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Weekend reading: Investment trusts ought to tread carefully when talking about market setbacks

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What caught my eye this week.

I was a little disappointed to hear (via DIY Investor UK) the Chairman of City of London Investment Trust making vaguely fearful noises about the liquidity risks of Exchange Traded Funds (ETFs).

City of London has a very good story to tell – its charges are low, and it’s beaten the market over three, five, and ten-year periods. It doesn’t get much better for an active fund, really.

And to be fair, compared to some outlandish charges you hear, the passive swipe made in its final results is pretty innocuous:

It also remains to be seen whether passive funds such as Exchange Traded Funds provide sufficient liquidity in a bear market because they have not been tested in their current size.

By contrast, City of London’s gross assets now exceed £1.5 billion and its market capitalisation stands at just under that figure.

Our size means that we provide investors with a ready liquid market in our shares and our closed end status enables us to ride out market setbacks without being forced into selling sound investments at inopportune moments.

But while all that’s technically true, I don’t think issues about the size and structure of the ETF market are very relevant to investors in City of London.

Yes, the ETF market is far larger than it was a few years ago. And yes, during moments of dislocation, ETF liquidity can be interrupted.

However these interruptions have tended to be very brief – think minutes, not days. Most of the time only smaller ETFs investing in much less liquid securities see any sustained mispricing. (I’d be cautious with so-called ‘liquid alt’ ETFs for that reason).

Moreover, as an active investor I see investment trust prices jumping around and spreads widening and shrinking all the time. Trading at a discount (or premium) to underlying assets is pretty much a feature not a bug for investment trusts. Indeed during the last bear market, the discounts to net assets on income investment trusts soared – as I flagged up at the time.

It’s true that the closed-ended nature of an investment trust means it does not need to sell underlying assets in a panic, which can be a benefit – especially if you want exposure to those less liquid assets where niche ETFs may struggle.

But the share price of the trust itself always fluctuates. And when the underlying market they invest in is in freefall – such as in a market crash – you can be pretty confident a growing discount will reflect that strain.1

Less knowledgeable investors who bought into reassuring words about the size and strength of a particular trust might be somewhat surprised if and when this happens. Especially as I am confident the biggest ETFs trading in the sort of liquid blue chip shares that big income trusts own will more or less function as normal and trade in line with assets for 99.9% of the time, even during a bear market.

Brief disruptions to ETF pricing may be a problem for some kinds of investors – say the hedge funds who use them in place of direct shareholdings to quickly shift their exposure to markets.

But most long-term private investors – exactly the sort who might favour investment trusts – would probably prefer the twice-a-decade 20-minute interruption to smooth pricing that an ETF might suffer over a persistent discount to the worth of their fund in a bear market.

I like the City of London Investment Trust – and not coincidentally my mum is a shareholder – but I’m not sure a fight with, say, a cheap and liquid ETF like the iShares Core FTSE 100 ETF is one it wants to pick.

From Monevator

Our updated guide to help you find the best broker – Monevator

From the archive-ator: You don’t have to go nuclear on work – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.2

London house prices fall for first time in eight years… – Guardian

…and are a ‘high risk bubble’ claims UBS – ThisIsMoney

Stamp duty receipts have soared 33% since ‘paralysing’ reforms – Telegraph

Krugman: There is “zero chance” of Brexit being good for UK economy – Independent

Carney gives strong hint of an imminent rate rise – ThisIsMoney

Complaining on social media could leave you open to fraud – ThisIsMoney

Why robot traders haven’t replaced all the humans at the NYSE, yet – Quartz

Data showing how one Uber driver's earnings were hit by ban talk.

