Investments Sorted For Now

Over the last weekend I have sorted out a number of issues with my investments.

To start with I have invested the Child Trust Fund Voucher (See previous post : http://pocket-money.blogspot.com/2006/09/child-trust-fund-voucher.html) ). I decided to go with the Children’s Mutual Baby Bond Choice. We have an existing policy with the Children’s Mutual and it was recommended as a best buy on one of the many sites I visited. By selecting the ‘choice’ option I could select the investment fund from a limited range. Fortunately one of the options was the Invesco Perpetual Income fund managed by Neil Woodford. This is a top-performing fund over 10 years and is very consistent. As I said in my previous post, I don’t envisage adding much to this investment, but I still want good long-term performance.

I also decided on the long-term savings vehicle that I would use to build a nest egg for our son as discussed here : http://pocket-money.blogspot.com/2006/09/saving-for-children.html. I did go with RIT Capital Partners and I expect this investment to perform well over the foreseeable future.

I have also restructured my own portfolio, which was triggered in part by the availability of a new fund. The Skandia UK Best Ideas Fund is being launched shortly and will run in a similar way to their Global Best Ideas Fund, which I invested in earlier this year. A number of top quality managers all pick their current best ideas for a portion of the fund. The Global fund has made 10% already and as new quality funds tend to rise initially I am hoping for a reasonable start to the new fund. I am able to invest with all of the initial charge discounted so this is a good opportunity to get in to this fund. I see this as a core holding and have sold three existing holdings and added some new money in order to make a reasonable investment in this fund and also a smaller investment in the Invesco Perpetual Income Fund mentioned above.

This means that my core funds are now:

SVM Global plc – 25% of portfolio
Skandia UK Best Ideas Fund – 21% of portfolio
Invesco Perpetual Income Fund – 9% of portfolio

These represent 55% of my portfolio with the remainder split across Europe, the far east, other emerging markets, Japan and a UK blue chip holding.

I’m happy with this structure and will review the situation again towards April when next years ISA allowance is available.

The funds I sold were:

Ruffer Total Return
Invesco Perpetual UK Aggressive
Cazenove UK Dynamic

These are good funds but the new structure fits my needs better at the moment and I think offers better prospects for now.

The Case For Gold

For many months now I have been considering diversifying my portfolio by buying gold. Years ago gold investors were considered doomsayers and nutters. The gold price was stuck at low levels and equities were all the rage. However, the technology bubble burst, share prices plummeted and gold started to increase in value.

Gold can be a good way to diversify a portfolio as it usually negatively correlated with equities, in other words when share prices come down, the gold price goes up.

Many commodity analysts think that gold could reach record-breaking highs in the coming years just like other commodities have. Gold can also be considered a safe haven in troubled times as its price does not rely on the performance of governments or corporations. Unlike currency, gold should maintain its value over the long term, as its value is not eroded by inflation.

Having said all that the gold price peaked in 1980 at $850/oz and fell to $252/oz by 1999, which is a huge bear market. Today the gold price is around $580/oz with many people believing that we are in the middle of a multi year bull run. One of the financial commentators, whose views I respect, wrote earlier this year that he was buying some gold as and when there was a price correction in the run, and this seems like a sensible policy to me.

There was an article in the FT a couple of weeks ago about a man who was so convinced about the case for gold and silver that he sold his house and invested the lot in these two metals. He now rents his house off the person he sold it to. He is already sitting on a tidy profit.

There are plenty of people who don’t think gold is such a great idea. I read an interview with an excellent fund manager where he said that gold could not be considered an investment as it does not pay a dividend, therefore it is just a punt.

I’m still not entirely sure, but a small holding as a diversifier and insurance against some sort of financial chaos in this uncertain world does seem appropriate.

If I do decide to buy gold, how do I go about it? There are certainly many options and I shall consider them in a future post.

Saving For Children

As I mentioned in my last post, I want to put aside some money to give our son a decent start in life, probably towards a deposit on his first home. As he is only six weeks old time is on my side. The questions are where and how to invest.

I’ll tackle the where part first. With a time frame of over twenty years equities are the only asset that make sense to me, especially as I wish to contribute regular small sums. The alternative of a bank or building society deposit account would expose us to a huge amount of inflation risk. We must also remember, when considering risk, that shortfall risk i.e. not making enough return is an important consideration.

£100 invested in the average building society account back in 1945 would have increased to £4,747 by the end of 2003. Whereas if the £100 was invested in UK shares, with all dividends re-invested, it would have been worth a staggering £78,743. Even if inflation is stripped out the shares would have increased your purchasing power 30 times whilst the bank account would only have increased 2 times. (Source: Article by Nick Louth on MSN Money - Here)

Now I’m not investing for 57 years but you can see the point.

So, having decided to invest in equities, how should I go about it?

A major concern is that I want us as parents to control the money until we decide to give it to him. That pretty much rules out anything in his own name unless we want to go to the expense of setting up a trust.

