NEWS FROM THE MEWS
The Hamilton Financial Team
The Hamilton Financial Advisory Panel
About Hamilton Financial
Hamilton Financial is a firm of private client investment managers and independent financial advisors. We are 100% owned by the directors. We have no financial tie-ups or obligations to third parties. We are proud of our team, our Investment Advisory Board and for our record of:
- Fee transparency
- Plain English
- Sensible financial & tax planning advice
- Good investment performance
- Competitively priced fees (no VAT)
Firstly, don’t miss out on using both your annual ISA allowance (£20,000) and your annual pension contribution allowance (£40,000 for most tax payers but a measly £10,000 for very high earners).
Please phone Victoria on 0131 315 4888 for more information.
Most of the articles in this edition of “News” are about the long term benefit of time in the market – as opposed to market timing. We pay tribute to our 5 favourite equity fund managers and we explain why we buy actively managed funds as opposed to passive funds.
I hope you enjoy our Spring offering of News from the Mews.
Andrew Hamilton CTA DipPFS
Financial planning using life assurance
Here are six reasons why life insurance is a crucial part of financial planning:-
- The provision of funds to pay off debt such as a mortgage.
- To provide for your family – e.g. education, living expenses, etc.
- To replace lost income.
- To provide cover for an Inheritance Tax liability.
- To cover the unexpected (ill health or accident).
- Peace of mind.
A 25 year level term policy for a 35 year old male non-smoker providing cover of £250,000 can cost as little as £11.25 per month (premium guaranteed not to increase over the 25 year term).
Call Victoria Mann on 0131 315 4888 for a quote.
Pound cost averaging versus lump sum investing
Years ago, I remember my parents telling me to put a regular amount every month into a savings plan. (I wish I had listened more carefully!)
This was in the days before pension plans, with all their tax benefits. I also remember being told that if you invest in a regular savings plan, such as a unit trust plan, it doesn’t much matter whether stock markets go up or down – “you will benefit from pound cost averaging”.
So what is pound cost averaging? In simple terms, it means that if the market value of your unit trust savings plan falls, it doesn’t matter: the cost of the next unit (or units) you buy will be cheaper – so the average cost of all the units you hold will have reduced. (For those of us who don’t have lump sums
to invest, it is quite good to know that it’s not all doom and gloom if the markets fall!)
But what about investors with lump sums to invest? Are they better to feed their cash into a savings plan in smaller amounts over a longer period – for example 3 months, or 12 months or even 3 years? Or are they better to invest the lot straight away? Let’s look at some facts:
- Pound cost averaging allows savers to benefit from market volatility over the long term by investing a small amount regularly.
- Pound cost averaging avoids full exposure to a market downturn.
- There is often a physiological peace of mind which comes with a “steady Eddie” approach.
“The key factor is time in the market. If you have a sizeable lump sum to invest for the long term, the statistics suggest that you will be better off investing it all immediately.”
- It is fair to say that regular investing can mitigate the effects of downward share price movements; but it also limits gains in bull markets.
- One of the factors that most benefits investments is time in the market – by investing in small increments, you are axiomatically denying yourself that time.
- Data and several studies of various portfolios suggest that lump sum investing will, in most cases, net you a greater return than you would get by investing fractions of that sum regularly over the same period. For example, a study by Vanguard in 2012 found that lump sum investors outperformed regular investors two thirds of the time. Abraham Okusanya, head of platform and investment research Finalytiq, used historic performance data and found that lump sum investors’ returns far outstripped those of regular investors, even over periods that included the market crash in 2008.
- The power of compound returns on the whole lump sum means that capital growth rolls up quicker than it does with incremental injections: and reinvested capital generates further returns.
- The cost of regular saving can be more expensive than lump sum investing.
The key factor is time in the market. If you have a sizeable lump sum to invest for the long term, the statistics suggest that you will be better off investing it all immediately. Having said this, investors are sometimes more influenced by their “gut instinct” than by dry statistics!
“The cost of regular saving can be more expensive than lump sum investing.”
Scottish Income Tax
You will already know that as a resident of Scotland, you pay more income tax than elsewhere in the UK. But do you know what the differences are?
These examples illustrate the extra tax paid by Scots:
If you are earning £33,000 and have no other income, you pay an extra £60.
If you are earning £50,000 and have no other income, you pay an extra £1,544.
If you are earning £200,000 and have no other income, you pay an extra £3,169.
(But we do live in a beautiful part of the UK!)
During the last 5 years, we have been fortunate enough to have backed six outstanding equity funds.
The graph below demonstrates their 5 year performance against the FTSE All Share.
