by Mark Dampier
If you can’t sleep at night, you are probably not investing the right way for your particular needs and temperament.
Patience is probably the most important discipline you need as an investor, and the hardest to maintain, especially when media commentators are either deeply gloomy or exceedingly optimistic. Keeping your head in these circumstances is the most important requirement of all.
Don’t be afraid of your own judgement. One thing I have learnt is that there are many clever people out there, but being clever and having common sense don’t always go together. Since the financial crisis of 2008 most clever people seem to have been spectacularly wrong about many things.
You need to find your own way and style of investing. I can tell you the mistakes I have made and I hope you will learn from them, but you have to find out what works for you and what suits your temperament.
If there is one rule for investment it is that there is always an exception to that rule.
Try not to get trapped in your own personal history and experience. The low inflation of the 1950s and 1960s trapped many into thinking that gilts were a solid, safe investment. In the 1970s high inflation wiped those investments out. Then, just when everyone had come to despise them in the late 1970s, along came a 30-year bull market in bonds! Today the talk is all of deflation. Anyone born in the 1980s or later can only remember low inflation and interest rates that rarely change and never go up. Do not presume that this will continue indefinitely. It won’t. If you can spot the inflection point you will make a lot of money.
Always have an open mind and be ready to question the statistics and any research you see. I have discovered over the years that much of it is very poor and flawed.
When buying a fund make sure you look under the bonnet to get an understanding of the philosophy and style of the fund manager. This will help you respond the right way when things go right or wrong. If you know why you will be more likely to buy or sell at the right time, which is all that investing is ultimately about.
Acknowledgements
I admit when Stephen Eckett of Harriman House first emailed me asking me to consider writing a book on finance, I thought it might be a wind-up, something that some of my colleagues have been very good at doing in the past. But in talking to Steve I soon realised he was deadly serious. His argument was that there was very little written about DIY investing that was any good, and if anyone could fill that gap, he thought it would be me. Well, I agree about the first part at least. There is a gap…
When I mentioned Steve’s idea to Ian Gorham, the chief executive of Hargreaves Lansdown, he responded very positively and after that the die was cast. Ian’s unfailing support for the book also helped me at those times when I thought about giving up on the whole project. I admit to having been slow off the mark. I am used to writing short pieces of just a few hundred words. I write a column for the Independent newspaper every Saturday, but that is seldom longer than 600 words. A book is a very different animal, needing a thought-out structure as well as good content. So I am indebted to Jonathan Davis who came in to assist me, interpret my ramblings and put them into much better English. Both he and Steve Eckett have the patience of Job.
I need to go back in time as well, because this book could never have been written if Kean Seager had not offered me that first job at the front door of my mother’s house. I will always be grateful for that first opportunity – something every young person needs to help them on the career ladder. His encouragement and advice in my early career was invaluable.
Some very special thanks need to go to Peter Hargreaves and Stephen Lansdown for the incredible support I have had at Hargreaves Lansdown. It was Peter who first rang me out of the blue in 1998 suggesting we had a chat and proposing I come to help him with fund selection and PR. Accepting the job at HL was undoubtedly the best decision I have ever made (with apologies to my wife). It has also given me the most fun of my working life. As Peter likes to say, you spend a third of your life asleep, a third at home and a third at work. If you can get the last two right, you have reached Nirvana.
While Stephen has stepped away from the business I still see him for a chat now and then and Peter as a major shareholder is still involved in the business, despite standing down as a director. Hargreaves Lansdown has an open-floor policy. There are no special offices for directors and Peter and I have always worked within a few yards of each other. We have never known each other’s extension number. We just shout across a row of desks, often to the annoyance of my colleagues.
I am lucky to work with a fantastic team of 14 research and PR professionals whose talents and hard work I happily acknowledge. There are too many to mention by name, but suffice it to say they are all far brighter than me. I give a special mention to Lee Gardhouse, who manages HL’s multi-manager funds. I knew him before joining Hargreaves Lansdown as a young whippersnapper and it has been a pleasure to watch him grow in stature and experience ever since. He has become an invaluable sounding board for my investment decisions, both personal and professional. Every DIY investor needs a Lee Gardhouse.
Finally I owe a huge thank-you to my wife Annette, whose unfailing support kept me going, especially through the hard times. When I was despondent at times, or if stock markets had taken a big tumble, her words should be remembered by all investors: “Stop worrying. You know it will all bounce back eventually. Just be patient.” Very wise words.
Appendices
Useful websites
It is easy to be confused by the jargon and technical terms used in the fund industry. The fund industry’s trade association has a particularly useful glossary of fund terms which you can find at: www.theinvestmentassociation.org/all-about-investment/glossary.html
You might also find this explanation of fund yields from the Hargreaves Lansdown (hl.co.uk) website helpful: tinyurl.com/HLfundyields
The websites listed below also have a lot of information about fund terms and industry trends:
Fund prices, ratings and news
trustnet.co.uk
morningstar.co.uk
citywire.co.uk
iii.co.uk
hl.co.uk
Industry websites
theinvestmentassociation.org (open-ended funds)
theaic.co.uk (investment trusts and VCTs)
News
bloomberg.co.uk
ft.com
Useful publications
Money Observer
MoneyWeek
The Times and Sunday Times
Financial Times
Analysing a fund
Here are some examples of the kind of information that is available to investors when analysing funds, with my comments. The example I have used is the Artemis Income fund, which is mentioned in the text and is a fund that is rated highly by many professional investors and advisors.