Investing small amounts means that single company shares are out, so that just leaves us with Unit Trusts/OEICS or Investment Trusts. I am a huge fan of Investment Trusts and indeed my largest single investment, outside my pension, is in shares of SVM Global plc.

An Investment Trust is a closed ended investment company that invests in shares of other companies. The closed structure means that there are a fixed number of shares in issue and the price is determined by supply and demand. The major advantage of this is that when investors want to sell, they do so in the open market and the trust does not have to sell any of its investments. The manager of a Unit Trust or OEIC, however will have to sell investments to pay investors that wish to withdraw their money. This invariably means selling at the worst possible time when investors are panicking and the share prices have fallen.

I need to find an Investment Trust that offers a cost effective savings scheme, that allows small contributions and re-invests dividends. Also, as this is to be a single investment it needs to be a trust that invests in a wide number of areas.

I think the Trust that best meets these criteria is RIT Capital Partners plc. This trust has a very good long term track record, invests in different assets around the world, including private equity and property and operates a savings scheme that can accept as little as £20 per month or lump sums of £250. The chairman is Lord Rothschild and the Trust holds large amounts of Rothschild’s money.

From a tax point of view dividends will have been taxed at 10%, which could not be reclaimed by non-taxpayers. So as long as the parent whose name the investment is in remains a basic rate taxpayer there should be no more income tax to pay. We are unlikely to save enough to worry about Capital Gains Tax and if we did we could sell over 2 tax years to utilise 2 lots of annual allowance.

It would be better in the child’s name perhaps as for at least 18 years he is likely to be a non-taxpayer but the lack of control would worry me more than any tax implication.

This is my current thinking. If anyone has any other ideas please let me know.

Child Trust Fund Voucher

Having had a child and registered him, you can then claim Child Benefit. This is available to everyone and is not means tested. It is currently the princely sum of £17.45 per week, which is a little over £900 per year.

Once you have registered for Child Benefit you are sent a £250 Child Trust Fund voucher. The idea being that you invest this for your child, parents, grandparents and friends can add to it each month, the Government will give you another £250 when the child is seven and when he is eighteen the money is his to give him a good start in life.

In my opinion as far as stupid ideas go this is right up there with paying children to stay at school and the Millenium Dome. If you give the average eighteen year old, probably on the way to university, several thousand pounds, what is he going to spend it on? Beer I suspect, or something equally daft. I don’t suppose there will be many who think of it as a deposit for their first home.

So, I will take the £250 voucher, thank you, and the top up when he is seven and invest them for the long term, but we shall not be adding anything to them. When he is eighteen he will have maybe a thousand pounds to spend as he wishes.

However, I still wish to give him a good start in life, but how do I do that?

Hopefully I will answer that question in my next post.

Nappies Everywhere

It’s been a long time since my last post due to the birth of my son on 4th August. I had a couple of weeks off work and thought that I could go to the gym, do some gardening and write some posts for this blog, how wrong was I!!

We have barely had time to eat. If we could do one thing in a day, other than looking after the little one, it was a miracle. However, things are starting to settle down a bit now so hopefully I can start to get some things done including posting here.

The new arrival has thrown up (excuse the pun) some interesting financial situations, such as:

• The price and effectiveness of nappies
• What to do with the Child Trust Fund voucher
• How and where to save to give him a good start in life

I will use the next couple of posts to share what we have decided.

Today…………………Nappies.

We have officially tried them all. From our practical experiments we can reveal that our nappies of choice are Tesco’s own brand.

We started by using Pampers, thinking that only the best was good enough for our child. However, we found two problems. Firstly, they are very expensive at about 13.5p a nappy and secondly they leaked just like all the others in some circumstances.

Next we tried Huggies; they leaked a lot and were similarly expensive.

So we decided to try the supermarkets own brands. Asda, Sainsbury’s and Tesco’s were all fine with Tesco’s being no more leaky than Pampers and also being a more comfortable fit. The other clincher was the price, at around 8p a nappy we save 5.5p every time we change him, which is approximately 10 times a day. Some quick maths reveals that this saves us nearly £200 per year.

We are currently using size 2, so it remains to be seen if the later sizes are as good value.

There is good quality and value to be found in the supermarkets own brands these days and not just for nappies. For example I prefer the Tesco’s crunchy nut cornflakes to the Kellogg’s original and I also like the cost saving.

Please comment with any good own brand products that you have found.

Selecting An Investment Fund

Crikey, it’s been a while since my last post. What with preparations for the arrival of Greg Junior in about a week, being insanely busy at work and the heat I have been remiss with my posting. I shall try to be a bit more regular in future.

Anyway, in my last post I explained why I invest in actively managed funds and said that I would detail how I find the funds to invest in.

I find that a good starting point is the Bloomberg Money magazine. This monthly publication is more in depth than your basic consumer finance magazine and will not suit every one, but it is a good source of ideas and the performance tables at the back of Unit Trusts/OEICS and Investment Trusts are pretty good. There are usually interviews with fund managers and various funds are reviewed each issue. The current issue has an article on the specialist sector and picks a number of funds for closer examination.

