don’t include them in my tracked and benchmarked investment portfolio.

For instance, I’ve socked away a big chunk of cash for a house deposit. Who knows if I’ll ever buy my white elephant, but I don’t want this six-figure sum dragging on my portfolio’s returns, since I’m not sitting in cash for reasons of investment judgement. Rather it’s for time horizon and real-life reasons.

I also keep my NS&I index-linked certificates to one-side. Usually these are lumped into my house deposit in my thinking, but sometimes I judge they’re too precious for that. Anyway, they’re also off-spreadsheet.

Illiquid/unlisted equities lurk outside, too. More on those another day.

And then there are things that are really risky, silly, or unjustifiable – or all of the above.

Things like my (mini) mini-bond portfolio.

Mini guide to mini-bonds

I don’t have a vast amount of money in mini-bonds. All told around 1% of my net worth.

That’s my main defence out of the way! (One can easily argue that it’s still 1% too much.)

But what, you might ask, are mini-bonds?

The cynical answer is that they are 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 am not (quite) so cynical.

A mini-bond – like any corporate bond – is effectively an I.O.U. from a company in return for your money. An I.O.U. with legal obligations wrapped around it.

What it boils down to is you give your money to the company in exchange for the promise that your money will be returned to you at some point, with regular interest payments until then.

So far, so much like a corporate bond.

However there some differences:

• Mini-bonds are aimed at retail investors (i.e. Joe Schmoes like us).

• They are not traded on exchanges, and so they cannot usually be bought or sold. Rather they are illiquid. You invest in them when they’re issued, and you hold them to maturity.

• The fixed lifespan of a mini-bond is short, with terms typically three to five years.

• You are not covered by the Financial Services Compensation Scheme.

• Some issuers have claimed they will allow existing mini-bond investors to rollover their bonds at the end of the term, which could be attractive depending on the environment (and the company’s fortunes).

• Yields are far higher than what retail investors are accustomed to getting from conventional investment products these days, especially from savings accounts. However the risks are different, and much higher.

• Mini-bonds are invariably issued by smaller companies – often barely start-ups.

• You usually get perks for being a bondholder, dependent on the issuing company – discount cards, free coffees or cakes, that sort of thing.

• The prospectuses are thinner than typical corporate bonds, and presumably legally less potent. (I suspect most people read neither anyway, and as a small investor, realistically speaking you’re relying on others in either case.)

So far so dubious, but these characteristics interact to make mini-bonds even dodgier investments than you might think, for an easily overlooked reason.

Your word is my bond

What mini-bonds most remind me of are investments from the old days – and by the old days, I mean the 16th and 17th Century.

Old, old!

Back then merchants and the occasional outré aristocrat would band together to put money into ventures untroubled by anything so futuristic as regulators, compensation schemes, or a transparent market.

This meant the soundness of an investment had to be entirely decided upon by the individuals.

Now you might think that still happens when a stock picker like me decides to buy, say, shares in Apple or IBM.

But that’s not really the case.

When I invest in publically listed shares, I am freeloading on the thinking of thousands of investors who’ve previously weighed up the pros and cons of the company concerned.

All their deliberations are (theoretically) in the price.

And when a passive investor buys the market via an index fund, they’re benefiting from this “wisdom of the crowd” writ large.

But mini-bonds (unlike conventional bonds) are not traded on markets. Because professional investors are not their target market, even the initial yield can be set without having to worry about pleasing the world’s smartest bond investors.

Indeed, to bother with the fuss of issuing a mini-bond, a company may have already been turned down for a low-hassle loan from a bank or a specialist investor – entities that know rather more than most of us about evaluating debt-hungry smaller companies.

No, mini-bonds only have to appeal to the hoi polloi like me.

In fact it’s even worse, because false modesty aside I’m surely at the more sophisticated end of the potential mini-bond buyer spectrum.

Indeed I sometimes suspect pricing might just come down to figuring out what’s the lowest yield the company can get away with to attract retail punters – with a few free donuts thrown in.

Reader, I bought some

It was this unattractive proposition that kept me away from mini-bonds when they first showed up. I even wrote a couple of strident posts warning of the downsides.

But over time, I’ve softened my stance a little.

I noticed early issues from brand-driven consumer-facing companies seemed to do well. In contrast, a couple of the more opaque financing-focused ones defaulted.

