Good reads from around the Web.

I have a soft spot for Hetty Green, and a bit of sympathy. There’s no doubt this super-investor of a century ago was a craven asset accumulator who put amassing a fortune above all else, but then so has been Warren Buffett for most of his life.

Yet whereas “Uncle” Warren is lovingly known as the Sage of Omaha, Hetty Green has gone down in history as “The Witch of Wall Street”.

Her black dress and hat didn’t help, but I think it was her ruthless and successful market raids in times of strife that got up people’s backs (or let’s face it: men’s backs).

Like Buffett, Green was greedy when others were fearful, amassing vast quantities of assets during downturns and then selling them at her leisure when the good times rolled.

This was back when cartels of wealthy speculators really did gang up to break each other and Green stared down more than her fair share.

She ended up insanely wealthy.

The only way is not up

I’ve been thinking about Hetty Green because for the first time since 2009 I’ve been a net withdrawer of money from the market this month.

Only a per cent or two here and there. Nevertheless it feels odd.

This year I’m not only doing it to defuse capital gains tax. I’m selecting the option to “transfer money back out to your nominated bank account”. In metaphorical Lord of the Rings terms, this is a dusty, cobwebbed path that has only been whispered about in myths and legends in my house.

I’m obviously not calling a top, nor claiming an ability to. As it happens I don’t share the doomy prognosis that this whole rally is built on phantasmagorical easy money. And for what it’s worth, I think the market is far more likely to be 100% higher than 25% down in five years time.

But there’s no denying these are “good times”. In contrast I remember ransacking my loft for semi-valuable junk that I could flog on eBay to keep buying even more shares during the darkest days of 2009.

I was lucky, but I might not have been rewarded so quickly for my boldness. The fact is I became massively overweight in equities, and I was very conscious of this when I welcomed my more level-headed co-blogger The Accumulator to the Monevator fold the following year.

My Colonel Kurtz style expedition to the limit of stock market exposure was not what I’d created this blog to be about. The Accumulator practices what he preaches.

Back to reality

That was then and this is now. Things turned out okay, and it’s just as important to be fearful when others are greedy as the more oft-cited opposite.

Having run with far higher equity exposure than is prudent for anyone who still hopes (/needs) to use a fair slug to buy a house, I’ve started dialling it back. I’ve been withdrawing cash, and also shifting some money into safer stocks and preference shares.1

Hopefully I’ll finally buy a house or flat soon (I really do want that big, cheap mortgage). But if I don’t buy then cash is an amazing asset over the short-term, even at a time of diabolically low rates, thanks to its great optionality.

Moody blues

As of Friday I’ve pretty much tripled my net worth since those 2009 lows (not entirely due my investments rising, but they did most of the heavy lifting) and if I’m honest I feel myself getting impatient if my portfolio doesn’t end the day or the week higher.

I’m taking for granted daily moves in my net worth that surpass my monthly earnings. A terrible sign!

This is a dangerous mood, and I’ve known it before — from before the crisis of course. Yet I probably wouldn’t be taking out anything if I already had the house. I would probably just tune the active portion of my portfolio to a more passive auto-pilot setting and take the summer off to refresh.

As it is I will definitely need some of this money within the next five years (perhaps the next few months) so I’ve returned to Personal Finance 101.

Or as The Accumulator might call it, sanity!

[continue reading…]

1. Note I say “some”. I’m one of those nutters who owns a handful of Tesla shares, for example! [↩]

I have long been a fan of income-orientated strategies. Not because the returns from income are necessarily always superior to total market approaches – though at times they can be – but rather because a focus on chasing capital gains can be so ruinous.

Not every decision in investing needs to be about maximising your theoretical return – there are other risks and rewards to think about, such as the risk of getting carried away, or the reward of being better motivated to reach your goal.

Accordingly, I believe in normal times many people would do better focusing on investment income rather than their net worth when calibrating their financial freedom plans.

But these are not normal times. Now it is expensive to have a taste for income:

• Cash was yielding 5-6% half a decade ago, provided you were happy to chase the best rates. Now it pays 2% at best.

• Long-dated UK government bonds will get you less than 2% a year. Gilt yields above 6% were the norm in the 1990s, and 5% was still possible before the financial crash.

• The only shares the market truly loves are dividend paying shares, which has brought the yields down on many of the HYP favourites

Today’s low yields may prove to be rational, and we’ve warned before you may come a-cropper if you eschew cash or bonds in disgust at their miserly yields.

Personally I’m happy to take the risk of holding zero bonds (I’m a more than semi-active investor, remember, unlike my nobler purely passive co-blogger).

I do maintain a larger cash war chest than I otherwise would though (and indeed am about to add more to Zopa).

