How to invest amid crumbling post-war certainties

How to invest amid crumbling post-war certainties

Until recently, political uncertainty was only an issue for those investing within emerging markets. 

That has now changed: the success of political populism, from the election of President Trump to Brexit and possibly the imminent French election, means the post-war liberal, free-trading consensus is under threat. 

It is in such times of uncertainty that investors need to remember the purpose of investment. It is not easily done. The very beginnings of stock market capitalism in 1600 combined two very different functions: investing in the cargoes of Dutch East Indiamen in expectation of the market riches they would bring back from Asia, and gambling that their ship would actually survive the dangerous voyage back to Holland.


Concentrating on certainty

That gambling instinct was given added weight in the 20th century by academic studies purporting to ‘explain’ the behaviour of stockmarkets, as well as simpler and quicker means of investing in all markets of the world. So today private investors must concentrate on what is ‘safe’ about investment, rather than what is possible but far from certain.

The former is income – regular, and rising, and compounding over the years. Such an income can only arise from ‘real’ as opposed to ‘paper’ assets, such as the shares of quoted companies, or rental-producing property.

It is also an income that is small in relation to the capital invested – perhaps on average between 3-5 per cent a year, so the costs that reduce this income are important.

Just because those costs look so low – a quarter per cent here, a half per cent there – they are all too often ignored by the investor and even by the manager.

These managers are rightly more interested in earning their management fees, which can vary between one-half of 1 per cent or more for the fortunes of large private clients, to the 2 per cent or so that can be charged by publically promoted unit trusts or ETFs.

But once the costs of dealing within the trust or fund are added, total costs come close to wiping out the income from the capital. This is especially true of those investment managers who react to every bit of news – good, bad or indifferent – and are more would-be dealers than managers, with annual portfolio turnover of 50 per cent or more.

Not surprisingly, then, both investors and managers end up of wondering about the purpose of investment, and come to the conclusion that it is all about capital gains and not income at all.

Indeed, today, the general belief within the investment industry is that no one can beat the market; it is a zero-sum game and the best thing to do is to keep costs low by buying index funds.


Problems with what we know 

However, few private investors share this pessimistic belief, for they know that many of their counterparts have proved it wrong. It is an example of a widespread investment problem – something seen as so obviously correct that it is never questioned. 

Aberdeen Asset Management has now commissioned Fund Consultants to compare the performance of investment trust NAVs and exchange-traded funds (ETFs). The report says: