ROBIN ANGUS is a director of Personal Assets Trust, a great favourite with risk-averse private clients, who like its focus on absolute returns (capital preservation first, make money second). In a letter to shareholders he lists what he claims are ten of the greatest investment misconceptions.
1. The point of investing is to beat an index.
If you spent all your time reading investment company reports you might be forgiven for thinking that the point of investing was to beat an index. Nearly every investment fund has a benchmark or comparator (even Personal Assets, although we’d be happy not to) and funds’ own reports often focus on performance relative to their benchmark.
But to quote Bobby White, formerly Chairman of Personal Assets, “Good relative performance does not necessarily buy the groceries.” If a fund sets out to preserve the value of capital and then, if possible, to make it grow, an investor would have every excuse for being as sick as the proverbial parrot if the All-Share fell by 30% and the fund’s net asset value fell by only 25%. It should have been able to protect its shareholders’ funds better than that even from the investment equivalent of Hurricane Irma.
The all-important criterion for judging the performance of an investment fund is whether it does what it says on the tin. Read the writing on the tin first, and if it accords with what you’re aiming to do, then that’s a reason for buying it. Thereafter, judge it on the extent to which it keeps its promises.
Even good performance in the absolute (as opposed to against a benchmark) doesn’t excuse everything. If I entrusted some of my ‘sacred savings’ to an investment adviser who promised to invest it conservatively but instead put it on a horse which romped home at 50-1 in the 3.30 at Chepstow, I might buy him a case of champagne to celebrate but I’d still give him the sack as my financial adviser, because he hadn’t done what he had promised. Never forget that a result by itself tells us nothing about how it was achieved. It might have been through careful, steady investment or wild, reckless plunges. As well as knowing where we are we also must understand how we got there.
2. The point of investing is to beat your competitors.
The second of my great investment lies is closely related to the first. The competitive spirit is in all of us, and we easily fall into the language of sport (indeed, I’ve just done so). My toes still curl when I remember how, nearly 30 years ago, I hypothesised in an investment trust annual about a ‘Management Olympics’ for investment managers. So forget all those metaphors about races. If an investment fund does what it says on the tin, that’s what matters. If it delivers more than it promises, then that’s fine – but not if the fund, in attempting to over-deliver, takes more risks than it said it would.
3. The point of investing is to make your money grow as much as possible.
No, it isn’t. Risk comes into it too. Every investor has a different degree of tolerance of risk, and a level of risk which one investor would be happy to accept would be much too great for another.
To investors who value stability and try to reduce worry to a minimum, Personal Assets offers low price volatility. Every year in our Report & Accounts we show a chart of share price performance against share price volatility. This shows investors not only how our share price has performed, but also how smooth a ride it has been. We may not be among the trusts which travel the farthest, but we do (we believe) offer a less bumpy ride.
4. Total return is the only fair way of measuring performance.
Total return is one valid way of measuring performance, but it’s less useful to private investors than to institutional investors. Private investors are not homogeneous. They have very different aims, tolerances of risk and tax positions. Therefore the total return I get from a particular investment may be different from the total return you receive from exactly the same investment, or I would receive if I held the investment in an ISA.
Let’s say I hold the investment in an ISA because I want to accumulate capital by reinvesting dividends free of tax. Total return in those circumstances is a useful measure. But suppose that I hold an investment because I want to live off the income from it without touching the capital. Total return is of no interest to me then. What I want to know is how big, safe and fast-growing the stream of dividends is. Total return would be the universally best measure of performance only if all investors held their investments for exactly the same reasons. But they don’t.
5. Past performance is no guide to the future.
To adapt the old chestnut, there are three great lies in life: the cheque is in the post; I’m from the government and I’m here to help you; and past performance is no guide to the future. A moment’s thought shows you how silly the last statement is. Were it true, we could abolish examinations, references and almost every other means of distinguishing between the options open to us.
Past performance is not a perfect guide to the future, but it’s the only one we’ve got and it can give us useful information. Do we want to invest in small companies? Then we go for proven small company managers. Do we want yield? Then we go for income managers with good track records. And so on.
6. The unforgivable risk for an equity investor is to be out of the market.
While there are circumstances in which this is true (fund managers who promise to be fully invested in equities at all times have a fiduciary duty to keep that promise), equity fund managers not compelled to be 100% in equities at all times can and should use their discretion. This is what they are paid for, and they shouldn’t hide behind a non-existent policy restriction.
7. To hold cash is an admission of failure.
Our industry hates holding cash, especially now that it’s all but impossible to earn any interest on it. It’s regarded as a failure of imagination and a waste of fees. But at times it’s right to hold cash, for without it we couldn’t do what we hope eventually to be able to do – buy bargains when at last these appear. We hold cash not only to reduce risk but also to ensure that it’ll be there when we need it.
8. Never be forced to pay Capital Gains Tax.
A major advantage of investment trust status is that investment trusts are exempt from CGT on gains realised within their portfolios. This is more tax-efficient than if a private investor managed the same portfolio in the same way. (Gains realised on the disposal of investment trust shares are of course subject to CGT at the normal rate.)
While CGT may not be as grim a levy as it was between 1988 and 2008, when a higher rate taxpayer was liable to pay it at the rate of 40%, even paying it at the current rate of 20% for higher rate taxpayers still goes against the grain. Sometimes, however, it’s better to pay it and sacrifice a portion of your capital gain in order to secure the rest. Purely tax-driven investment decisions are best avoided.
9. Gold, being sterile, is not a proper investment.
Ian Rushbrook, when he was managing Personal Assets, would never hold gold, for this very reason. And he wasn’t alone. Lots of able investment managers I have known held the same view, even if a few of them may have accumulated Krugerrands on the sly. Yes, gold is sterile. It pays no dividends but costs money to keep safe, and – in short – it’s easy to see why it’s been called a ‘barbarous relic’. But we don’t see it that way. Gold can do a job for us, and as long as it does we’re prepared to hold it.
10. Capital is capital, and income is income, and never the twain shall meet.
Is this a great investment misconception? You’d think that someone who regularly questions the usefulness of the total return approach to measuring investment performance would deplore any blurring of the lines between capital and income.
Far from it. Sometimes it makes good sense. As a recent example, we began temporarily ‘borrowing’ from capital to maintain the level of our dividend. Our reason for so doing is that it’s more conservative to realise a small portion of high-quality investment profit than to switch into lower quality, higher-yielding stocks. Counter-intuitive though it may be, sometimes being prepared to dip into capital for living expenses rather than reduce portfolio quality can be what true total return investing means.
ROBIN ANGUS was an executive director of Personal Assets from 1984 to 2020 and for many years was part of the No 1 rated team of stockbroker investment trust analysts.