There was something to learn here, so I decided to invest some money.

I didn’t do so completely witlessly. I spread my modest mini-bond allocation among multiple issues to reduce company-specific risk. I read the prospectus and the business plans. I avoided mini-bonds that smacked of financial engineering.

In particular I concentrated on companies where I could see several reasons to raise money via mini-bonds, rather than going to a bank.

For example, consumer-facing companies might see the bond as a publicity boost, or a way to recruit thousands of advocates who will act as unpaid marketers in directing their friends and family towards their products.

Finally, all the bonds I’ve bought were via crowd-funding platforms. While this is no substitute for a true market, my feeling is there is potentially a wisdom of crowds effect here, or at the least a lot of people who can give a potential mini-bond a sniff test.

And I have seen several mini-bonds rejected and withdrawn.

That suggests you can’t just flog any old nonsense as a mini-bond. (At least it has to be a certain kind of nonsense!)

My mini-bond portfolio

I am not going to name specific mini-bonds. Rather, here’s my portfolio in abstract terms, which I built up over a couple of years:

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

So, fairly diversified in terms of company specific risk, but not so much in the bigger picture, as it’s clearly a bet on the consumer economy, principally in London. (You probably won’t be surprised to hear I was happier with this before Brexit!)

More positively, you can see the yield is quite attractive – though probably not enough to really compensate for equity-level risk for fixed income returns.

What do I mean by that?

Simply it’s very possible that one or more of these bonds could default and see me losing some or all of my investment, without the compensation that others could go on to deliver years of “multi-bagging” returns like with shares. My upside is capped (the interest payment, plus my return of capital) and the downside could be 100%.

I’ve not had any bonds default yet – and I’m past the halfway mark for my oldest mini-bond. But I’m prepared for one or perhaps two to cause problems. Beyond that and this ‘fun’ mini-bond portfolio will become an expensive headache.

Regardless, my 1% net worth exposure is not going to change my world. Putting money into a mini-bond is not like buying the lottery ticket of shares in a small cap stock that could become the next Microsoft.

The most I can do is grow my 1% to 1.5% or so over 3-4 years.

Big whoop!

So why, really, did I bother?

Well one reason is that I don’t call myself The Investor for nothing.

I am interested in investments of all kinds, and I have a very high risk tolerance.

Shares, corporate bonds, unlisted companies, spreadbets, venture capital trusts, EIS schemes, National Savings certificates, fixed interest savings bonds, overseas stocks, options, investment trusts, funds, trackers, subscription shares, warrants – I’ve owned them all.

It also doesn’t hurt that I have a website that’s dedicated to this stuff.

I can chalk it up as homework!

Of human bond-age

More seriously, investing in mini-bonds (and in the equity of start-ups) is active investing without a safety harness. You’re pretty much on your own, as I explained above.

There are some upsides. Specifically, you often get to meet the entrepreneurs behind the companies in an informal environment in a way that it’s just not possible with the CEO of BP, say – or even a legally-hamstrung AIM company director.

You can see how they hold their drink when you ask them a tough question and then you can suck on your straw and observe their answer.

I’ve mentioned before that one possible future I see for myself is as some kind of active angel investor, or possibly even the owner of an investment-related company. Long before then, I want to repeatedly test my ability to evaluate whether people, companies, and my money should get acquainted.

I want to improve. Until I get a ticket at the big table, these crowd-funded offerings are one testing ground.

Possibly I’ll lose some money. There’s always a price to an education.

Mini mogul

I must admit I enjoy my mini-bond investments at least as much as my far more sizeable investments in listed shares.

It’s fun using your investor card, for example, at a start-up you’ve put money into, and to have a chat with staff about how things are going.

Heck, it’s nice knowing your money went directly into funding the growth of something new – rather than that you just bought some second-hand shares off another private investor like yourself.

True, it’s not nice enough for me to allocate more than 1% or so of my funds to mini-bonds. But I’m glad to be involved.

Incidentally, I’m especially glad given that the mini-bond opportunities seem to have dried up recently.

From talking to insiders, it seems part of the reason is that peer-to-peer platforms have undercut the yields on mini-bonds. So companies are going to peer-to-peer instead of bothering with the rigmarole of issuing a mini-bond.

Will this end in tears? Will my mini-bond portfolio crash and dwindle, for that matter?