Hamilton Financial Favourite Funds – 5-year Total Return
“ When those who predict the bad times are finally right, they ignore the gains that others have made whilst their predictions were wrong.”
What have all the managers of these funds got in common?
I suggest that they all share some or all of the following traits:-
- They are good stock pickers
- They are more interested in selecting good companies than about macro-economics.
- They take a long term view (“time in the market”)
- They don’t try to time their entry into the market to secure the lowest price.
- They are patient
- They do their homework
- They run their winners
- They are optimistic
- They are honest
- They would rather pay full price for a good company than buy a bad company because it is cheap.
(Oh, and they enjoy a bit of luck from time to time!)
One of our core holdings has been Terry Smith’s Fundsmith. Terry Smith is not without his critics. He has the temerity to point out on his website that “ fees produce a major drag on returns over time”. And yet in his January 2019 letter to Fundsmith unit holders, he defends his Ongoing Charges Figures (OCF) of 1.05%; an OCF which compares most unfavorably for example with the OCF’s of Scottish Mortgage 0.37%, Finsbury 0.67% and Independent Investment Trust 0.21%. That said, his performance over any time period you care to mention since launch in November 2010 is eye watering.
Here are his recent observations on successful investing:-
- Markets are unpredictable and anyone who tries to forecast them is likely to fail;
- When those who predict the bad times are finally right, they ignore the gains that others have made whilst their predictions were wrong;
- Good market runs do not peter out for no reason, but because of an event; for example, rising interest rates;
- Market strength is capable of conquering several negative events, as witnessed by the years of growth in the late 1990s;
- Periods of market strength do gradually reduce. As they slow, it is unwise to jump between investment styles in search of growth;
- If you wish to buy value (i.e. cheap stocks) best to do this after a market fall;
- When markets fall – which they will – aim to be sensibly invested and stick to your long term convictions.
I would be confident in saying that these are investment principles common to all our favourite equity fund managers. To us, they make perfect sense – which is why we will continue to support them.
You will have gathered that we like our equity funds!
But that does mean we ignore other asset classes – we certainly don’t. Why not? For a very simple reason.
When market sentiment changes from optimism to pessimism, equities suffer disproportionately. This is what happened in October of last year when the FANG stocks (Facebook, Amazon, Netflix and Google) so long a denizen of “growth” stocks suddenly fell out of favour. Why is this? Why are they inherently more risky? You could advance a whole lot of sensible explanations but I would say that the main reason is that unlike, for example, a UK Gilt, companies are not obligated to pay income. Sure, directors will think long and hard before they think about cutting a company dividend, but sometimes they do, and that is not only inconvenient for the shareholders, it invariably has a detrimental effect on the share price.
So that’s why each and every single one of Hamilton Financial’s portfolios will contain not just a good amount in equity funds but a not insignificant amount of “other” funds. Such funds will have been purchased mainly for income and not growth. The benefit of this policy can be seen in the last quarter valuations of equity funds versus fixed interest and alternative funds.
(Fixed Interest funds invest in bonds issued by both companies and governments: Alternative funds may include infrastructure and commercial property).
Have a look at this graph and see how our 3 non equity funds held up in the quarter to 31st December 2018 compared with the sharp falls experienced by the FTSE All Share and one of our favourite equity funds
The other reason for balancing equity funds with other funds is more prosaic. If you have a Self-Invested Pension Plan (SIPP) you will be interested in a source of reliable income rather than say growth.
Growth funds will typically hold shares in companies that re-invest a large proportion of their portfolios in purchasing more capital assets to make higher profit in the future; rather than to pay out profits as dividends.
Carefully chosen equity funds will usually outperform bond funds over the longer term.
History backs up this assertion. But for the reasons I have given, it is preferable to balance these with funds that exist to produce reliable income.
“Each and every single one of Hamilton Financial’s portfolios will contain not just a good amount in equity funds but a not insignificant amount of “other” funds.
Such funds will have been purchased mainly for income and not growth.”
- Perhaps you are not already a customer of Hamilton Financial?
- Perhaps you have wondered if your investment portfolio is properly diversified?
- Perhaps you have wondered how it has performed over 5 years against the relevant indices?
Hamilton Financial specialises in providing a confidential dispassionate investment review.
Please phone Andrew Hamilton on 0131 315 4888 for further information. ( This is a free service.)
Passive v. actively managed funds
For a variety of reasons, we only use Actively Managed funds. (These are mainly investment and unit trusts investing in real assets.) You will hear a lot about Passive funds. (Typically these are either Index Trackers or Exchange Traded Funds). These have become popular with Financial Advisers. This is principally because:-
- Their charges are cheaper than the most actively managed funds,
- Because IFA’s can (and do) charge the same wealth management fees for doing much less work (this is wrong) and,
- Because of the popularly held belief that “only 25% of actively managed funds ever beat the index”.
