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My annual investment mea culpa

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My old boss, the legendary Nils Taube — Britain’s longest-serving fund manager — started work in the City in 1946. I worked with him in the 2000s. Around this time of year, in his sixth decade of management, he would say: “You know, Simon, I think next year I might get the hang of this thing.” He had a superb record, but he never stopped trying to improve and learn from his mistakes.

So each Christmas, like him, I look back on the year and reflect on what I could have done better.

My first priority has always been to protect investor wealth. Most of my own money is in my funds, so I share investors’ pain if things go wrong. Over the past decade, global equities have nearly trebled in value, rising at around 11 per cent a year — it is important not to give away these gains too easily by succumbing to the psychological tendency to become more adventurous after the market has risen. 

How well did we weather the storm? It is always good in reviewing portfolios to check how resilient they have proven to unexpected shocks. In March, when the market collapsed, we were 6 per cent ahead of the index. But it was then that we made our biggest mistake. 

When the market hit the bottom I was confident that it had overshot on the downside. We could see the pandemic was serious and deadly, but — as I periodically remind readers — businesses can be extraordinarily resilient. 

We bought at the bottom but should have been bolder. One of the advantages in an investment trust is the ability to gear and we should have done so. 

Thankfully, what we did acquire was right at the time. Investment instinct is to buy what has fallen furthest, on the assumption that reversion to the mean will drive a sharp bounce. This is a dangerous strategy that can leave you holding some crud whose business is actually in dire trouble and so will not snap back. 

Lockdown was always going to be devastating to sections of the economy, such as restaurants and some retail. Many companies will never recover. However, the pandemic benefited other industries. 

We should have had more Apple shares, and not holding Tesla was a drag on performance relative to the index. But our investments in companies such as Amazon and Netflix saw accelerated growth for obvious reasons. Salesforce.com and ServiceNow benefited from businesses increasing their use of technology providers that facilitate dispersed working.

If the right thing to do in March was to buy more of what had gone down least, that changed in November with the election of Joe Biden and the vaccine advances. At that point there was finally a rotation into value. Many UK housebuilders were up 20 per cent or more in the month.

I did look at some beaten-up UK stocks in the summer, but in the end I felt that buying them would be to drift from the principles on which our funds are built. We construct portfolios around long-term secular growth themes such as “low-carbon world”, “online services” and “automation” but do leave some space for general high-quality stocks.

We considered Lloyds Bank, which has the leading share of mortgages in the UK and in normal times makes a decent return on capital there. On the assumption of a good Brexit deal the valuation left plenty of upside. However any deal leading to a deeper or longer recession or more unemployment could pose a problem. We decided not to buy any and have watched the shares rise 40 per cent since.

Overall, we are still up nearly 7 per cent on the index in the year to date (the Mid Wynd trust is up 19 per cent in sterling year-to-date after all costs, and the global equity index just under 12 per cent). More importantly, I am comfortable with how we are positioned for the year ahead — there are no stocks gnawing at my conscience at night. 

Where did we lose money? Over the year it was principally on stocks sold in March, when concerns about the length and depth of lockdown and recession were at their height.

Live Nation, which sells tickets for large rock concerts, has bounced back strongly, nearly doubling from the lows (where we sold it) — though the index has similarly recovered, rising 42 per cent from the lows in sterling terms. (A side note here: if you are being serious about this exercise, always put your gains and losses in the context of the wider market. A 20 per cent loss in a rising market is arguably worse, for instance, than a 25 per cent loss in a fast-falling one.)

Other holdings where we took losses on disposal in March, such as Land Securities, have come back very little as investors remain sceptical of recovery prospects. Our decision there proved correct. 

Of course, we also got things right for the wrong reasons. We have a range of investments in scientific equipment makers such as Thermo Fisher. We did not expect this pandemic, but we invest in this area as public health generally moves towards more testing and monitoring of patients. When governments needed mass testing for the virus, these companies benefited.

The big lesson we take from 2020 is not to underestimate the rate of change caused by new technologies or the speed at which new products can now be brought to market. Witnessing healthcare companies go from identifying a new virus to delivering a vaccine for it within a year is frankly astonishing. 

If you have been too hesitant this year, not wanting to bank on a vaccine so soon, you had good historical grounds for caution. The mRNA technology on which these new vaccines are based has never before been used to develop vaccines, but the clinical trial data is consistently impressive. One person’s caution is another’s prudence.