The company’s own factsheet
My comments
All funds are required to produce monthly factsheets. They are the obvious starting point for your analysis. Note that there are two sections on the fund’s performance. One (the class R units) goes back to the launch of the fund in June 2000. These are the units that ordinary individual investors can buy. The second (class I units) only goes back to 2008, and shows the performance of the institutional class, only available to professionals or investors with a minimum of £250,000 to invest.
The lower charges for bulk buyers explains why the performance has been better (81.7% over five years versus 75.1% for the retail class). It is also worth pointing out how the price of the accumulation units is significantly higher than that of the distribution (or income) units – 346p vs 206p for the bid price. This underlines how reinvesting the dividend from a fund, rather than taking it as income, will always produce a higher compounded return over time.
While the factsheet says that the fund has an initial charge of 5
.25% and an annual management charge of 1.5%, in practice if you buy a fund through a broker, you will rarely have to pay the initial charge and since the rules on fund commissions were changed in 2013 the annual management charge will also be reduced by at least 0.75% provided you own the so-called unbundled units. So if you buy this fund through the HL platform, for example, the ongoing charge figure (OCF), the figure that combines the annual management charge with other costs charged by the fund, is now 0.70%.
Extracts from HL’s research into a fund
My comments
This is an example of the kind of research about this fund that you will find on the HL platform. Other platforms will often have similar analysis, which goes beyond what the fund management company itself provides. The chart on this page, for example, traces the fund manager’s performance not just back to the launch of the fund by Artemis in 2000, but further back in time to include his time with a previous employer, where he ran a similar equity income fund. We also comment on the fund’s investment process and its contrarian investment style.
My comments
This graphic breaks down the regional balance of the fund’s investments – not much value for a UK fund like this, but more useful with a global fund. It is worth noting that many of the company’s largest investments are multinational companies, such as Shell and HSBC, which trade globally but happen to have their shares listed on the London stock exchange. If you measured where the companies owned by the fund generate their revenues, it would show a very different regional pattern.
My comments
This analysis breaks down the sector and market capitalisation of the stocks that the fund owns. By comparing this to other funds, and with the main market indices, it generates valuable detail about the style of the fund. You can see that nearly 30% of the fund is invested in companies with a market value of more than £50 billion. It also has a large weighting in financial stocks. You can compare this to the makeup of the main London market indices (the FTSE 100 and FTSE All-Share Index) to see whether the fund manager has more in one sector than the market as a whole. Artemis Income is what the industry calls a large-cap fund.
Morningstar’s verdict on this fund
The following is an example of the kind of factsheets about funds which you can obtain from independent analysis companies such as Morningstar. There is a lot of detail, and some of it may take some getting used to. I might draw your intention to the equity style map, which attempts to show how the fund stacks up against two main style measures – the size of the companies the fund invests in (large, medium or small) and the manager’s general investment approach (growth, value or something in between). Being in the top left-hand quadrant indicates that Artemis Income is a large-cap value fund and that it has consistently followed this style over many years. The ‘equity region exposure’ graphic shows the result of the kind of look through geographic analysis I described earlier.
My comments
This page is definitely for those who are data freaks! Note that the risk (meaning the volatility of the fund’s performance) has been below average over all but the most recent periods. Given that the long-run return has been average, the Sharpe ratio – a measure of risk-adjusted return – is positive at 1.30 (quite high by industry standards). The R-squared is an attempt to measure how closely the fund’s holdings have performed compared to the UK market as a whole – broadly speaking, the closer to 100 the figure, the more closely the fund follows its benchmark. What this suggests is that the Artemis Income is a mainstream fund investing in the largest companies in the UK market and a solid performer that has added some value over and above what you might have obtained by buying a UK index tracker fund – but mainly because it has been less volatile rather than because of its exceptional returns. My analysis at HL would be slightly different to this conclusion – which underlines that even detailed statistical analysis will not always lead you to a clear-cut conclusion.
How multi-manager fund managers see Artemis Income
I suggested in the text that it might be useful to cross-check your analysis of a fund by seeing whether it features in the portfolios of the best multi-manager funds. Here is an extract from the most recent published portfolio of the Jupiter Merlin Income fund, one of the most popular multi-manager funds in the UK. You can see that Artemis Income is the third largest pure equity income fund, after Woodford Equity Income, Royal London Equity Income and M&G Global Dividend.
You can also cross-check against the holdings of HL’s Multi-Manager Income & Growth portfolio, where Artemis Income is the second largest holding after Woodford Equity Income. Given what I have already said about this fund, you probably won’t be too surprised by this.
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First published in Great Britain in 2015.
Copyright © Mark Dampier
The right of Mark Dampier to be identified as the Author has been asserted in accordance with the Copyright, Designs and Patents Act 1988.
Paperback ISBN: 978-0-85719-467-1
eBook ISBN: 978-0-85719-511-1
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