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Holly's Blog: Infrastructure and tips from Mr £20 Billion

11 July, 2017

Before the crash of 2008, interest rates were 5%. Cash savers were laughing. Fast forward twelve years and interest rates are a bit cr@p (to use a technical term.)

This also means that bonds (basically just an interest-paying IOU to investors from Governments or companies) are also a bit ho hum. We’re looking for new ideas and ways to put our long-term savings to work.

Infrastructure is the new sexy

Increasingly this means we will look at things like infrastructure. Buildings. Wind farms. Trains.

At a global level, the glut of savings held by the vast number of baby boomers just means there is simply too much money lolling around the system for interest rates to go much higher anytime soon. Cash and bonds will keep on being a bit meh. Shares in listed companies can only offer so much. And as well as everyone looking for better potential returns, climate change mandates from policy makers and regulators will fuel significant development in the infrastructure sector within the next decade.

The snag with this stuff is that it can’t be quickly bought or sold, like shares. If 10,000 people suddenly want to sell their stake in a wind farm, they can’t. Infrastructure projects don’t work on eBay or a stock exchange.

These illiquid assets are what created the much-discussed problem for Neil Woodford. The inability to sell with a few clicks doesn’t mean that these assets are suddenly worth less. It just means that everyone got the heebie-jeebies simultaneously and ran for the door. And a crowd can’t fit through a door at the same time.

Long-term funds

Yesterday the trade body for fund managers (the Investment Association) published a paper which tabled the new concept of a “long-term” fund. New vehicles to hold mostly illiquid assets and do away with the idea that investors could buy or sell units in this fund on a daily basis. Instead there would be time slots at appropriate intervals for buying and selling.

Hmmm. Academically the idea is fine. It’s logical. Even interesting!

But in practice I’m not sure. What we saw with Woodford is an example of how a noisier than ever 2019 media echo chamber can create a self-fulfilling prophecy – with every bad story, people withdraw another £50 million and pour oil on the fire. This would continue to happen even with funds which only allowed trading every three months, for example. The pressure on those dam gates would be pretty intense if popular sentiment swung.

Fund managers are very disappointed with their annoying customers

There’s another more fundamental problem with long-term which I think shines a light on the bigger problem.

The industry desperately wants investors to be long-term players. To think in time slots of 7 or 10 years. But this is academic. With our own money, we struggle to go much beyond 3 years. Fund managers love to tell us why we’re wrong. Why we shouldn’t bail after 5 years of cruddy performance. Why we shouldn’t benchmark their performance against the cash in our current accounts. But the inconvenient truth is that of course we do.

If we told Audi that we needed more boot space, Audi would not spend years telling us that we were wrong or come up with a reason why that request was flawed. They would just get on with it and deliver more boot space. Can you imagine Audi standing up at industry conferences and talking about how they needed to "educate" their customers. (If I hear one more industry bod talk about needing to “educate” people I will have an involuntary swearing meltdown.) There’s a failure to listen and a trust meltdown.

'Cause girl you earned it, yeah (to quote The Weeknd)

We do not build long-term relationships with those we do not trust. Which means we want access to our money when we want it and on our terms. This is not an engineering problem. Or a problem which will be fixed by actuaries or number crunchers. No – if we are to think long-term, fund managers first have to earn our trust. They will do this principally in two ways.

  1. By doing a better job of telling us what they are doing with our money. What the objectives are.

  2. By telling us precisely what they are charging us to do this. And I don’t mean fiddle-fuddling around behind AMCs and OCFs and WTFs but an embedded digital calculator which says, "Hello Holly, for your £1,000 we will charge you £6.75 a year all-in." Ta.

So here’s my view. We want to invest in progressive, interesting things. We probably get that some of this is not easy access. But before you tell us about long-term funds and how we need to adapt our behaviours to ultimately suit your structures and view of the world – you have to earn this trust.

Tips from a £20 billion man

I spent an hour yesterday talking to the chap who manages asset allocation for one of the world’s largest fund managers. He looks after about £20 billion of money in their ‘multi-asset’ funds. I always figure it makes sense to ask someone who manages £20 billion what I should be thinking about with my £20.

In a nutshell – he thinks there’s a 20–30% chance of a US recession next year. He thinks bonds are a bit dull, especially Government bonds. He thinks the US is overcooked but the UK still looks quite interesting. And he really likes infrastructure which he observes will still develop and grow even in a stock market downturn. Note to self – time to check I’m properly diversified and just have another look at how much exposure I have to US tech stocks across the board. And I might actually spend a bit more time researching infrastructure funds.

Have a great weekend everyone.


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