Which brings me to one final piece of advice if you are reviewing your own performance this year: do not be too hard on yourself. Nils Taube would deliberately do this exercise only once every 12 months. Do it more often and you can find yourself driving by your rear-view mirror. As he always cautioned: “Don’t kick yourself too much — you might bruise.” 

Simon Edelsten is co-manager of the Mid Wynd International investment trust and the Artemis Global Select fund. 



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‘Digital big bang’ needed if UK fintech to compete, says review

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Sweeping policy changes and reform of London’s company listing regime will spark a “digital big bang” for the City and turbocharge the UK’s fintech industry, according to a government-commissioned review.

The report, to be published on Friday, warns that the UK’s leading position in fintech is at risk from growing global competition and regulatory uncertainty caused by Brexit

The review, carried out by former Worldpay chief Ron Kalifa, is one of a series commissioned by the government to help strengthen the UK’s position in finance and technology.

Both sectors are under greater threat from rivals since the UK left the EU in January amid growing global competition to attract and retain the fastest growing tech start-ups. 

Changes to the UK’s listing regime are recommended, such as allowing dual-class share structures to let founders maintain greater control of their companies after IPO. The review also proposes a lower free-float threshold to allow companies to list less of their stock.

Kalifa said the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies, meant that the UK needed to move quickly.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry. We should be setting the standards and the protocols for these emerging solutions.”

John Glen, economic secretary to the Treasury, said more than 70 per cent of digitally active adults in the UK use a fintech service “but we must not rest on our laurels . . . all it takes is a bit of complacency to slip from being a leader of the pack to an also ran”.

He said the government would consider the report’s recommendations in detail. 

The review was welcomed by executives at many of the UK’s largest fintechs and leading financial institutions such as Barclays. Mark Mullen, chief executive of Atom Bank, said the review was “essential to maintain momentum in this key part of our economy and to continue to drive better — and cheaper outcomes for all of us”.

The review also recommended the government create a new visa to allow access to global talent for tech businesses, a move likely to be endorsed by ministers as early as next week’s Budget, according to people familiar with the matter.

Fintechs have been lobbying for a visa scheme since shortly after the 2016 Brexit vote, but the success of remote working since the onset of the coronavirus crisis has reduced its importance for some firms.

Revolut, for example, has ramped up its hiring of fully remote workers in Europe and Asia to reduce costs and widen its potential talent pool, according to chief executive Nik Storonsky.

Charles Delingpole, chief executive of ComplyAdvantage, a regulatory specialist, agreed that fintech was becoming more decentralised. He added that the shift in tone from the government could have as big an impact as specific policy changes. “Whilst none of the policies is in itself a silver bullet . . . the fact that the government recognises the threat to the fintech sector and is publicly acting should definitely help.”

The review also proposed a £1bn privately financed “fintech growth fund” that could be co-ordinated by the government. It identified a £2bn fintech funding gap in the UK, which has meant that many entrepreneurs have in the past preferred to sell rather than continue to build promising companies. It wants to make it easier for UK private pension schemes to invest in fintech firms. 

The report also recommended the establishment of a Centre for Innovation, Finance and Technology, run by the private sector and sponsored by government, to oversee implementation of its recommendations, alongside a digital economy task force to align government efforts.

The review has identified 10 fintech “clusters” in cities around the UK that it says needs to be further developed, with a three-year strategy to support growth and foster specialist capabilities.

Dom Hallas, executive director at the Coalition for a Digital Economy (Coadec), said it was now important that people “follow through and actually implement” the ideas in the review. The sector’s direct contribution to the economy, it is estimated, will reach £13.7bn by 2030.

However, the review also raised questions over the role of the Competition and Markets Authority, saying that the CMA should better balance competition and growth. 

“There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech,” it said. 

“Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions.”

Charlotte Crosswell, chief executive of Innovate Finance, which helped produce the report, said: “It’s crucial we act on the recommendations in the review to deliver this ambitious strategy that will accelerate the growth of the sector.

“The UK is well positioned to lead this charge but we must act swiftly, decisively and with urgency.”



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Coinbase: digital marketing | Financial Times

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Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

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US stocks make gains on Fed message of patience over monetary policy

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Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.



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