September 2018: whiplash

The major UK news in September was the Salzburg EU summit, which saw the UK PM become a victim of political whiplash.  This affected the markets, but not entirely predictably.  If you’ve been asleep in September, you’ll struggle to see the ‘surprise’ summit result in the financial charts.

The Trump saga was preoccupied with the Supreme Court last month.  This doesn’t obviously translate into market sentiment, thank goodness.

Nonetheless, from a UK markets point of view, September had its own form of whiplash.

Taking just the UK, for instance, consider equities (FTSE-100) and sterling. FTSE-100 veered between 7550 and 7250, a swing of 4%. By contrast, the S&P-500 nudged between 289 and 295 – about half as much change in the month. Meanwhile, GBP:USD veered between 1.282 and 1.328, a swing of almost 4% as well.

The FTSE-100 and GBP:USD are correlated, of course.  The USD is the ‘currency of the world’, and FTSE-100 companies mostly are global businesses, trading heavily in USD.  So when the GBP falls, the FTSE-100 goes up – these are the same companies, and valuing them in USD makes in many ways more sense than valuing them in pounds.

But the total swing of the FTSE, measured in dollars, was over 5% in the month.  And back again.  This means any particular snapshot of returns feels very arbitrary indeed. Those of you who ignore month to month movements are definitely on the high ground here.

Anyway, be that as it may, as at the end of September FTSE was up just over 1%.  Sterling itself rose too, about half as much.  And, so it happens, so did the S&P.

Bonds, on the other hand, are heading down.  With rate rises firmly on the agenda, the economy ‘booming’ (ish), now isn’t a very bonds-friendly time.  Or at least that is my superficial read on the situation.

So, at the end of the month, the markets I’m invested in rose by about 0.5%, on a constant currency basis, but the overseas currencies fell by about the same amount.  My portfolio fell just over half a percent – slightly lagging my market exposure. Though for the quarter I am in fact up almost 3%.  No problems here, let’s move on.

As it’s the end of the third quarter, it’s time to review my objectives for the year.

Objective 1: Reduce my taxes (from 30% to 29%) and expenses (65bps to 60bps).

I’m pleased to find that my average investment income tax rate has dropped to 28.6%, just ahead of my goal.  This is in no small part due to my windfalls in Q2; I’d moved most of these into Mrs FvL or my Ltd company, both of which have lower effective tax rates than 30%. Very satisfactory.

As to my expenses, my Q2 windfalls have helped me here, because none of these funds have been deployed in a high-expense way.  As a result my blended expense ratio is around 56bps, including the private bank.

Overall this objective is on course for a solid SUCCESS at year end.

Objective 2: Track my target allocation. 

Since the shakeup some liquidity gave me in Q2, I have been a bit wobbly here.  I’ve been working to reduce this but only rather slowly.  I’m a very reluctant seller, and have not had enough surplus cash from dividends/etc to move the needle much.  As a result right now I have six cells (out of 12) with bigger deltas than 1% of my portfolio, and my Equities exposure is 4.0% less than target.  This isn’t great and I am working to tighten these.

In fact the process of writing this post and staring at these deltas has prompted me to take some actions proactively.

Objective 3: Learn something new.

How hard can it be to learn something new, I ask myself.  Well I certainly have found the blog post about Diversification, and its comments, have got me thinking.  But I’m not sure what I’ve learnt yet.  Watch this space.