Coke is it

As yields have been pushed down across the fixed income classes, some safety-first investors have tiptoed into equities.

I suspect this is what has led to the most defensive-looking shares – utilities and the big consumer staples companies, as well as healthcare – doing so well.

You can also see the popularity of dividends in investment trust premiums and discounts. The equity income investment trusts long ago moved to a premium, whereas many global growth trusts still sit on big discounts. I’m just working through the update of my demo high-yield portfolio for next week, and I’ve already noticed my comparison basket of income trusts has truly been on a tear.

When a supposedly safer investment gets more popular, the price appreciation means it’s probably become more risky.

Sure, companies like Diageo and Coke will always be more predictable than miners or metal bashers.

Whether the shares are a safer investment comes down to the price you pay. If people are paying too much for boring dividend stocks, then they will get lower returns than usual in the future.

Hunting high and low

Active investor David Schwartz touches on this theme in his article in the Financial Times. (The link leads to a search list, the article should be up top).

Schwartz writes:

At first glance, a high-yield strategy looks to be worth pursuing. Profits from a steady investment within the high-dividend universe rose by 123 per cent in the past 15 years, assuming dividends were quickly reinvested.

In contrast, a low-yield investment approach resulted in a gain of just 41 per cent.

But the trend was reversed when a 10-year timeframe was used. Low-dividend shares gained 179 per cent since May 2003, against just 135 per cent for higher yielding shares.

Low yield shares did particularly poorly around the time of the dotcom crash, because so many tech firms blew up. In addition, steady ‘old economy’ companies had been shunned for years, which meant they were relatively cheap and sported high yields in 2000.

But very different conditions prevail today.

I’m not suggesting you should now blindly buy low yield companies instead of high yield ones. Passive investors should as always follow the principles of strategic ignorance and simply stick to their asset allocations. Active investors should be wary of any cut-and-dried ‘rules’ at all.

However the steady media and adviser commentary that’s pushing investors towards dividend-paying stocks does seem like an accident waiting to happen:

• Firstly, all share prices decline from time to time. How will bond investors turned reluctant dividend-chasers cope when this bull market finally ends and their portfolios wobble?

• Secondly, according to Schwarz low-yield shares are actually outperforming since 2009, despite the fad for income.

The dividend-chasing I’m discussing here has been most evident over the past 6-12 months, and is mainly a blue chip phenomenon, rather than a market wide one. I don’t think high yielding cyclicals are being targeted, for instance, which may explain that post-2009 result.

I also suspect Schwartz’ short-run data may be skewed by BP’s problems, and by the scrapping of bank dividends during the crisis.

As banks like Lloyds and RBS start paying dividends again, these low-yielders may deliver strong returns as they move back to being the higher yielders of tomorrow.

Consensus is costly

Let’s not get carried away with any of this. Schwartz’ analysis only covers 15 years – a blink of an eye in market terms. It doesn’t prove anything in particular.

Also, a big bonus of income-focused strategies is they substitute trying to trade for profits or even going for total return for simply building up your income streams. When you’re ready to spend the income instead of reinvesting, you just start to spend it.

In my experience income strategies also tend to be less volatile, with reinvesting the higher income helping to further cushion the downside.

All this has advantages (mainly psychological) that may even outweigh the pursuit of the greatest total return that is theoretically available from buying the entire market. Some people may therefore still rationally choose to buy equity income trusts on a premium, for instance, or income-orientated ETFs that may contain relatively overvalued dividend paying shares, even if returns prove to be a bit lower than from racier alternatives – especially if they’re refugees from the bond market.1

Tastes wax and wane. Back when I first got seriously interested in investing, a company’s shares sometimes got dumped for initiating a dividend payout! Growth was everything to a lot of people. Today the opposite seems to be true.

I don’t think even the blue chip consumer-focused dividend payers that are now so popular are in a bubble, exactly, although their multiples look quite stretched in many cases.

But if you’re buying higher-yielding stocks in this market – especially the so-called ‘aristocratic’ dividend payers – because you expect them to deliver higher returns than equities overall, well watch out.

Being in with the popular crowd has never been a route to investing riches.

1. Personally I would prefer certain of the larger global trusts still on reasonable yields and discounts, but each to their own. [↩]

It’s never a good idea to invest in a product that you don’t understand or can’t get good data on.

And while the ideas behind the Powershares FTSE RAFI ETFs aren’t so hard to grasp, getting a handle on how they’ve performed is like a Soviet show trial in numbers – the truth is hard to find.

Why should you be bothered with the RAFI ETFs? Well, they could offer UK passive investors a chance to capture the value premium, via a so-called ‘smart beta’ strategy known as fundamental indexing.