A London Uber driver’s day on the road mapped out [Search result]FT

Products and services

Metro Bank’s new 1.95% one-year fixed savings rate is a table topper – ThisIsMoney

Economy Energy has launched the cheapest tariff on the market – ThisIsMoney

Forget pension freedoms, we want annuities again – Telegraph

New Amazon smart home devices include the Echo Show and Echo Spot – Amazon

P2P lender Zopa is et to reopen to new investors [Search result]FT

Hargreaves Lansdown will pay £20-£500 cash back for transfers – Hargreaves Lansdown

Not only do you get £10 off your first Thriva blood test kit with the following link, you can use the code SUM50 at checkout to get a further 50% deduction – Thriva

Comment and opinion

Saving money and running backwards – Morgan Housel

Has Neil Woodford lost it? – UK Value Investor

Three slogans that don’t work for money managers, but should – Validea

Active funds? What we really need are inactive ones – Evidence-based Investor

Why the Equifax breach stings so bad – New York Times

Market myths that hurt investors – Ben Carlson

Nobody knows how this share trading A.I. is making money – Bloomberg

Cryptocurrencies and blockchain investments [Wealth warning!]Wexboy

New highs should be bought, not sold – The Irrelevant Investor

3 challenging scenarios for value-quality investors – Clear Eyes Investing

Reader case study: Self-employed and free – The Escape Artist

What happens when Warren Buffett runs your pension plan – Bloomberg

Skilled managers “should and actually do” hold fewer stocks – Institutional Investor

What kind of asset is Bitcoin? [Data crunch]CXO Advisory

Interest rates and factor premiums [Geeky]Alpha Architect

Off our beat

Could we already ban the sale of petrol and diesel cars? – BBC

Why Larry Summers is the economist everyone loves to hate [Podcast]Freakonomics

From passion to profit: Turn your hobby into a business – Guardian

A half dozen lessons about writing and getting a book published – 25iq

Crotch Crescent, Titty Ho, and other hard-to-sell addresses – Telegraph

And finally…

“Every morning Jared had to call his chaperone and tell him what he was working on that day. The only thing that made it different from preschool was that you got to carry a gun.”
– Nick Bilton, American Kingpin: Catching the Billion-Dollar Baron of the Dark Web

Like these links? Subscribe to get them every Friday!

  1. Presuming there’s no discount control mechanism in place – and that the trust retains sufficient financial flexibility to use it as the crash continues. []
  2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 27 comments… add one }
  • 1 Retirement Investing Today September 30, 2017, 10:57 am

    “Hargreaves Lansdown will pay £20-£500 cash back for transfers.” Thanks for highlighting this to readers. As you’re aware I’m always trying to minimise my investment expenses. One of the methods I use to do this is to build some wealth in my expensive employers pension fund to take advantage of salary sacrifice and then periodically partially transfer out to one of my SIPP’s.

    Last week I just did this again. I transferred to my HL SIPP for three reasons:
    – To take advantage of the offer you highlight;
    – HL allow an electronic application and electronic transfers are possible with many pension providers. This meant I applied on the 17 September and the transfer was in my HL SIPP by the 20 September; and
    – I now have sufficient wealth in the HL SIPP that means my annual charges in this wrapper are already maxed at £200 provided I stick with Shares, investment trusts, ETFs, gilts & bonds. I bought VERX with an OCF of 0.12% and VUSA with an OCF of 0.19%, both ETF’s, meaning no extra HL annual charges.

  • 2 @algernond September 30, 2017, 11:59 am

    @RIT I can’t see anything about the cash back rates on the website…. Do you have to go through the application procedure before you find out?

  • 3 Retirement Investing Today September 30, 2017, 12:17 pm

    About half way down this link http://www.hl.co.uk/pensions/sipp you’ll see a red £ symbol. Click on the ‘Find out more’ link for details.

    Cash back rates are:
    £5,000 – £24,999 £20
    £25,000 – £49,999 £50
    £50,000 – £99,999 £100
    £100,000 – £149,999 £250
    £150,000+ £500

    This offer seems to come up periodically. I’ve now used it three times since mid-2015.

  • 4 Lord September 30, 2017, 12:48 pm

    I am truly struggling to understand how unilateral free trade could conceivably be advocated by anyone with any semblance sanity.