For all the talk of reinventing finance, it’s hard not to believe that the various Fintech ¹ innovations are being at least partly nurtured by super low interest rates that have encouraged bolder investors to venture into exotic and newfangled products.

And it seems unlikely these will all prove to be a ‘free lunch’ in the wider tale of investors chasing yields.

Time will tell. At least I got a free coffee…

1. Financial Technology.[↩]

Good reads from around the Web.

I dread to think how many articles I’ve read about retirement spending over the years. Especially as I’m not even personally super-interested in the subject.

I’m certainly not like my co-blogger, who is constantly tweaking his parameters like a SETI researcher who thinks he might just have made first contact but is worried he could have just discovered a bird nesting in his satellite dish.

Many readers also seem to be searching for their perfect numbers, via spreadsheets, the latest safe withdrawal rate estimates, and micro-projections about their portfolio’s future returns.

I simply aim to have enough money to live off the income, whatever it may be, and to cut my cloth accordingly.

I appreciate though that this is a lofty goal for anyone who isn’t an investing fanatic with knowingly Spartan tastes and no spouse or kids (and a quixotic one, given that lack of heirs) and so I am forever reading articles on the pros and cons of this or that withdrawal method, especially when compiling these links.

Every week I come across at least a couple of takes on the subject – old news for most of us, but potentially an eye-opener for someone new to sorting out their finances. Each piece has to go through the sniff test.

All of which is a long-winded way of saying I actually read something a bit different this week in a Wall Street Journal article about the same old subject.

The author, Dr Shlomo Benartzi, is a professor at UCLA specializing in behavioural finance. The article is about how to maximize happiness in your retirement spending, rather than simply how to stretch it as far as possible.

The whole piece is worth a quick skim even if you think you’ve read it all before, but the idea I found most interesting was to include deliberate “spikes” in how you dole out your retirement dosh.

Informed by the way a kid enjoys chocolates as a treat but would grow bored if it was on the menu three times a day, the author suggests that in retirement:

…instead of gorging on candy, people would receive larger sums of money at various intervals, before resuming their regular payment schedule.

For instance, clients might enjoy a “luxury summer,” featuring higher levels of spending that allow them to travel around the world first class.

Although very few financial plans offer such a feature, people seem to know they’d like it. According to a survey by researchers at Harvard Business School, a majority of people want a retirement distribution featuring a “bonus month” every year.

This method provides an important psychological benefit. Because the higher drawdowns are a special treat, we never adapt to the elevated level of consumption.

The luxury summer feels like a special reward.

It’s a novel idea that would surely liven things up, if you can afford to include it in your plans.

Have you any other ideas about how to make your retirement spending more than just one long slog of spending money month in, month out?

[continue reading…]

For various reasons, I don’t write much about my active investing these days on Monevator.

One reason is we’ve found our niche explaining why you should ignore 90% of what’s written about investing in the popular press and instead invest passively.

In that light it’s no fun having to re-explain my antics to people who read Monevator for the passive material and who – understandably – get perplexed by what I’m up to.

(This series is my best explanation if you’re interested.)

The schism is made worse by my passively pure co-blogger The Accumulator still being mainly away writing the mythical Monevator book.

We used to do passive posts Tuesday, active Thursday, and the free-for-all links on Saturday.

But with that routine constipated due to a lack of Accumulated fibre, there seems to be even more upset and indigestion when I go off-piste.

Golden years

But there’s another big reason why I’m not writing so much about my active ideas at the moment.

And that is I haven’t got so many convincing active ideas!

There’s a passage in The Snowball, Alice Schroeder’s biography of Warren Buffett, where she talks about how in the 1950s Buffett kept finding “golden apples” lying around on the floor – and he could barely believe they hadn’t been picked up.

Hindsight is wonderful – and I know my stock picks didn’t always feel like no-brainers at the time – but still, that’s a little like how I felt between 2009 (when I was pretty sure the market was cheap) and 2013 (by when most things had been re-rated).

For instance, consider UK commercial property REITs, which appeared a good bet to me in the aftermath of the credit crisis.

As late as December 2011 I was able to write that:

If you believe the pessimism about Europe and the global economy is overdone, then some REITs offer good yields as well as seemingly undervalued assets for you to snap up.

In that article I suggested diving deeper into the small cap end of the property market, highlighting six companies I thought looked interesting.