• The value premium offers investors the chance to amp up returns.

• Fundamental indexing theoretically fixes some of the problems of market cap indexing, particularly the tendency to load up on overvalued equities.

• UK passive value funds are few and far between.

Better still, the RAFI ETFs have been available in the UK for over five years now, so we can pit the claims of fundamental indexing against some hard numbers.

However it turns out that getting Powershares, Bloomberg, Morningstar and Trustnet to agree on the performance data about these ETFs is like hoping for consensus at a UN Climate Change Conference.

Pick a number, any number

The following table shows the various returns quoted for the Powershares FTSE RAFI Developed 1000 ETF (PSRD).

Data source	1-year return %	3-year return %	5-year return %
Powershares	16.04	7.86	6.04
Bloomberg	26.16	6.76	6.29
MorningStar	23.22	4.08	4.24
Trustnet	18.5	2.8	3.4

Source as stated

So that’s about as clear as John Prescott then – lots of different numbers that would ideally be the same.

• The figures date from 3 May, except for Powershares which quotes from March 31.

• Bloomberg doesn’t say whether dividends are reinvested. The others all do.

• MorningStar and Trustnet clearly state the returns are annualised. The other two skip the details.

• Powershares’ performance data isn’t available on its retail site. You have to masquerade as a professional client to access such privileged information.

Trustnet’s numbers are clearly off as they’re lower than its figures without dividends reinvested. Trustnet’s net return figures match MorningStar’s total return numbers, bar rounding error, so we’ve at least got some kind of match.

Ultimately, it’s not good enough and I wish Invesco Powershares would present clear, updated, annualised figures on its own website, so that investors can see what these ETFs are really capable of.

Performance anxiety

Inconsistencies also bedevil the other three RAFI ETFs I checked out, namely:

• PSRU – UK equity
• PSRW – All-World including emerging markets
• PSRM – Emerging markets

In the case of PSRW and PSRM, Powershares doesn’t quote performance data for either fund, despite the fact they’ve been available for over five years. Instead it quotes the index performance.

That’s sneaky because the indexes don’t include the fund’s actual costs, which drags down performance like a lead weight.

The RAFI Emerging Markets ETF is known to have suffered significant tracking error due to costs. (Presumably that’s why PSRW and PSRM switched to a synthetic index replication strategy after a couple of years).

A lack of performance transparency is enough to make me give up on a fund there and then. There are already enough potential grey areas and grey hairs associated with investing, without creating extra room for doubt.

But as I said earlier, value funds are hard to come by in the UK. It would be great if I could find strong evidence that these ETFs work, so let’s persevere.

Battle of the value trackers

What I really want to know is that PSRD performs well against other value trackers. I know that value funds can lag the market for many years, so I need reassurance that my value pick isn’t a duffer.

The following index trackers all offer varying takes on the International1 Large Value strategy. The exception is the L&G fund, which is a Large Blend international tracker that acts as a proxy for the market.

How does PSRD match up?

Fund	1-year return %	3-year return %	5-year return %
PSRD – Bloomberg numbers	26.16	6.76	6.29
PSRD – MorningStar numbers	23.22	4.08	4.24
Dimensional Int Core	21.6	7.6	6.9
Dimensional Int Value	23.6	5.2	2.8
DBX STOXX Global Select Divi	24.5	10.9	5.4
L&G Int Index Trust I	21.2	8.0	6.3

Source: As stated or Trustnet

On the whole, it hasn’t been a great five years for value equities, so if PSRD performed as per the Bloomberg numbers then I’m interested. Much less so if the MorningStar (and Trustnet) numbers prove true.

I can’t get a clear signal from the numbers though, and the same story repeats itself for the UK RAFI ETF – PSRU – which seems OK by some lights and slothful by others.

The All-World and Emerging Markets ETFs don’t look great by any yardstick over five years, and have clearly suffered at the hands of reality. Perhaps the synthetic approach will turn things around, but the lack of live data on the site is hardly reassuring.

Case not proven

Here’s the problem. Fundamental indexing is something of a novelty act in comparison to tried and tested market cap investing.

In theory, fundamental indexing is the superior strategy over time, but theoretical advantages can be overwhelmed by the costs and the practical difficulties of real-world application.

I need more reassurance, not less, to take the plunge. If I can’t tell whose numbers to trust – and the ETF providers aren’t making matters crystal – then I’m going to err on the side of caution and leave these funds alone.

I dare say that other funds are afflicted by inconsistent data, too. But bold claims have been made for fundamental indexing and so the supporting evidence should be placed squarely in the hands of investors – assuming the evidence is out there.

Take it steady,

The Accumulator

1. Developed world equities including the UK, but not emerging markets. [↩]