FIRE v London

Interested, yet?  I’m not mentioning interest, because the Bank of England’s long-awaited base rate decision was on 2 Nov, after the month end.

October felt like back to the basics of human relations, courtesy of Harvey Weinstein.  In the UK we had a foretaste of this drama with the Jimmy Saville scandal a few years ago.  But the rumour mill is whirling around Westminster, and the first scalp – Michael Fallon – has just been claimed.  It feels very reminiscent of the dark days of poor old John Major’s wafer-thin majority Tory government, just after his ‘back to basics’ plea and well before the Edwina Currie story got out.  None of this has much relevance to investing or markets, not least because the current Tory government has very little credibility in such matters so markets are largely ignoring the daily newsflow.

Overseas the Catalonian independence movement has been the main story.  This has curious echos of the Nationalist nonsense going on in these isles.  But there is clearly more relevance to the real world.  I’m amazed that 20 large Spanish companies managed to relocate to Madrid almost overnight, in order to stay afloat on the ship which the separatists rats (there’s a rat in separatists, geddit?) are jumping off.  If only we’d had this sort of behaviour going on in Scotland or, dare I say it, among UK-based businesses before the Brexit referendum it would have made Project Fear a darn site more credible.

In any case, and notwithstanding some of the Washington histrionics about tax reform, there’s not been much to report in the markets for October.

Continue reading “Oct 2017: Sex and separatism” →

(Republishing an old post which I somehow accidentally deleted)

It’s the end of the third quarter. As the summer comes to an end and we approach harvest season, I am struck by the analogy between farming and portfolio management. I’ve been doing quite a bit of farming in the metaphorical sense. Let’s take a look.

• Adjusting my business plan. For my portfolio, a key part of my business plan is my target allocation.  As my deleveraging continues, it’s time to revisit my target allocation.  I’ve now reduced the net debt target by 10% of my portfolio value. As I do this I also need a compensating drop in the ‘asset’ part of the balance sheet.  So now I’ve been revisiting the appropriate mix of assets – is the mix of ‘arable’ (equities) and ‘wheat’ (fixed income) still the right mix? Overall as I deleverage, reducing my risk level, I am slightly increasing my target equity exposure. The table below shows the changes, and the resulting new targets are further down this blog post. You can see I’m also, indirectly, increasing my US weighting (to 50%) at the expense of my UK weighting (now 25%).

• Move one of my ‘mortgages’. I have two portfolio loans, and borrow in both GPB and USD. I only recently noticed that with US interest rates on the rise there is now a significant difference between borrowing costs between GBP and USD. My UK bank charges me around 2.50pc for borrowing GBP; my broker charges less than 1.50pc for GBP, but about 2.5pc for USD. By shifting some USD debt into GBP I save. Hence the business plan’s change on cash is all in the USA column.  I am not a forex trader so this is not a bet either way on GBP or USD – it’s just arbitraging the interest rates. Already, I’ve moved around £100k this way, saving me around £1k pa.
• Selling a ‘field’. To deleverage I need to sell assets. Normally I hate selling. But if the asset is owned by the bank anyway, and I repay the bank with my proceeds, then my net position doesn’t change – only my risk levels and my exposures. The question is what to sell. I’m mostly selling fixed income holdings, as long term I prefer equities and the fixed income was mainly there to smooth returns.
• Moving a ‘fruit tree’ away from the ‘taxing squirrels’. Some of the work required to manage my ‘farm’ is to reduce fees and taxes. My main effort here has been to shift assets into Mrs FvL’s name, as well as into my Ltd company. She is a basic rate taxpayer and I am a higher rate one. I’ve moved about £30k around in Q3; not as much as I’d hoped but still useful. If this makes 3.5pc and I’ve saved 20pc tax then this is £200 pa. For one quarter’s work this is OK.
• Paying down the ‘mortgage’. Deleveraging continues, as repay my portfolio loan. I’ve done pretty well in Q3 on this, and have got my loan-to-value ratio down below 25pc. My farm would have to drop in value an unprecedented amount to trigger foreclosure.
• Topping up the farmer’s wife’s pension. My own pension is big enough to be on track to exceed the Lifetime Allowance. If if my investments do well then the taxman will penalise me. But my wife’s pension still has some way to go. So I’ve topped it up by £5k. In theory, at least ; right now the SIPP provider can’t trace the payment.
• Off to the market, but to buy not to sell. As usual this little piggy’s assets have been productive, with several of the animals providing me with income. I’ve redeployed these funds into a mixture of ‘arable’ assets (equities such as Disney, WPP, QCom – more details here).

But enough of my farming. How did I finish up in Q3?

Looking back at Q3 the most obvious market developments felt currency-related.  But it is noticeable how equities – particularly US and European equities – rose significantly.  Being long global equities and hedged on the the pound has felt like the right strategy throughout.

In September in particular we saw a big jump in the value of the pound. At the same time, and unrelated (unlike FTSE movements), US/European equities rose significantly too. Fixed income fell slightly – the more so in the UK where foreign investors presumably marked prices down as the currency rose.

Continue reading “Q3 portfolio review; it’s been a busy summer.” →