Here’s how their share prices did between then and now:

Company	Gain
Daejan	115%
J Smart	31%
McKay Securities	75%
Mountview Estates	163%
Mucklow Group	73%
Panther Securities	1%
Average	77%
FTSE All-Share	31%

Source: Google Finance / Yahoo Finance

Golden apples, alright.

I don’t have total return data to hand, unfortunately, but taking into account dividends the outperformance of these six shares versus the wider UK market would be even better – and income is often the major attraction of holding commercial property.

Of course I owned a lot more in my portfolio than just these winners. In fact at the time of that article from memory I held precisely none of them, though I was buying various UK commercial property firms on and off throughout the period.

But that isn’t my point here. I’m simply highlighting that bargains could indeed be found strewn about a few years ago, at least the way things turned out. (“Things” including no UK recession or Eurozone implosion, and continued easy money from the Central Banks).

Brexit bargains

It’s been tougher sledding recently. Aside from the odd bit of “plunging” during market sell-offs, I’ve been mainly hunting around in commodities and energy companies, emerging markets, and financials over the past 12-18 months.

These have been anything but easy buys, and not always good ones.

I’ve repeatedly traded around my UK and US bank positions as they’ve waxed and waned, for instance, and while emerging markets have come good, I was optimistic too early. Energy has been strong in 2016, but 2015 was carnage.

However this year did provide one great buying opportunity – at least in retrospect.

The market was chaotic in the hours and days that followed the Leave win in the EU Referendum, as terrified investors raced to dump their UK shares.

I should know, because as an avowed Brexit-phobe I was among the dumpers.

In the weeks afterwards I felt I’d done okay getting through Brexit intact, especially considering how surprised I was by the result. I saw my portfolio rally like everyone else, and I tried to forget about the two or three holdings I’d sold at steep discount in the aftermath.

However it’s become obvious that as an active investor I left money on the table.

I’m not even talking about the crazy buys you could make the morning after the vote before.

Yes, in theory you could buy big UK banks at 20-30% or more down, but liquidity was non-existent. You had to buy blind, and you could only guess at what we now know – that a systemic crisis was not underway.

I’m thinking more about the good companies that were marked down in the sell-off and took some weeks to recover, even as the smoke cleared.

I picked up a couple of things, but overall I was too timid (partly, no doubt, because of my feelings about Brexit, even as Britain’s post-vote resilience has confounded me).

Six of the best

There does remain one corner of the market that I feel is still suffering from a Brexit hangover, however. While it might not be exactly strewn with golden apples, I think it’s probably not stuffed with rotten ones, either.

To go full circle, that corner is commercial property – specifically the big UK real estate investment trusts (REITs).

The REITs fell in the wake of Brexit and the coincident closure of several property funds, and they have not yet fully recovered.

The following table shows how the six largest such REITs are priced relative to their recent-ish peaks, and also their price-to-book value (a measure of the premium or discount of their price compared to the value of the assets on their books).

Company	Decline from 12-month peak	Price-to-book ratio
Land Securities	-23%	0.7
British Land	-28%	0.7
Hammerson	-11%	0.8
Segro	-2%	0.96
Intu Properties	-18%	0.8
Shaftesbury	-2%	1.15

Source: Google Finance and Company Refs

Well, that’s an interesting table, isn’t it?

The first thing I’d say is that dramatic as some of these falls are, prices have bounced since the bottom of the Brexit sell-off.

Shaftesbury fell 14% the day after the EU Referendum, for example, to hit 822p. It’s since risen 18%. And while British Land is still dramatically below its highs, it got as low 545p in the wake of Brexit, compared to today’s 632p.

So the panic seems to be wrung out, even if some of these shares are still languishing.

The more interesting column for me though is the price-to-book ratio.

In the case of British Land, for example, it most recently declared its net asset value per share to be 919p as of the end of March 2016.

In theory then, if you buy British Land shares today for 631p, you’re getting a 30% discount to their underlying value.

Bargain!

Well maybe – but things are obviously not quite so simple.

Why the discounts?

There are many reasons why REITs might trade at a discount to their net asset value (that is, NAV or book value):

1) NAV too high: Investors might not trust the NAV, either because they suspect it was over-stated at the time the accounts were filed, or because they think that underlying prices (buildings, in the case of REITs) have fallen since then.

2) NAV will fall: Investors may fear that prices are going to fall in the future, and so try to factor that into their purchase price now.

