Your portfolio
“Investors should
consider what they’re
hoping to achieve
when they choose an
investment and not just
get side-tracked by an
impressive presentation”
investments around, including three
absolutely pointless water ETFs, an
IPO ETF, two CoCo ETFs, a number of
robotics trackers, those which focus
on fintech, batteries, digitalisation
and even a ‘wide moat’ ETF,” he says.
The manager fears the specific
fields these trackers home in on
are often too narrow with too few
viable investment opportunities,
making them a riskier proposition for
investors. Often the more “faddish”
of these themes tend to rise and fall
quickly as investors move on to the
next area of interest. Sleep points to
coal mining, nuclear and shipbuilding
ETFs as examples of previously
popular areas that have crashed and
burned and are no longer available.
He fears many of today’s themes
could go the same way.
Yet others argue ETF providers
are simply responding to demand.
BlackRock points out thematic ETFs
saw a compound annual growth rate
of 128 per cent between 2014 and 2017.
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Powell says the demand is driven by
people who want to invest in themes
“they can understand and that
resonate with their everyday lives”.
Laird adds: “There are a lot of
good ideas in ETFs but there are
a lot of questionable investments
too. Investors should consider what
they’re hoping to achieve when they
choose an investment and not just
get side-tracked by an impressive
presentation.”
IT’S DÉJÀ VU
ALL OVER AGAIN
by Alasdair McKinnon, manager of the Scottish Investment Trust
Even though the late Lawrence ‘Yogi’ Berra was an outstanding
baseball player, he is possibly best known for his ‘Yogisms’ –
apparently nonsensical comments attributed to him that contain a
cryptic life truth. After all, who can disagree that “the future ain’t
what it used to be” and “you can observe a lot by watching”.
However, this outlook is titled with the Yogism that reflects the
resigned inevitability of watching a re-run of a situation you’ve
already experienced.
Those who have already read my previous articles will be aware that a
simple philosophy underpins our approach to investment. At the core of this
philosophy is a recognition that investors are not, in aggregate, dispassionate
– emotions.
calculating machines but instead retain human
As humans, we have many differing emotions, desires and motivations but
one apparent constant, which is maintained across cultures and geographies,
is a desire to be part of the group. This crowding instinct has been a great
benefit to humanity and living standards are unquestionably far higher than
if we operated as individuals. Working as a group allows division of labour,
specialisation and economies of scale.
However, we believe that this crowding instinct does not usefully translate
into financial markets as the crowd is inherently a momentum beast. Crowds
naturally gravitate towards what has recently been successful and shun what has
recently been unsuccessful. The crowd voice, which is always alluring, is driven
by individuals who seek to align themselves with success and disavow failure.
In financial markets, chasing momentum works. Until it doesn’t. By the
time an investment has performed sufficiently well (or badly) for it to become
an accepted wisdom, conditions are ripe for the trend to change. It is this
momentum mentality which creates the business cycle and the numerous
bubbles (and subsequent busts) which have bedevilled investment markets.
We do not attempt to follow investment fashions and instead seek
investments in which we can foresee long term upside. We actively seek
unpopular areas because this is where the balance between risk and reward can
be most favourable. Rather than perpetual trends we believe in cycles, which
brings us neatly back to the déjà vu referenced in the title.
Investors currently exhibit remarkably low levels of scepticism about
‘hot’ investment themes, particularly in the technology area, which mentally
transports us back to the late 1990s when similar enthusiasm reigned (it
didn’t last). The collapse of Long-Term Capital Management (LTCM) in 1998
and the subsequent Central Bank response, arguably, created the conditions
RISK WARNING
for the dotcom bubble. Following the bailout of LTCM, the investment mood
swiftly became feverish, with the best performing investments defined by their
elevator pitch (a simple conceptual story with grand visions) and eyeballs (the
gathering of unprofitable user views). Sales of IT hardware and services boomed
both to salve the impending ‘Millennium Bug’ and due to an increased desire
for personal computers. Those companies that had benefited from this trend
became valued as if the good times would never end.
By the time an investment has performed
sufficiently well (or badly) for it to become
an accepted wisdom, conditions are ripe
for the trend to change.
Things are different today, but in some ways they are the same. Once again,
investors are excited by concept investments even if the most speculative of
them all, the cryptocurrencies, have already disillusioned their fan club. Investors
continue to reward the new ‘eyeball’ metric which, these days, is instead
unprofitable user growth. Internet shopping, food delivery, ride hailing services,
music and video streaming, to name just some, are all subsidised at the point
of use by investors. Meanwhile, investors show scant concern that the premium
smartphone boom has peaked and have only recently started to consider that
companies operating in the ‘Wild West’ space of internet advertising may be
about to meet the posse (courtesy of the Facebook data scandal). ■
High conviction, global contrarian investors
For more information visit
www.thescottish.co.uk
or follow
@ScotInvTrust
The Scottish Investment Trust PLC
Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them
can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest. The Scottish Investment Trust PLC has a
long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these
borrowings would magnify any losses on these investments. This may mean you get back nothing at all. Investment trusts are listed on the London Stock
Exchange and are not authorised or regulated by the Financial Conduct Authority. Please note that SIT Savings Ltd is not authorised to provide advice to
individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability
of an investment, you should contact your financial advisor. Issued and approved by SIT Savings Ltd, registered in Scotland No: SC91859, registered office:
6 Albyn Place, Edinburgh, EH2 4NL. Authorised and regulated by the Financial Conduct Authority.
Telephone: 0131 225 7781 | Email: [email protected] | Website: www.thescottish.co.uk