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Confessions of a private investor

I have been managing my own money for over 15 years: in 2000, I gave up the safety of a bank salary and non-contributory pension to lead a management buyout.  I found myself with a couple of legacy final salary entitlements and a small pension pot in “Zombie” fund manager, Phoenix Group.  My pension manager like many at the time had given up the ghost, but rather than throw out its legacy customers, they sold out to Phoenix.  I was able to choose from a range of funds managed by the company, but they all had titles like “balanced managed” and I wasn’t happy with that. I wanted more flexibility so I transferred into a SIPP I’d opened up with Hargreaves Lansdown. The game was afoot!

My approach to investing has always been top-down and manager based: my attitude has always been that I am probably wasting my time trying to pick stocks, even though I have been a professional analyst and investor.  My logic is simple, I am a business owner/manager now. This is worse than having a full-time job. Even though I am intimately involved in the world of finance, I don’t have access to the data and the time that a pro-investor would have to select stocks, so don’t try and beat them, pay them.

Having given over the job of nitty-gritty stock and bond selection, I do not give away the asset allocation decision: if you also look at the process of fund management, funds are constrained by asset type, bonds, equities etc. and by a strategy, sector or geographic focus: income or growth, biotech, EU exc. UK etc.  A manager doesn’t have the ability to say forget Europe, let’s buy US stocks.  That’s not in his mandate, so whilst he or she may be a brilliant stock selector, they are trapped.  I am not.

In my next blog, I’ll have a look at my performance history, but here I want to talk about how I run my “investment process”.  We’ll contrast this in later blogs with the kind of approach a conventional institutional manager will follow and why.  In the early years my search for funds was a bit ad hoc, but was revolutionised a few years ago by my discovery of the Salty Dog Investor website https://www.saltydoginvestor.com

The name is a bit of a private joke – the founders made their money in shipping.  They set up the service to prove they could do a better job than the professional wealth managers they used.  The main thing I get from the service is their performance data by sector which is perfect for helping me pick funds that are performing well in the sectors I am interested in.

For you as an investor there are two great things here to help you start investing, or investing in a more structured way. Even if you don’t subscribe, get free access for a month and a look at the newsletter and performance data.  This will give you a great start.

One is the set of sample portfolios on page 3 of the Newsletter.  If you went to a private client wealth manager they would give you a questionnaire to assess your risk appetite and appropriate level of risk for you.  They would then make up a portfolio like one of these three depending on your risk appetite.  Go to Nutmeg.com – a few clicks and slide the risk slider and you’ll see how to get to the same place.

Two: To help you build the portfolio yourself (and save 1% p.a.) the Salty people divide the fund world into different risk categories – cash, money market funds & Government bonds is “Safe Haven”.  At the other end of the spectrum emerging markets small cap stocks is “Full speed ahead emerging”.  In their monthly data they provide an analysis of the best performing funds over the last 4,12 and 26 weeks so you can see what sectors are performing and more particularly what funds.

So, if you fancy managing your own money:

  1. Decide your risk appetite
  2. Choose a mix of funds
  3. Open an account with a broker, (if you can’t think of one, Hargreaves Lansdown keeps coming top in customer satisfaction surveys.  I’ve never found a good enough reason to leave)
  4. Invest

One of the big things Salty Dog talk about is momentum.  Momentum investing has a lot of academic support: basically, the idea is that stocks out/under-perform over an extended period.  If you buy the best performing stocks each month or two and sell the worst performers in your portfolio, you outperform the index consistently.  You’ll follow winners and cut losers.  The Salty people want you to sell what goes flat or down and pick new winners.

This makes sense: each fund manager bets on which types of stocks in a sector will win, defensives, cyclicals, commodities etc.  If a manager is outperforming, they have caught the popular mood.  Jump on.  Equally though, when a manager’s selection starts to underperform, it is difficult for a manager to dramatically change their allocation in the short-run and to market time.  They are also probably committed to a strategy or allocation.  You can just be agnostic and follow winners.  I have found some top performers this way and got in when they still had a couple of years of strong performance in them.  I’ll talk about my portfolio next time, but CF Odey’s Absolute Return Fund is a great example – I was in a very lack-lustre absolute return fund, which didn’t achieve its Libor based benchmark.  I found Mr Odey’s fund through the Salty Dog data and switched.  The fund’s momentum continued into the next year, where it was a top performer, to the extent that the managers imposed a 4% entry fee on new money.  If you’ve read any press about Mr Odey over the last year or so, alas the fund has gone off the boil.  Crispin has been bearish through and since Brexit.  The markets have not been.

I am not an active momentum investor.  I prefer to take broad asset allocation decisions which will be good for 1-2 years.  I then hope that the companies and managers I invest in will create some value.  Using momentum data should help me get performance out of the sectors I invest in.

 

 


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