  • 5 ermine September 30, 2017, 2:31 pm

    Hehe – after five years’ hindsight I’m still of the view that going nuclear on work is the only way to nirvana. I was so glad to tell HMRC I don’t sell any of myself for money earlier this year. In fact if anything dealing with HMRC as a non-PAYE grunt was even more stressful because of the 101 ways you could screw up. Although it was the VAT man that really gave me a headache, the joy of no more quarterly returns knows no bounds. And getting out before all that making tax digital stuff making it all even more hateful…

  • 6 Retirement Investing Today September 30, 2017, 2:45 pm

    Interesting that even after a number of FIRE years you still view “going nuclear on work” is the way to nirvana. This is still my thinking and I’m still so glad I went for it and achieved FI in a fairly short period with FIRE just around the corner.

    Occasionally I doubt myself a little as a number of bloggers over the years have chosen alternate routes such as part time work very early on as an alternative. I’ve also had bloggers/readers challenge my approach as something they just wouldn’t do. I guess each to their own and it takes all types to keep the world interesting.

  • 7 Passive Investor September 30, 2017, 5:08 pm

    @ Lord. It’s fairly basic economic theory. In a nut shell. Consumers buy goods more cheaply. There is more cash left over to spend / invest. The U.K economy gets to do things it is good at more – (high end) manufacturing and services.
    There are complicating factors
    1) it isn’t a very good negotiating position to state out loud (bilateral free trade is better than unilateral free trade after all)
    2) it is disruptive. Unemployed Welsh steel workers won’t get much comfort from the fact that their children will be better off after they have moved into different industries possibly out of Wales
    3) It is difficult to sell politically. Partly because of 2) and partly be because the electorate as you may realise doesn’t have a great appetite for (moderately) sophisticated economic theory.

  • 8 Grislybear September 30, 2017, 7:00 pm

    @ Investor.”but I’m not sure a fight with, say, a cheap and liquid ETF like the iShares UK Equity Index Fund is one it wants to pick.” Isnt the fund mentioned not an ETF.

  • 9 The Investor September 30, 2017, 7:07 pm

    @Grislybear — Ack, quite right, apologies all. Brain lapse. (This was why I stopped trying to write these Saturday articles on a Friday morning before my email out deadline! 😐 ) Have replaced with the very nearly equally cheap FTSE 100 ETF from the same stable.

  • 10 ermine September 30, 2017, 7:17 pm

    @RIT I did some work after a gap because I was fearful of taking a stock market hit before the Osborne changes to pension flexibility, though also because I was also helping someone out when they were dropped in the dirt by someone walking off the job at short notice.

    But while what I did didn’t have the stress of performance management etc, there was the low-level stress of just being flippin responsible if something went wrong, and I just got to hate that over time. Then there were the issues of dealing with HMRC, both from a personal POV as a sole trader, which is relatively straightforward but not something I’d dealt with before – my previous ‘side hustle’ was a Ltd co and the accountant interfaced with HMRC. But I was also wrangling VAT, and on lots of little transactions unlike my own Ltd co. I fairly quickly came to the conclusion this wasn’t what I retired for, and I’m still of that view. There was some fascinating scientific work that came my way too, but while that was interesting the pay wasn’t enough for the trouble. But I did see some interesting places.

    I’ve was on PAYE for thirty years. It’s quite possible that I’m institutionalised, but I do know one contractor who went permie for a few years because he couldn’t face the intimidation from the VAT and HMRC.

    I think this is a Marmite issue, some people have Stockholm syndrome with work, some don’t. After five years out I am already seeing my erstwhile engineering relevance get dated. And that’s okay with me. There’s plenty more to life.

  • 11 david m September 30, 2017, 7:34 pm

    Value of £100 to 31 August 2017
    FTSE All Share – 5 years £164, 10 years £179
    iShares UK Equity Index Fund – 5 years £161, 10 years £178 – yield 3.19%
    City of London Investment Trust – 5 years £172, 10 years £223 – yield 3.90%

    I prefer City of London Investment Trust.