I then use the www.morningstar.co.uk website to get a performance breakdown of the last six or seven discrete years plus the current year to date. To me this is important as a five year cumulative, which is available in many magazines, can be distorted by a freak performance in one year. At the moment it is easy to get information back to around 1999, so you can see how the fund has performed in good times and in bad. Although past performance is not necessarily a guide to the future, I think that if the same manager has run the fund for the period in question and he has delivered in rising and falling markets over at least five years, on a discrete year basis, then this is a good sign and the first tick in the box.

I then look at Hargreaves Lansdown’s Wealth 150 List http://www.hargreaveslansdown.co.uk/wealth150/funds.asp . Hargreaves are an Asset Management and Stock Broking company and this is where I keep my stock market investments. The head of research, Mark Dampier, maintains a list of 150 funds that he believes will deliver over the long term. These are good funds run by good managers and are constantly under review. It is important to note that not every good fund is on this list, but if it is on the list that adds some comfort.

Finally, I have to buy in to the Managers philosophy. I like to know how they invest and if it matches the way I think then I’m happy. I like the house style of companies such as SVM, Ruffer and Artemis and consequently I invest in their funds. I like the manager to have a large stake in his own fund if possible as this aligns their interests with mine. The companies own websites such as www.svmonline.co.uk and www.ruffer.co.uk are excellent sources of this sort of information.

If all this seems like too much effort then there is always the fund of funds route. This means that you buy into funds that invest in other funds, so you are in effect paying someone to select the funds and manage your asset allocation for you. This brings with it an extra layer of charges but the team at Jupiter, for example, are delivering results and winning awards. The manager of the Jupiter fund of funds team, John Chatfield-Roberts has written a great book on fund investing called Fundology which is available here: http://books.global-investor.com/books/22930.htm?ginPtrCode=00000&identifier=708f875ea3b70ddbd50550d102061bbc

The bulk of my non-pension stock market investments are invested in shares of SVM Global plc. This is an investment trust managed by Colin McLean and Donald Robertson. They invest in shares of other investment trusts and hedge funds that the private investor just can’t get into. They also like to select funds where the manager has a large stake in the success of the fund. This Trust has considerably out performed the FTSE World Index over the past five years and both managers have substantial personal investments in the fund.

So, in a nutshell, that is a brief overview of the way that I select funds after I have decided on my asset allocation. Please comment with your ideas and methods.

Active or Passive Investment

I thought it was about time that I put down my thoughts and opinions regarding active versus passive investing.

For those that don’t know, in terms of collective funds such as unit trusts, active investors select the stocks for their funds that they think are going to perform and passive funds investments are selected by a computer in order to track a particular index like the FTSE 100.
The often-touted advantages of passive investing are that over the long term around 75% of active funds don’t out perform the index and, because there are no expensive fund managers to pay, passive funds are cheaper. Charges for passive funds are usually around 0.5% pa as opposed to active funds charges which are around 1.5%.

It is, of course, no coincidence that passive funds get pushed harder in a bull market, such as the last 3 years. In a rising market, with indexes rising, tracker funds are going to increase in value, and with low charges helping they will out perform many unit trusts. In a bear market however trackers will just follow their index down.

There are a number of reasons why I’m not convinced by the passive argument.

1. Passive funds can only ever under perform against their index. This is because they track the index then deduct charges, so the best they can do is a small under performance.
2. In a bear market trackers are losing money with no thought.
3. The main argument that most active funds fail to beat the index is flawed. It assumes that these funds are impossible to avoid and I don’t think they are. There are a lot of poor funds out there and people who know what they are doing know which they are. There are a number of funds that consistently beat the index and again they are not difficult to find. A lot of active funds are closet trackers, that is they hold lots of stocks weighted closely to the index so are in fact trackers with high charges, but again not that hard to avoid.
4. In a bear market I think you need a manager to reposition the fund more defensively to minimise losses and then to search out the recovery stocks that have been oversold.
   It is for these reasons that I prefer to invest in actively managed funds and shares of individually selected companies.

Having said all that I do believe that there is a place for trackers and 75% of my current pension arrangement is in tracking funds. The reason for this is simple, I don’t believe that my pension manager is capable of out performing the index. I have no choice but to use this manager because my employer will put 9% of my salary into this fund providing I add 4% of my own. That is a deal too good to turn down. There is some fund choice so I have selected the fund that is 75% passive and 25% managed by external managers. If I ever move employers then I would move this fund, but for now I’m happy enough to leave it knowing that over the long term the index will rise and should out perform cash, bonds and property and cover me against inflation.

For the novice investor a low cost tracker with say 0.3% charges, like the one offered by Fidelity, should provide a good holding for the long term. However, by selecting quality funds run by good active managers it should be possible to out perform over the long term.

So how do you pick the quality funds?

I will look at this in my next post.