Navigating one’s way through chaos

I thought it was tough plotting a way through investing after the last financial crisis, but the current chaos is even harder.

To begin with we have the froth in valuations that is created by low interest rates and quantitative easing.

Last time round we all guessed what the likely outcome of these two policies was going to be – now having seen it before we can be pretty certain.

When you look at a growth versus value chart, it seems like we are in one hell of a growth bubble

But you have to add in to this the current pressure on companies to end dividends and share buybacks, the latter of which was certainly responsible for some of the very hefty valuations seen in recent years.

Then we have the future of income and of value investing. Certainly when you look at a growth versus value chart, it seems like we are in one hell of a growth bubble, with a spike outreaching the one created before the 2000 dotcom crash.

On the one hand your gut must tell you this is about to end. On the other, your brain tells you we know we are probably going to have low rates for longer. 

I just do not see a place for value in this current market. Picking sensible valuations of companies, by whichever metric you want, just gets harder with the scale of the financial bailouts developed countries are starting to use.

And so to income, and producing it in a world of reduced dividends. True, investment trusts may be the answer, but many savers are resistant to the complication and gearing that involves.

You could try family-owned companies, which tend to be more resistant to cutting dividends on their majority holding. But even they, too, will feel the political pressure in the turmoil.

So growth it is, taking money from profits to produce an income. If we are to have more froth in the stock market, that seems like a sensible strategy – but by heck, it does not half add more risk into a portfolio.

Then there is a big final wrinkle in all of this: the future of trade.

The political fallout in China, the Middle East, the US and Europe from oil, Covid-19, tech, and Brexit (yes, it is still there, looming on the horizon) makes negotiating a global strategy for investing highly difficult.

As an ‘ordinary saver’ I am just trying to cut out the background noise and focus on the main pillars of good investing: broad diversification, regular savings and long-term horizons.

I think that is what most people in accumulation want. And if I were an adviser I would be emphasising this over and over again. As a client, I would want to know that my annual fee had paid for a much more in-depth look at my portfolio this time round, and a long reassurance that the strategy is right.

But who knows really what strategy is right?

The most important skill at this time, now the market has calmed, is not sounding like some kind of investment genius; it is communication.

The high cost of trackers

Like almost anything it does, the move by St James’s Place to offer passive funds has sparked much debate.

It is wise of a restricted advice company to offer as much choice as possible, particularly in a world where passive investing has so many fans.

But we all know the mantra with trackers: they have guaranteed underperformance.

We have not precisely seen the fee structure for the SJP trackers yet, but any upfront charge on investing (particularly if it is going to be 5 per cent) will be hugely punitive and wipe out years of returns.

I have had enough dialogue with SJP over the past year or so to have an idea of what they will say. We are likely to hear arguments that you cannot compare the cost with traditional trackers because SJP is a different model, that one tracker will be part of an entire portfolio, and that the cost represents a much bigger service offering.

Whether you take the SJP fee as the quoted 5 per cent, or the 2.9 per cent it says is the average (the industry average quoted upfront fee is between 2.5 per cent and 3 per cent) – whichever way you cut it, the upfront charges still seem very expensive, and startlingly so if you then invest mainly in trackers.

Narrowing the gap

In it together? Pah. (And I am not talking about Dominic Cummings).

Rishi Sunak has made it clear we must level the playing field so everyone pays equally to get us out of this mess.

So I have one suggestion: scrap defined benefit pensions in the public sector: they cost £13bn a year.

That will help narrow the gap.

James Coney is money editor ofThe Times and The Sunday Times

@jimconey