Let’s just dwell for a minute on what a tracker fund is. A tracker fund is one which invests in exactly the same shares and exactly in the same proportion as the index that it tracks. Let’s take BlackRock’s iShares FTSE 100 ETF. It’s present market cap (value) is currently £6.3 billion. Amongst the 100 most valuable UK quoted stocks it holds 5.73% in BP .This percentage represents the same weighting as the FTSE 100 itself. The fund pays an annual dividend of 4.18%. The iShares FTSE 100 ETF fund management charge is 0.07%. The exact composition of the fund will vary according to the value of Britain’s biggest companies. For example, the last new entries into the FTSE 100 were GVC Holdings and Ocado. These companies replaced Mediclinic International and G4S. Now let’s compare the performance of the tracker over more than 8 years with our favourite 6 equity funds (we use this timescale because it is from the inception of Fundsmith’s Equity Fund).
As you can see, there is no comparison – the tracker has been comprehensively beaten. But, supporters of tracker funds will say, “Ah, but in the end only 25% of actively managed funds beat the index, so why take the risk?” It’s a seductive argument and one which plenty of lazy IFAs use to support their case for passive investing. There is a simple solution but it requires quite a lot of hard work. And that’s to implement a system for finding active fund managers who, over time, have consistently outperformed their peers. (Note that we are not aiming to own the fly away best funds; rather we aim to own the most consistently above average funds within their asset class.)
Do we get this right every single time? No, of course we don’t! But our cumulative performance ( i.e. the average performance, derived from all our individual client portfolios) since we started in earnest nearly 5 years ago, comprehensively validates our faith in supporting active fund managers, with an outperformance of the FTSE All Share by over 17% and the Blackrock iShare FTSE 100 passive fund by 22%.
Hamilton Financial – Cumulative Performance
31st May 2014 to 30th November 2018
(NB. The Hamilton Financial investment performance reflects our diversified approach to building client portfolios.
In other words, we don’t just invest in equity funds. We include other funds specialising in other asset classes, such as bonds and “alternatives”. This is to bring some balance and downside protection.)
For those of you who don’t know, I used to be an accountant. I started out in the City of London with Binder Hamlyn before setting up my own firm Andrew Hamilton & Co in 1983. It was fun. Apart from lovely clients, I had a good team. I particularly enjoyed training young apprentices, some of whom have gone on to enjoy stellar careers.
We had a reputation for giving good face to face advice at a price which was roughly a third of what the big bugs charged. The one area which we didn’t cover was the provision of investment advice. This was then the province of the banks and the Independent Financial Adviser (IFA) community. It may seem conceited to say, but I thought I could do better! And so I decided to change horses and become an investment adviser myself.
“We had a reputation for giving good face to face advice at a price which was roughly a third of what the big bugs charged.”
Victoria Mann and I sat our financial planning and investment exams at the same time as becoming apprenticed for 18 months to Chiene & Tait Financial Services. In 2013, we became fully fledged investment advisers. From the outset, we set out to apply the same level of good practice to financial services as we had to accounting. We only charge fees. We avoid taking product commission. We give fixed fee quotes. The client knows exactly what they are paying for and there are no surprises – some of our old accountancy clients have become Hamilton Financial clients. We are deeply grateful to them for putting their trust in us and helping us to get started.
We had 2 big breaks early on. Firstly Alex Hammond-Chambers, an old friend and a much respected fund manager, agreed to chair our Investment Advisory Board. With Alex’s reputation, we were able to attract others of similar calibre. The result is that we have an Investment Advisory Board without equal. We are incredibly lucky to have them and whilst they never give specific investment advice, their collective wisdom is hugely beneficial to our investment process. The second piece of luck was accidently bumping into another old friend, Peter Rintoul. Peter has had more than 40 years in the investment business. He has a very good investment brain allied to a large helping of common sense. It is thanks to Peter that our clients have enjoyed such good all round investment performance.
Peter introduced to us a simple investment proposition; which is to build diversified investment portfolios for clients using the expertise of good fund managers. The portfolios are placed on secure wrap platforms (the investment equivalent of your internet bank account) which allows you to hold all your investments in one place regardless of tax “umbrellas” (ISAs and pensions). You can argue that by investing in pooled funds rather than direct equities, you double up on charges. However, we can and do argue that the twin advantages of diversity (both geographical and sector) and specialisation more than compensates for this extra level of charges.
“Some of our old accountancy clients have become Hamilton Financial clients. We are deeply grateful to them for putting their trust in us and helping us to get started.”
