A new edition of The Intelligent Investor

A rite of passage for many investors is reading Benjamin Graham’s classic 1949 text, The Intelligent Investor. I’m no exception, and consuming the book avidly some years ago was a milestone in my journey from employee to early retiree.

At the time I recall thinking how astute Jason Zweig’s between-chapter commentaries were, but also how frustrating it was they hadn’t been updated since that edition’s publication in 2003.

Some good news has appeared on Amazon.

Timed for the 75th anniversary of the original’s publication, a new edition of the Intelligent Investor will be published in late October 2024.

Notably all the commentaries have been updated as per this post from Jason Zweig himself:

This fact alone makes a purchase of the new edition likely to be an intelligent investment.

This could 'HIRT': Investment Implications of a Labour Government

Rachel Reeves, the next Chancellor (?)

One thing a private investor learns, often the hard way, is to be wary of any consensus that emerges among investment commentators and fund managers.

The latest version of this is the widespread belief among UK fund managers that investors have little to fear from the likely outcome of the July 2024 UK General Election, namely a decisive Labour victory.

As the recent annual report of the CT UK High Income Trust put it: “Whilst the likelihood of a Labour administration often causes concern for investors and volatility in markets, for now at least the messaging from Labour and in particular the Shadow Chancellor has been benign.”

A plea for stability and the policy clarity that is likely to flow from a new government with a majority likely to be well over 100, with a probable decade or more (at least) in power, was a theme at the recent Hill and Smith AGM I attended, with more opportunity than risk being the Chairman’s assessment of the consequences of a Labour victory.

At first glance, there is much to commend such a view. Few could argue that the outgoing Conservative administration has been a model of competence and consistency, with five Prime Ministers in eight years and few substantive legislative achievements. What little remained of a long-standing Conservative Party reputation for economic probity was squandered in the ill-fated six-week tenure of Liz Truss and Kwasi Kwateng.

In so far as Labour has articulated detailed economic and financial policies, growth and investment are the keywords.

What is Labour's approach to financial markets?

An early 2024 policy document, Financing Growth, offers some clues.

The overall tone is redolent of early New Labour - working with financial markets to deliver economic prosperity and greater social opportunity. It’s possible to envisage sectors of the economy such as smaller companies, green transition technologies and industries located in the Midlands and North of England being favoured.

However, even within a seemingly benign policy statement there are hints of what I term the probable ‘HIRT’ to come: Higher Intervention Regulation and Taxation.

HIRT: Higher Intervention Regulation and Taxation

1. Directing pension fund investment into UK companies

There has been growing concern across both Labour and Conservative parties at the low level of institutional investment in UK equities. According to Office for National Statistics data, at the end of 2022 UK pension and insurance funds held only 4.2% of UK listed shares, down from 45.7% in 1997.

Labour's 'Financing Growth' document proposes to “Undertake an in-government pensions and retirement savings review” and introduce an initiative modelled on the French Tibi scheme, channelling capital to UK growth businesses, particularly smaller, high-growth companies that might otherwise struggle to attract investment.

The French scheme seems to have worked well thus far, and this proposal may be well-merited. However the suggested means of implementation signals the likely style of greater government intervention to come under a Labour government, capital allocation by committee:

“Labour will set up an oversight committee to manage the scheme comprised of private investors who will be responsible for drawing up an accredited list of venture capital funds and UK small cap funds, supported by British Patient Capital.”

2. Taking aim at AIM?

What politicians omit to mention is at least as important as what they announce. A striking absence in the 'Financing Growth' document is any mention of London's Alternative Investment Market.

Business Property Relief, and the attendant Inheritance Tax exemption for qualifying AIM-listed companies, must be just one of many investment tax reliefs likely to come under pressure, given the repeated commitments by both Rachel Reeves and Keir Starmer that rates of income tax, National Insurance and VAT will not be increased by a new Labour government. 

Revenue will have to be found elsewhere, and investment reliefs like this are prime targets.

3. What kind of ISA(s)?

'Financing Growth' expresses a commitment to renew individual investors' interest in owning shares:

"Labour will look to deliver a modern ‘Tell Sid’ campaign for retail ownership to highlight the value of British people supporting British businesses"

This may signal a desire to make the Stocks and Shares ISA a British-only ISA. It's not too difficult to imagine a future Chancellor arguing 'why should the British taxpayer subsidise investment in overseas companies'?