  • 12 pulpo September 30, 2017, 8:12 pm

    @ david m
    yes, but you’re buying historic performance and essentially betting on Job Curtis maintaining his form. I think he has been running the trust for over 20 years, must be approaching retirement age and who knows what comes next. The trust may return to mean over time or it may not but assuming it won’t is folly.

  • 13 Hariseldon September 30, 2017, 8:35 pm

    @david m

    It’s worth noting that City of London is 69% FTSE100, 16% FTSE250 11% International Equities, employs gearing.

    If you were to pick a more accurate benchmark, a blend of indices that match its portfolio you would find that the performance is adequate but not outstanding.

  • 14 John B October 1, 2017, 12:45 am

    It seems to me that some people think that the active/passive arguments don’t apply to ITs, that they are somehow special. As far as I can see they are just active funds with an internal cash buffer which leads to smoothed dividends and better liquidity which both come at the expense of greater price volatility. And they have the added problem that success breeds success as good results pull in investor money so the price exceeds the Net Asset Value, which is rather Ponzi. Reversion to the mean is always likely to sting people who join late harder than with conventional funds.

  • 15 L October 1, 2017, 8:00 am

    @TI – without meaning to come across as rude – what is it about Uber that merits so many mentions (apart from your credentials as a liberal London snowflake (joke!))?

    I cannot see why we would want to lionise a company where someone makes £8/hr driving a ‘luxury’ car before costs, he’d be better off working in McDonald’s!

  • 16 Adrian October 1, 2017, 11:35 am

    I’m not that impressed with CTY. It may have outperformed the FTSE All Share but it has lagged the FTSE 250

  • 17 david m October 1, 2017, 1:42 pm

    In a choice (or a fight, quoting the Investor) between City of London and an all-share tracker my current preference is for City of London. It’s best to hold a few trusts in the UK equity income sector, where 14 of 21 trusts beat the index over 10 years, to guard against a dip in an individual trust’s performance.

    The mid-cap and international allocations and the gearing will be a part of why City of London has beaten it’s all-share benchmark over 5 and 10 year periods. If you want higher growth and yield is not a consideration then I agree you can do better.

    There are three mid-cap investment trusts that you can pick to try and beat the FTSE 250 if that is your benchmark.

  • 18 The Investor October 1, 2017, 6:54 pm

    @L — Well this week’s mention was more of a follow-up to last week’s mention. I do think what Uber represents is hugely important and transformative (I’d write ‘the company’ but I don’t want to conflate some of its internal culture to date with that — gotta keep those snowflake credentials brightly burnished. 😉 )

    In my view what it represents is a disruption we’ve barely begun to reckon with yet.

    I cannot see why we would want to lionise a company where someone makes £8/hr driving a ‘luxury’ car before costs, he’d be better off working in McDonald’s!

    I’m basically a free market technology-believing capitalist, and what the driver gets paid is, without want to be cruel to any drivers, irrelevant compared to the power, utility, and flexibility of the technology and business model. At an extreme but I think realistic incarnation, the likes of Uber could reduce the country’s car fleet by 90%, increase utilization of cars left on the road by a similar amount, and put what was until very recently a luxury enjoyed by the rich (seamless door-to-door chauffering) into the hands of everyone. It saves, as I said last week, multiple millions of man hours a month in London alone.

    Talking about driver pay in this context is like shaking your fist at the cotton mills replacing the artisan weavers in their cottages, or the word processor replacing the typing pools. Invariably advances are disruptive to someone — if something is worth replacing or improving, then it will always be true that that thing consumed meaningful time, resources, or money — and the more we do with less the better standards of living rise.

    Productivity gains are why we’re not all still growing our own food with 96% of our time.

    Of course, the leftie-leaning bit of my personal mix wants me to keep education and training channels open, have support networks for displaced workers, have a universal credit or safety net or income or whatnot. The suddenly superfluous are our fellow citizens and we should always strive to find useful roles and contributions from those willing and able to make them in society.

    But deliberately sticking what will soon be the past – just like the automobile industry inevitably replaced the horse industry, and on and on back through time – for the sake of concerns about how in some snippet of history somebody is getting paid £8 an hour (entirely though their own choice) is missing the big picture.