Unlike most private client asset managers, we are advisory rather than discretionary investment managers. This is not only beneficial in terms of our charges (fully disclosed on our website), but it enables us engage with our clients before making investment changes. Most clients actually like the idea of being involved; and it means we are never less than very thoughtful in making investment recommendations.
If I was to try and sum up our core principles, I couldn’t do better than repeat what we say at the foot of every email:
“Hamilton Financial provides independent investment advice with an appreciation of clients’ need for income, a good understanding of risk and a keen eye to diversification. We do so without hidden charges, jargon or unnecessary complexity and without charging commission on investment trades.”
The Highland Lady in Ireland – Journal by Elizabeth Grant of Rothiemurchus
If you enjoy history and more particularly social history, I urge you to read this wonderful account of living in Ireland between 1840 and 1850. Elizabeth Smith (née Grant) wrote that the journals were “a safety valve… for my own great griefs”, “a chronicle of my times” and as a moral compass for her young children, Janie, Annie and Jack.
The journal chronicles daily life as a wife, mother and landowner; the tribulations of farming, her concern for the poor and her part in helping to found a school for local Irish children. But she also uses the journal to express her views on British Foreign policy, religion, and politics. Here are a couple of observations noted by her February 1842.
“Such dreadful news from India. Sir Alexander Burnes murdered and Sir William Macnaughton: General Elphinstone dead of gout from anxiety of mind – sixteen officers killed – others severely wounded. In the camp a month’s provisions only. In the Town of Cabool none – the garrison determined to cut their way through the enemy and were butchered in the passes almost to a man. 5,000 fell, the sixteen ladies, wives to some of these heroes are led away captives by the Afghans – to such fate – millions upon millions of treasure have been wasted – and lives – how many thousand lives including a little band of the cleverest men in the service – to keep Shah Souja on a throne where he is detested… and what earthly business was this of ours? Surely we have plenty business and plenty territory in India without entangling ourselves with this warlike nation inhabiting an almost impenetrable country at such a distance?”
“Sir Robert Peel brought forward the Budget. A manly statement exaggerating nothing, concealing nothing, blaming no one, declaring the truth that for the last six years the expenditure has exceeded the income by little short of two millions annually. His plan may be compressed into an income tax to be imposed for three years, not quite three per cent on all incomes above £150.”
You cannot help but admire this woman’s courage, insight, forbearance and integrity – a moral for our times, perhaps?
A future open champion?
The last Scottish golfer to win an Open championship was Paul Lawrie who won at Carnoustie in July 1999. We may just possibly have unearthed the next one. Connor Wilson grew up playing golf at Castle Park Gifford, East Lothian. He is the current Under 18 Scottish Boys Champion and came 3rd in the world junior champion of champions.
His coach, David Burns, thinks he has the skill and determination to go the very top. (Both in his temperament and his swing, he reminds me of Justin Rose.) For the last 3 years, we and some other local friends have been helping Connor to turn his dream into reality.
Keep an eye on this young man. With a large helping of luck, I think he has the class to do his country proud.
STUNNING OFFICE SPACE
(No Business Rates)
Newly refurbished light airy, modern Mews office in Stockbridge, Edinburgh. The office is available from 8th April 2019. The office comes with 4 desks and lockable two drawer pedestals, along with adjoining private boardroom.
For further information and viewing ring Victoria on 0131 315 4888
A very simple problem (which most harvard students get wrong)
A bat and a ball cost £1.10 between them.
The bat costs £1 more than the ball.
How much does the ball cost?
See below for the solution
Most people answer 10p. The correct answer is 5p. If the ball cost 10p and the bat cost £1 more, the bat would cost £1.10, making the total cost £1.10 + £0.10 = £1.20.
This puzzle appears in a book by the behavioural economist Daniel Kahneman’s called Thinking, Fast and Slow.
According to Kahneman, more that 50% of students at the top US universities (Harvard, MIT and Princeton) get this problem wrong.
“A number came to your mind. The number, of course, is 10: 10p. The distinctive mark of this easy puzzle is that it evokes an answer that is intuitive, appealing, and wrong. Do the maths, and you will see. If the ball costs 10p, then the total cost will be £1.20 (10p for the ball and £1.10 for the bat), not £1.10. The correct answer is 5p. It is safe to assume that the intuitive answer also came to the mind of those who ended up with the correct number—they somehow managed to resist the intuition.”
Tel. 0131 315 4888 Fax. 0131 332 1835 E. firstname.lastname@example.org W. www.hamilton-financial.co.uk
Directors: Andrew Hamilton CTA DipPFS Victoria Mann DipPFS