Nothing explicit has been stated about the level of future ISA allowances. Indeed the author of a 2023 Resolution Foundation Report calling for the introduction of a lifetime cap of £100,000 on ISAs has been selected as a Labour candidate for a relatively safe seat in Wales.

4. The direction of travel is likely to change, decisively

I'm not suggesting an idea like a £100,000 ISA cap will become Labour policy soon after the election, simply arguing that just as in the 1970s ideas from right of centre think tanks rapidly moved from the fringes to become government policy, so in the late 2020s and early 2030s, the same process is likely from the left. 

Ideas like an ISA lifetime allowance; equalising rates of capital gains tax, dividend tax and income tax; the explicit channelling of capital towards social policy goals could well move from appearing beyond the left wing of what is feasible to part of a new settlement between governments and financial markets.

Not all of this need be negative for UK investors. 

The larger the Labour majority the more emboldened the government may become in navigating towards a rapprochement with the European Union. it's highly likely that re-joining the Single Market and Customs Union will figure in the Labour leadership election to replace Starmer at some point in Labour's probable second or third term. 

Whatever one's views on Britain's exit from the EU, moves to recast that relationship in less antagonistic terms, even if only incremental in the short-term, are likely to be looked on favourably by potential investors (particularly from overseas) into UK equities.

5. Could 2024 be another 1979 or 1997? 

In 1979, as he was about to lose to Margaret Thatcher, the outgoing Prime Minister, James Callaghan observed, "You know there are times, perhaps once every 30 years, when there is a sea-change in politics. It then does not matter what you say or do. There is a shift in what the public wants and what it approves of."

As I write this post on Sunday 9th June 2024, just under a month before the General Election, the Sporting Index Spread Betting Market is implying Labour will win 432 seats out of 650, a majority of over 200.

A victory even only half as decisive is likely to usher in an extended period of Labour government, with policies potentially more radical than commentators currently envisage, particularly if the UK's fiscal position and Labour public expenditure plans require higher taxes, which are likely to be levied on wealth rather than income from employment.

Even if the UK stock market, or parts of it, prosper under a long-term Labour government, it’s unlikely that investors and companies will be able to keep as much of the profits for themselves in the future as they have in the past.

It would be complacent to retain current assumptions regarding the limits of intervention, regulation and taxation.

The 2024 General Election is the first step towards a potentially radical new policy regime for which investors need to prepare.

In Search of Global Small (ish) Cap Funds

 

Like first loves, or the musical passions of our teenage years, the research we discover at an early stage of our investment journeys continues to shape our thoughts and actions for the rest of our lives.

My ongoing fascination with seeking out investments in smaller companies stemmed from reading Strategic Value Investing (2013) by Horan, Johnson and Robinson, Gervais Williams's The Future is Small (2014), which cited Dimson and Marsh's long-run data on the outperformance of UK smaller companies, the 2023 version of the graph displayed below, data from Deutsche Numis, showing the results of investing £1000 in 1955, smaller companies versus the All-Share index:

However, just as those findings impinged on my developing investment consciousness in the early to mid-2010s, so that outperformance of smaller companies began to wane. Indeed, as many recent discussions have pointed out, the small cap premium seems to have disappeared in the last decade, not just in the UK.

A Financial Times article from March 27th 2024 draws attention to the relative underperformance of small caps in the 'Magnificent Seven' dominated US stock markets in seven of the last eight years:

Indeed as data from the MSCI World Small Cap Factsheet show, you have to take the starting point right back to the start of the 2000s before the outperformance of small caps reappears. Over one, three, five and ten years the MSCI ACWI World Index has outpaced the small cap index:

However, such findings have not eroded my instinctive leaning towards small cap companies. Indeed, for the long-term growth segment of my portfolio I have been redoubling my efforts to seek out investment vehicles that provide access to global smaller companies.

Why smaller companies? Precisely because of their recent underperformance, and the potential for recovery as interest rates and inflation look set to moderate.

Why global smaller companies? I already have extensive exposure to UK smaller companies, and after the next UK General Election the likely Labour government may not be unambiguously positive for the UK stock market, particularly if it wins a large majority and becomes more radical into probable second and third terms.

There are surprisingly few global smaller companies investment trusts, and the two mainstream trust options, Smithson, and The Global Smaller Companies Trust, have not kept up with the MSCI World Small Cap indices.