    Also, outside of the likes of the readership of this blog, the fact is most people earn low wages, here and abroad.

    I find it a bit willfully naive when I read everyone getting overly upset about the wages of their Uber driver in the car unless they are also someone who only shops hyper-ethically, never buys clothes from pretty much any high street chain, never buys a Pret sandwich, etc etc etc. Almost nobody lives that way. I guess it’s a case out of sight and out of mind and all that. 🙂

  • 19 L October 2, 2017, 12:56 pm

    I am sure that Uber and the like and driverless vehicles could achieve the sort of transformative change that you’re talking about. That said, I disagree with your assertion that being unimpressed at the fact that a technological sea change is built (in part) by squeezing drivers until they squeak marks me out as a luddite.

    My ethics most definitely affect what I buy and how I buy it and many of my purchasing/service choices cost a little more as a consequence.

    It’s a funny old thing. My logical thought is that a genuine example of massive car sharing using environmentally friendly (unmanned) vehicles would be wonderful for the planet and would save individuals a lot of money. It’s the journey to that point that I’m uncomfortable with.

  • 20 The Investor October 2, 2017, 4:28 pm

    @L — At any point in the disruption/transformation of an industry there’s dislocations and personal loss/disruption/worse. But the question is what do you want to do about it?

    Let’s take the example of the transition from horse powered transport to cars and machines in industry. I am typing on my mobile on the go so cannot source data, but pre-cars there were from memory 3-4 million horses in operation in the UK. There were huge value chains built around the horse at the center of commercial life — from horse breeders (including dedicated varieties) to farms supplying horse feed/hay and distributors of such, far higher numbers of people employed in agriculture, staging posts along the way for feeding/stabling horses, thousands of people employed to clean up after horses on an industrial scale (non-trivial — imagine the daily horse dung from hundreds of thousands of horses in London), leather workers, blacksmiths, the list goes on.

    All of these livelihoods were wiped away along the path to the industrial era. As you know this doesn’t happen overnight. There is a gradient of formerly useful skills/technologies/professionals being competed away. In the history books it looks is a paragraph and a black and white photo — in reality it is exactly what happens when, for instance, technology like Uber and (to come) autonomous driving sweep away the old order.

    At every stage, people would have said “it’s not right, I can see the benefit of this and that but look at my neighbor who used to have a great job doing horse shoes but now has to work on the car assembly line” etc. But almost nobody would want to go back now.

    You say your views aren’t Luddite, but this sort of transition is exactly what happened that caused the Luddites to riot and gain their name in history, as you may know. Mills appeared and the the formerly well-paid self-managed small artisans/weavers saw their professions devalued by machines and their formerly skilled work replaced by something anyone could do by operating a machine in a mill that massively drove down the cost of and effort of producing textiles.

    The benefit was mass production of textiles, clothing etc, which directly leads to our society today where we long ago stopped having a suit for “best” that we keep for 20 years and boots we inherit, and instead for good or ill have TopShop.

    So in that sense your views *are* Luddite. 🙂 They were protesting about the economics of the new machines versus the old order.

    Personally, I think it’s pretty pointless and counterproductive standing in the way of this sort of thing. But as stated above I’m not cold to the impact it has on people, so I think as a society we do best to try to consider how we re-train / re-orientate the minority affected on the path to the benefits for the majority. 🙂

  • 21 The Investor October 2, 2017, 10:26 pm

    @L — Re-reading this I don’t think we really disagree much. 🙂

  • 22 Scott October 3, 2017, 10:32 am

    @TI – I don’t want to speak for L, but my reading of his comments is that he’s not so much protesting against the societal change brought about by new tech, which is what you’re arguing in favour of, but rather the employment practices of Uber – low pay, no benefits, ‘self employed’ contractors, etc.
    If the new technology itself is so good (and I believe it is, or can be) then isn’t it possible for it to be introduced in way that makes things better for both consumers and employees?