3) Supply and demand: Perhaps the typical investor believes the NAV is just dandy and reflects reality, but there simply aren’t enough buyers around compared to people selling for whatever reason to hold up prices.

4) Dividend yields can be a factor. If alternative yields are more attractive, dividend-minded investors may not buy REITs until the yield becomes competitive, which could cause their share price fall to increase the yield, even if the underlying NAV is unchanged.

5) General uncertainty: If you’re less sure about the future of the economy or the markets, you’ll typically demand a bigger discount. This is especially true in the case of REITs, where the underlying holdings (buildings!) can take months or years to sell, and where some of the NAV may include developments that haven’t yet been built or sold.

All these factor interrelate, of course. For instance it’s unlikely that investors will be demanding steeper discounts to NAVs and higher yields without something similar going on in the real-world market for physical property.

I should mention here that commercial property has its own sub-language, especially in the US, which talks about ‘cap rates’ and so on. At the end of the day though the metrics of investing are the same.

There a few fundamentals worth keeping in mind with commercial property, however:

• It is illiquid. You know how it can take an age and a small fortune to sell your house? Same here.

• Rents can be illiquid, too, for want of a better word. Rent reviews may be upwards only, for instance, so tenants cannot theoretically negotiate discounts. But they can go bust, so… Also at times of high inflation, rents may not keep pace (which can be a bit of a knock on commercial property’s inflation-fighting credentials in the short-term).

• Commercial property is fueled by debt, just like manure grows crops.

• The front line of the sector is speculative. Combined with all that debt, this means commercial property goes through cycles of booms and busts, especially in big cities.

I’ve written more about commercial property if you’re interested.

Opportunity knockers

So are these big REITs on a discount screaming buys?

Who knows – but I do think they’re worth a second look.

True, when you see discounts of 30% or more to book value, you might think the market knows something certain about their underlying NAV.

And there are dark clouds around, for sure. Negative voices were calling the top of the UK commercial property market even before Brexit threatened to send tens of thousands of bankers and related office jobs overseas.

However there’s not much sign so far that property prices have slumped 30%, or anything like it. In fact we’re only a few percent down since Brexit, and the pace of decline even in the capital is slowing.

The take-up of office space in London bounced back relatively quickly after Brexit, too.

Also, if you believe that the big discounts to NAV reflect the market cunningly sniffing out an imminent London property crash, then you have to square London-centric Shaftesbury trading near NAV with, say, Land Securities trading at 0.7x.

Their portfolios are not exactly the same, sure. But they share enough in common that the idea one could be slammed while the other sales through unmolested seems fanciful.

The big REITs are in general not highly-geared, either – certainly they’re not overloaded with debt like they were back in 2007 ahead of the last downturn.

This all raises the possibility that there’s a dislocation here in terms of price and value.

Popularity contest

Price-to-book ratios do definitely swing about in this sector.

In the two years between spring 2013 and spring 2015, for instance, British Land mainly traded at a premium to book value. (i.e. The price to book ratio was over 1x.)

Premiums may be justified if investors have correctly anticipated further gains to come – perhaps because the future value of development projects are modestly carried on the books, or because underlying prices for offices or shops are rising faster than company accountants can keep up.

But fluctuating ratios just as often reflect changing sentiment, too.

I can’t help noticing that the three companies with the largest discounts in my table are the three largest UK REITs. This trio alone comprises about 35% of the iShares UK Property ETF.

I wonder if they’ve been sold off more harshly – or have taken longer to recover – precisely because they’re so big and relatively liquid?

I read somewhere that open-ended commercial property funds were holding REITs in lieu of cash, and selling them when investors began redeeming their funds after the Brexit vote. Perhaps that’s piled on the pressure?

Because I remain relatively unconvinced about the UK and London’s medium-term prospects (I mean compared to the more positive view I had of the business-as-usual scenario rejected by voters in June) it’s hard for me to get super-excited about this apparent opportunity.

However I’ve had a nibble of Land Securities and British Land, among the big REITs I’ve mentioned today, and I may well buy more.

Time will tell if there’s a worm in these apples!

As mentioned I own shares in Land Securities and British Land, so who knows what biases are influencing my thinking. As always this piece is NOT a recommendation that you or anyone else should buy any shares mentioned. You must do your own research, and make your own decisions. Good luck. 🙂