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The 12 days of Christmas for canny investors

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It might be tempting to splurge on Christmas gifts and treats, especially if this particularly bleak midwinter sees you far from loved ones or feeling lonely, and you have surplus funds sitting in the bank.

In a year when many people, unable to spend in shops and restaurants, have become “forced savers”, why not consider gifting money instead to your family and loved ones?

To make this more attractive than simply giving a cheque, why not give a carefully selected investment? It should last longer than an Xbox, could spur an interest in financial education and will at least give you the opportunity to talk about something other than Covid-19 and Brexit. Plus, the pandemic has also focused many people’s attention on the need for a long-term investment plan — this could be a helpful kick-starter.

Our 12 funds of Christmas, based on the traditional song, are not personal recommendations but ideas to explore. We recommend that you discuss them with loved ones — perhaps do a bit of research together each day of the festive period. This is not a joke — HM Revenue & Customs reports many tax returns are filled out during this period, so why not research investments?

On Christmas Day we suggest you find your partridge, a bird considered full of wisdom, being closely associated in Greek mythology with Athena, the goddess of wisdom. Clever investors know they cannot control performance, but they can control costs. So a smart choice would be a low-cost, highly diversified, global multi-asset fund, perhaps investing in trackers (index funds), which aim for growth in line with stock market performance, as opposed to active funds planning to beat the market (which may underperform). 

With a tracker fund, you might catch any Santa rally — the seasonal upsurge in shares that traditionally occurs between Christmas and New Year — though there are no guarantees that we will see one in 2020. 

Potential partridges
Vanguard Life Strategy 80% Equity, BMO Sustainable Universal MAP Growth (a low-cost active fund), Fidelity Index UK.

After the largely housebound partridge, we turn to the next gift, two turtle doves — migratory birds that annually cover big distances. Investors too must look far and wide in search of opportunities, not least in the US, the largest global financial market and the most important overseas destination for British savers.

Two turtle doves to consider
Vanguard US Equity Index Fund, Premier Miton US Opportunities. 

Next up are more airborne gifts — three French hens, followed by four calling birds, which together develop a European theme. The original calling bird, or “colly bird”, was the European blackbird as “colly” meant black as in “coaly”. 

Europe is home to some amazing global brands, such as Ferrari, L’Oréal and LVMH, which might be expected to perform well as high-spending countries come out of recession. You should have such fancy fowl in your portfolio.

European birds to watch: MAN GLG Continental European Growth Fund, Liontrust Sustainable Future European Growth, TR European Growth Investment Trust.

On the fifth day of Christmas, buy five gold rings for the enjoyment of wearing them, but be aware that the price will far exceed the meltdown value due to the workmanship and the retail mark up. 

Investors usually buy gold to diversify their risk, to hedge against a fall in the stock market, or as a store of wealth when the political or economic outlook is uncertain. You can buy gold coins or bullion if you have a secure place to store them. However, many investors prefer to buy the precious metal using a low-cost physical gold exchange-traded commodity, which holds bullion on your behalf and can be easily bought and sold. Others look to funds that invest in gold miners. But don’t be dazzled, even at Christmas — limit gold and gold mining to a small portion of your investments because it can be volatile.

Gold ring alternatives
iShares Physical Gold ETC, Merian Gold & Silver Fund, BlackRock Gold & General Fund.

Six geese a-laying makes me think of income funds, which are popular with retired investors and can also be used by investors growing their money, if they reinvest the income. And, for extra diversification, I am adding the next gift in the song — seven swans a-swimming, as these too produce plenty of eggs.

The UK has long been the goose that laid the golden income egg for many investors, but this year UK dividends — the regular income paid out by many stock market listed companies — have been scarce.

So I am suggesting you diversify your income sources which is easily done as geese and swans are plentiful elsewhere in the world.

Geese and swan egg-layers
Royal London UK Equity Income, City of London Trust, Morgan Stanley Global Brands Equity Income Fund, Guinness Asian Equity Income Fund.

Days eight and nine of the Christmas 12 bring women to the party — the milkmaids and the ladies. Even today you may struggle to find a female fund manager: last year Morningstar found that investors in UK funds are more likely to have their money managed by a man called David than a woman.

But some of the best managers are women: in August, Goldman Sachs found that US female fund managers had outperformed their male colleagues so far in 2020, beating them in the worst of the turmoil of the pandemic.

Milkmaids and ladies to follow
Karina Funk, head of sustainable investing at Brown Advisory, and manager of the US Sustainable Growth Fund, Catherine Stanley, manager of BMO Responsible UK Equity Income, and Laura Foll at Janus Henderson, who co-manages Lowland Investment Trust.

Ten lords a-leaping gives us time to pause and look up some advice from iconic investors from history. 

Lords of investment
Benjamin Graham, John Templeton, Peter Lynch and John Maynard Keynes. They were, in order, the inventor of investment analysis, the pioneer of global mutual funds, the former head of Fidelity’s flagship Magellan Fund, and the father of Keynesian economics.

Their lordly investment wisdom includes: “The intelligent investor is a realist who sells to optimists and buys from pessimists” (Graham) and “Successful investing is anticipating the anticipations of others” (Keynes).

Next up are Eleven Pipers piping — a reminder that Edinburgh has a thriving financial centre including some major investment fund houses such as Baillie Gifford. It is worth checking out some of the funds managed north of the border. Some show their Scottish links in their names, while others are not so obvious.

Pipers
Scottish Mortgage Investment Trust, managed by Baillie Gifford, was up 121 per cent over the year to December 11, driven by the performance of some of its technology holdings, while Murray International Investment Trust, run by Aberdeen Standard Investments, is a good option for income-seekers, having a dividend yield of 4.8 per cent.

On the 12th day, the last in our song, give yourself a well-earned break and contemplate this list of investment gifts — perhaps to the sound of two hits from the 1970s — Money, Money, Money from Abba and Money by Pink Floyd. Or you might prefer something a touch more modern — Independent Women, by Destiny’s Child (2001), with the great feminist, or perhaps post-feminist, line, “I buy my own diamonds and I buy my own rings”.

But whatever your musical taste, if you are thinking of finance don’t forget about tax — and give a listen to The Beatles’ classic, Taxman. It doesn’t give you twelve drummers drumming but we can do better and offer you Ringo Starr on drums, cowbell and tambourine.

Moira O’Neill is head of personal finance at Interactive Investor. She holds the investments in Vanguard LifeStrategy 80 and 100% equity funds, City of London Investment Trust and Scottish Mortgage



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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. 

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.

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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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