The Great British Trade Off – Trading vs Investing: Humbug switches to funds

 

The Great British Trade Off is between two trading partners Humbug (because he owns a sweet shop and possibly because of his demeanour) and Fagin (because he like to pick the market’s pocket); as part of their product development and market testing exercise, for the tax year 2017/18 they decided to challenge each other to see who could produce the best return on a real life one hundred thousand pound portfolio, both using different variants of the momentum trading system they’ve developed.

They have since extended the scope of the competition due, in the main, to the realisation that the temptation to chase short term gains – and thereby win the challenge – was detrimental to the overall objective of long term wealth creation.

Having started his Diary of a DIY investor odyssey as an investor in small cap and AIM stocks, Humbug has now decided to put his faith in active fund management where the cost of ownership has reduced and the managers are determined to prove the additional value they bring after a honeymoon period for trackers and passives.

 

‘I went up to ‘The Smoke’ to dine with Fagin a few days ago and was deeply impressed with how smooth his trading operation has become, he’s very close indeed to being right in the zone where he no longer thinks consciously about what he’s seeing and re-acting to, he’s almost at the point where he trades instinctively.

Good stuff, good stuff indeed.

Me? Yeah, right – what can I say? Well I’m not a bad trader, but as I’ve demonstrated this year I’ve got it all to learn as an investor.

But I’m so focused and hungry to learn that it’s going to happen and as I wrote last time, it needs to happen sooner rather than later and I’m determined that it will.

Spotting very short term momentum isn’t easy, but it’s a great deal easier than spotting medium to long term momentum I’ve found. So, I’ve had a total re-think that I hope is going to get me round the problems I’ve encountered in the last eight months.

‘I’m not a bad trader, but as I’ve demonstrated this year I’ve got it all to learn as an investor’

Whilst I may well take short term trades in individual shares for my own account, they won’t feature in my dialogue about the competition that Fagin and I are engaged in (The Great British Trade Off), here I’m only going to write about my battle to demonstrate that long term investing is a better way to build wealth than short term trading.

My original idea at the start of the competition was to construct a little mini hedge fund, trying to pick shares that not only appeared to have momentum but that also fitted together into a balanced portfolio. I achieved the balanced portfolio bit quite well, what I failed to do was get the momentum.

So, going forward my plan is not to worry about balance, all I want to see is momentum. I’m going to sub-contract out all the research into what shares to buy by only investing in funds and I’m going to pick which funds to hold at any one time by using a self designed heat map that uses a combination of big picture thinking on my part allied to my love of charts to confirm that my thinking is (at least at that moment) correct.

Fagin and I co-operate together behind the scenes more than you might think, given that we’re competing with each other. He doesn’t know it yet (but he’s going to find out by reading this) that he’s got a treat in store. Our next meeting is going to be all about me and nothing but me.

What I’m now trying to do is very much a work in progress and I need his input into what I’m doing and perhaps even more to the point what I’m not doing. My plan is to get a system in place that just about runs itself, taking about half an hour a week of my time. How lucky is Fagin, getting co-opted into helping me design the system that beats him?

Let’s now look in detail at my current thinking and present holdings.

The thinking about the big picture is easy, whilst I’ve no idea where markets are going in the short term and what the news will be tomorrow, there are a number of themes running right now that are compelling.

‘I’m so focused and hungry to learn that it’s going to happen’

They are that high tech is going to play an ever greater part in all aspects of our lives, that Japan at long last has a prime minister who understands how to get his country’s economy growing (if only we had the same, I personally can’t think of a single UK politician who has a bloody clue, most of them would struggle to run an ice cream stall at the seaside on a hot day) that China is hell bent on economic world domination, that emerging markets are not constrained by red tape like those in the West, that small companies are more likely to grow faster than large ones, that at this stage of the cycle high yields are better than low yields, that the fund manager Terry Smith of Fundsmith really does know what he’s doing and has lots of skin in his own game, in other words he’s invested very heavily in his own funds so his interests are exactly aligned with me as an investor in his fund and that the US is going like a train.

It’s going to take quite a while for me to be fully loaded, currently I’m 40% invested with my money spread across 21 different funds. I’ll be increasing my stake in each one (and maybe others) if and when they trigger the ongoing momentum signals I’m looking for on my charts and equally will reduce or cut my positions completely if they falter.

 

Technology

 

I’m worried about the current very high valuations the market has on this sector, but feel I must be in it because it’s obviously going to be such a driver of economic growth going forward.

I’ve £1k in AXA Framlingham Global Technology, £3k in Neptune Global Technology, £3k in Pictet Robotics and £3k in Polar Capital Global Technology.