There are a handful of global smaller company OEICS, and two have outperformed the MSCI World Small Cap index in recent months: IFSL Marlborough Global Small Cap, and Liontrust Global Smaller Companies (see table below, data from Hargreaves Lansdown, to 28^th March 2024):

How small is small?

In analysing these two funds, one question immediately arises: how small is small? The answer for each fund is 'not very', at least in UK terms, as according to Morningstar each fund has an average market cap of about £4.7 billion. So for a UK investor they are better understood as small and mid-cap funds.

There are some differences between them: only one of their top 10 holdings overlaps (Vertiv Holdings,  supplier of digital infrastructure support services, such as data centre cooling). Marlborough has 57% in the USA, against 65% for Liontrust. While each fund has about 40% in industrials, Marlborough has 19% in technology, against Liontrust’s 6%.

Despite their strong recent performance, the funds are very small: as of 29^th February 2024, Marlborough less than £5m, Liontrust less than £25m.

I have taken a small position in the Marlborough fund (which was made available in the UK in autumn 2022) despite the oddity of it being run for Marlborough by two English fund managers working for the Australian asset manager Ausbil in Sydney. 

Commentary on the Ausbil web pages provides useful insight on the Marlborough fund's investments in companies supporting the renewal of the USA's electricity supply system.

It’s worth noting that the Liontrust fund had a change of manager in spring 2022.

I may invest in Liontrust Global Smaller Companies as part of my new tax year’s SIPP allocation.

Interesting though these two funds are, the lack of a global microcap fund or investment trust continues to frustrate…

Listening List: some online investment resources

As an investor, increasingly it is online interviews, podcasts and webinars that provide investment insights and ideas.

Here is a list of resources I've found useful lately:

Quoted Data: commentary and interviews with investment trust managers, new video usually every Friday.

Money Makers Podcast: commentary and interviews with investment trust managers, new episode usually every Saturday.

Investor Meet Company: webinars direct with company management, often tied to annual or interim results.

Paul Scott Small Caps Podcast: weekly podcast by Paul Scott, commentator on UK small cap results and trading statements for Stockopedia.

Algy's Investment Podcast: Interviews with fund managers conducted by Algy Smith-Maxwell of Jupiter fund management, including Anthony Bolton of Fidelity Special Situations fame, and Terry Smith of Fundsmith. The interviews seem to be dated roughly autumn 2023.

Onward and Active/Activist?

In a previous post from 2021 I bemoaned the dearth of UK-based value-inclined fund managers.

Since then, as my 2042 portfolio illustrates, I have found more such funds than I originally envisaged, albeit often having to look hard, and beyond the narrow confines of what the IWeb platform chooses to make available.

With April 6th and a new tax year approaching, thoughts have turned to next year's SIPP allocation, and in doing so a relatively new fund has caught my attention.

Onward Opportunities Trust

The Onward Opportunities is a rarity - a UK investment trust that launched in 2023. Not only that, it did so at the height of the Silicon Valley and Credit Suisse bank turmoil in the spring, and persisted despite 'only' raising about £12m, well below the £100m figure widely seen as the minimum for investment trusts to be viable.

The January 31st 2024 NAV of £1.097 shows well the trust performed in its first few months, despite an often hostile environment for UK small cap investing. This has prompted my initial investment outside my 2042 portfolio SIPP, and strong consideration of this trust to be one of those to which I hope to add in my SIPP each year until I reach 75.

The trust's approach of small cap value married with active/activist engagement accords well both with my value style inclinations, and two of my strongly performing existing holdings, Rockwood Strategic, and outside of my SIPP, the Japan focused Nippon Active Value.

The Onward Trust's admission document cites the work of a Duke University business professor, Alon Brav, and associates, which finds a value enhancing outcome from activist forms of investment, see for example this 2022 paper, Governance by Persuasion.

To be worthwhile for a retail investor, an active fund, particularly one like the Onward Opportunities Trust with a performance fee [my one reservation, albeit the manager confirms the NAV is quoted net of any such fee entitlement], the fund needs to be markedly different from the wider stock market.

To put it more concretely, when a trust portfolio includes companies you've never heard of (React, Transense) particularly at the 'micro' end of the small cap spectrum, it at least has the potential to perform very differently from a passive vehicle.

Additionally, as I've often stressed on this blog, investing is a human endeavour, subject to qualitative and social considerations. As an economic/investing counterpart to the ecological benefits of biodiversity, in a world where value investing vehicles are hard to find, new ones, and the emerging generation of fund managers behind them, deserve at least strong consideration.