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Diary of a Fund Manager - Brexit by Numbers - 17.06.19

A numerical description of Brexit, more about change and fund management lessons from the art world, all make an appearance in this week’s Diary.

Investors are in a pensive mood with markets little changed in recent days. Last week equities ended marginally ahead, bonds and gold unchanged, whilst the dollar was our collective currency of choice. Despite burning tankers in the Strait of Hormuz the price of a barrel of oil moved up by only a fraction. Less demand, more shale supply, the explanations flooded in. Something must have changed, but quite what is a matter of debate.  

Events did, of course, continue to unfold. US inflation is on a modest upslope, but on closer inspection it is only rent, public transport and healthcare that are getting more expensive. The German government was able to borrow at an interest rate of -0.24% per annum which when you think about it is more than strange. Invest your money with us and we’ll give you back less than you put in – guaranteed. On the UK side of the Atlantic and Channel, the economy seems to be stagnating. Arcadia managed to do a deal with its landlords and so lives to fight another day, but lack of shoppers remains an unresolved problem. Brexit remains a riddle, wrapped in a mystery, inside an enigma, perhaps best described in numbers given that so many words have been written about it over the last three years: 6/314/160,000/0. That is, six remaining candidates for the leadership of the Conservative Party and so the next Prime Minister, each asking for the vote of 314 MPs, before presenting themselves to 160,000 members of their party. Zero is the number of people who know what will happen next. The odds of an early general election are rising. Elsewhere we await news from the Fed about US interest rates and trade tariffs from our betters at the G20 meeting in Japan. Life, business and investment carries on, but pensive is the order of the day.

Being on the right side of change when it comes to making a good investment return is a perennial theme of these Diaries. Some statistics that caught my eye; since 2010 annual global camera sales have fallen from 121 million to 25 million. In the US, consumer sales of MP3 players are down 87% since 2007 with portable navigation systems -80%. Smartphones rule ok! Amazon is looking at ways to use its ubiquitous platform to lend money to small businesses and Facebook has a plan to issue its own digital currency. Bankers beware. And as robots with AI replace tasks currently done by people some advice for those planning a career or just worried about job security. Find something that involves a series of non-rational tasks, social intelligence, complex critical thinking and creative problem solving.

Back to the here and now, and in response to last week’s Diary, I now know a bit more about how the shipping industry works, whilst Neil Woodford’s problems have provoked several client discussions about the importance of liquidity and diversification when it comes to sensible investment. The old adage that markets are always liquid, but you might not like the price is being proved yet again.

Talking, or indeed writing about investment, may seem a distraction from the critical task of implementation, but I find that the lens of explanation does sharpen the image of reality. At a time when economic growth is likely to remain anaemic, those who focus on numbers like GDP or invest in indices find it hard to be optimistic. In contrast, searching for companies on the right side of change is a much more productive use of time. Winners taking business away from losers may be a zero sum game so far as economic growth or an  index are concerned, but it’s a game worth playing. The risks are, however, asymmetric. Winners in a changing world are equally at risk from new disruptors. On top of that investing in highly rated, and in some cases loss making companies, is at times uncomfortable. Losers tend to stay losers however cheap they appear.

And so to Liverpool to take part in an event organised by the ever excellent Quilter Cheviot Liverpool office in the Walker Art Gallery which at present is hosting an exhibition of the work of Charles Rennie Mackintosh. My task for the evening was to talk about investment for a few minutes before passing the baton to a Mackintosh expert. Back in the 1990s I worked for Flemings, an independent merchant bank with strong views about investment. Being of Scottish origin a decision was made in the late 1960s to buy some Scottish paintings, which at the time were out of fashion and so cheap. Ad hoc buying became a collection, others noticed the qualities of the Scottish Colourists and prices rose. Indifferent works or those similar to others in the collection were sold and the proceeds recycled into the works of young Scottish artists, some still at college. Reflecting on this it struck me that the similarities with fund management were unmissable; buy cheap, keep the best, sell lower quality at high prices and selectively invest in the new. An unplanned benefit for those of us surrounded by paintings not only in meeting rooms, but also corridors and offices was that we assimilated the art without having to study. I still think that if the light is right I can spot a Wilkie, McTaggart, Cadell or Peploe at twenty paces and at a push might even recognise an Elizabeth Blackadder or Craigie Aitchison.

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