  • 23 The Investor October 3, 2017, 12:11 pm

    @Scott — The thing is, I think the low pay is part of the ‘benefit’ for those using the service. What Uber effectively does is removes the benefit of being knowledgeable about where to pick up passengers (because technology does it), how to market yourself as a cab (because Uber flows you customers) and how to get from A-B (not unique to Uber, you can get this free from Google Maps).

    Similarly to how mechanical looms removed the need for expensive artisan weavers — the benefit of the machine is specifically that it cuts costs.

    This is bad for drivers (though I’d note it’s a free market) but good for passengers, and in the long-term for society. (Because if you can use technology to do something cheaply, then the resources that were previously being spent on drivers / the work/time spent by those drivers can instead be redirected to doing something more productive. Think again of the huge move off the land from 90% of people working in agriculture for an extremely clear example).

    But it sucks in the meantime to be a worker displaced by a robot (/platform/whatever), which is why we need support networks and retraining.

    For the sake of balance I should add there are those who think the Uber business model is not viable long-term, because they are not charging (they say) the actual cost of transporting someone from A-B. That in effect their VC backers (and you could argue, though I wouldn’t, the underpaid drivers) are subsidizing the cost of transport.

    I think though that it’s similar to the Amazon playbook… you pay upfront to grow scale then reap the benefit later (most immediately when self-driving cars get traction in 10 years or so, and your main cost — drivers — vanishes).

    Cheers to you and @L for thoughts.

  • 24 Naeclue October 4, 2017, 12:17 am

    Value of £100 to 31 August 2017
    FTSE All Share – 5 years £164, 10 years £179
    iShares UK Equity Index Fund – 5 years £161, 10 years £178 – yield 3.19%
    City of London Investment Trust – 5 years £172, 10 years £223 – yield 3.90%

    FTSE All World – 5 years £209.1, 10 years £252.5
    Delivered with lower risk than City of London Investment Trust

    I prefer FTSE All World, via a portfolio of highly diversified cap-weighted ETFs.

  • 25 Learner October 4, 2017, 5:01 am

    Something that always sticks in my craw about Uber’s takeover in London has nothing to do with wages or governance or financial subsidies: 100% of black cabs are wheelchair accessible. How many UberWAVs are there in London? .1%? Ride-sharing as an alternative is one thing, but cheering the demise of black cabs is quite another. Leaving accessibility to the free market alone seems unlikely to produce an adequate let alone equal level of service.

  • 26 FI Warrior October 4, 2017, 8:49 am

    After reading this comment trail, I had an opportunity yesterday to talk to an actual taxi owner acquaintance. He has a small outfit of ~7 cars and his take on Uber was interesting and certainly not what I had expected. My impression of Uber until then was that they were just another voracious newcomer working off the neoliberal blueprint of undercutting existing services by stiffing their employees and their public behaviour has done them no favours in dispelling this image.

    So this small business owner said he was totally unaffected because of the difference in their business models. He works in a small town where he has about 15% of the taxi market and the nearest place Uber operates is Birmingham. He said it’s not worth their while going into such small towns (>50 000) to poach fares and also his investment in setting up is so small that unlike London black cabs with huge ‘plate’ costs, he has little to recover in overheads.

    Still driving himself, he is sympathetic to the working conditions of individuals, but said that given Uber is just a booking platform, it’s not that different to lone drivers paying ‘radio charges’. (like a standing charge for getting bookings from bigger firms) These guys are self-employed and get some independence in working when they want by effectively outsourcing their admin and marketing to get custom. So it seems the whole taxi-picture is evolving into a larger and more varied spectrum with the changes that Uber is pushing.

  • 27 John B October 5, 2017, 12:33 pm

    This article makes a lot of sense. Uber are cheap more because of the deep pockets of the backers prepared to lose £3billion a year to gain market share. Once they get a monopoly the fares will rise past local operators to reward those backers. Those local operators need to club together to develop their own app, and viral market it as the ethical choice, so they can regain market share without building up debt.


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