I’m late to the party and so sadly haven’t had the benefits of their past performance as all four funds have performed brilliantly this year, being up 33%, 31%, 30% and 45% respectively.

I’ve also got an opening £1k in the AXA Framlingham Robotic Fund. This fund only launched in February 2017, but is going like a rat up a drain-pipe having gained 24% in ten months. I’m betting that they’ll all continue to do well in spite of the stretched valuations.

 

Japan

 

I’d like more exposure to Japan, but am being patient and waiting for the next suitable buying opportunity. The outstanding fund in the sector is Legg Mason IF Japan Equity Fund Class X (currency hedged) which is up a fraction under 50% for the twelve months to date; I’m holding £5k worth.

 

China and Hong Kong

 

This market corrected quite sharply for a couple of weeks in late November/early December, just after I’d topped up the three funds I’m holding, which is the risk I always run as I’m buying into actual momentum.

Not ideal, but nothing got anywhere near my stops and in the last couple of weeks the upward trend has resumed, so all is good.

I’ve £4k in Old Mutual China Equity, £3k in Gam Star China Equity and have very recently opened a £2k position in Baillie Gifford Greater China Fund. Over the last year this has been the star performer, up 50.4% and provided this superb out-performance continues it is the one I want to be over weight in next year.

 

Fundsmith

 

Terry Smith, the force behind Fundsmith is a legend; generally speaking I’m not a huge fan of the cult of celebrity having met and interviewed many of them in my time and let me tell you most of them are shallow self important tossers – however Terry Smith is anything but.

‘let me tell you most of them are shallow self important tossers’

Google him and read his blogs, he talks total sense. His approach to finding companies to invest in is so blindingly simple as well as sensible, that I’ve devoured his thinking and love it. I’ve currently got £3k in his Fundsmith Equity Fund, however he’s got hundreds of millions in it and I’m happy for my handful of pennies to be riding on the back of his money. The fund is up 23.65% in a year which means on my calculations that he’s made over a million pounds a week from his investment.

Can I say it makes a nice change for a company boss to be earning millions simply because he’s got serious skin in the game, rather than from the hopelessly over generous remuneration package with its golden hello, ludicrous salary and expenses, share options and all mighty pay off for failure after ‘he’ leaves, having destroyed shareholder value, that so many CEO’s enjoy at the expense of their ordinary shareholders. I’m a big fan of Terry Smith (you don’t say……..Ed).

Lord Lee who is also something of a legend (shame he doesn’t run a fund, I’d invest in that if he did) is also a great fan of skin in the game.

From the point of view of little people like us, hitching a ride with a CEO whose personal wealth is very tied into his business has to make sense. Sure, they won’t always make the right decisions, but one thing you can be certain of, is that they won’t be ‘betting the farm’ on some gormless idea to boost their own ego.

‘Here’s to a happy and prosperous New Year and my resurgence in the Great British Trade Off’

UK

 

As I write I’ve holdings in five UK focused funds, with just a £1k opening holding in each. If the ‘Santa’ rally continues next week I expect to be topping them all up. Man GLG Undervalued Assets and Man GLG Income Fund do what they say on the tin, the other three are, Janus Henderson UK Small Companies, Marlborough UK Micro-Cap Growth Fund and the best performer in the last twelve months the Jupiter UK Small Companies Fund up 41.76%. In line with my policy of going where the action is, all things being equal this is the one I expect to be heavily loaded into in the coming months.

 

Specialist/Emerging Markets/High Yield/Global

 

I’ve £2k in the Sarisin Food and Agriculture Opportunities Fund, in a world with a rising population the need for food isn’t likely to go away anytime soon. £1k in the Neptune Emerging Markets fund, up 29.5% this year and £2k in the JPM Emerging Markets Fund, up 33% this year. £2k in the Invesco Perpetual High Yield Fund up 9.4% and £1k in the AXA Pan European High Yield Bond Fund up 6% and finally £2k in the Neptune Global Alpha Fund. The operative word in that one is ‘alpha’, it’s up 25.4% in a year.

 

So there we have it for 2017, with hindsight I wish I’d adopted this fund based investing model from day one of the competition. Just look at the percentage increases these funds have enjoyed this year, had I been in them from the outset instead of being four thousand pounds down I’d be over twenty thousand pounds up.

Sure, Fagin would still be in the lead but I’d be close enough to be keeping him looking over his shoulder and worrying.

Oh well, never any point in ‘if’ ‘cause ‘if’ didn’t happen did it? Here’s to a happy and prosperous New Year and my resurgence in the Great British Trade Off.’

 

 

Yours aye, Humbug

 

 

See all of the thrusts and parries here