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Holly's blog: Where there are bandits there is alpha

03/08/2018

Yosemite Sam.jpg

 

Yesterday the only people to get excited by the Bank of England’s decision to raise interest rates to 0.75% were PRs. My Inbox filled up with the opinions of the industry’s great and good. None of which were very interesting.

 

However the summary remains - interest rates, which were stuff all, went up by stuff all, to stuff all.

I’m being a bit flippant - More than 3.5 million residential mortgages are on a variable or tracker rate – the average is 4.72%. This suggests an average increase of about £300 for those affected. And savers shouldn’t hold their breath – there is no rule that banks need to increase what they pay on cash accounts. The best deal for a one year fix is currently with Atom Bank, paying 2.05%. Notable for a call out is Skipton, which has passed on yesterday’s rise to savers, including those in their Lifetime ISA which will pay 1%.

I think the more interesting thing about yesterday is that nothing dramatic happened, because we all knew this was going to happen. Markets had already priced it in. PRs had already written their releases. The speed and availability of information in 2018 has changed financial markets, and this also impacts our investments.

 

Rothschild made money from superior information

It's told that the Rothschild banking dynasty made huge amounts of money after the Battle of Waterloo. Nathan Rothschild – so it’s said – was the first in London to hear of Wellington’s victory. He tricked markets by selling huge amounts of stock, leading everyone to assume this meant defeat. They all piled in and sold, prices tumbled and then Rothschild picked up shares at crazy low prices. Information is power and power is money. Fast-forward to 2018, and the internet and Twitter have largely democratised information.  And if Joe Bloggs knows the same as Nathan Rothschild – that game is over. 

 

There is no ‘superior information’ left in developed markets

I know a lovely fund manager who is so posh that he doesn’t seem aware that walking around the City with his shotguns in a bag before heading to “the Country” is perhaps less than sensible*. And I will never forget him telling me this – “Where there are bandits, there is alpha.” You have to say that aloud in a plummy voice to get the full impact. So what did he mean?

 

Alpha is the holy grail for fund managers. Loosely speaking it’s how much better you perform than the average. If the FTSE does 6% in a year, and a fund manager returns 10%, that’s 4% of alpha. The more that we research and poke about in markets, the harder it is to deliver alpha because everyone else knows everything that you do. Put simply, lots of people think that the enormous US stock market is so analysed and pored over that no-one can get an edge. No-one can possibly know anything more than others. And so it’s harder to deliver alpha. So you may as well just buy a cheap old tracker, keep your costs low and aim to trundle along matching what the S&P 500 does.

 

I have had the HSBC American Index fund for 5 years now. It costs about 0.06% a year and has returned 106%. That will do me. (Before you all rush to pile in, of course this will also come temporarily tumbling down when the caffeine-fuelled US market catches tech-stock induced flu, but that’s another blog)

 

Where there are bandits, there is alpha

Now consider less well-researched markets. There is less information. Fewer analysts. Probably more brown envelopes. Unreported goings-on and lots of unanticipated news. People on the ground will find it easier to get some insights and information, which will help them to make smarter calls about companies’ futures. So where there are bandits, there is alpha. And I will pay for good active managers in these markets.

 

Of course, this is over-simplifying things. There are still good stock pickers in developed markets. Lindsell Train are examples – their global equity fund only has 29 shares in today, and has gone up by 131% over the last 5 years. These guys embody the difference between data and insights – they have the same information as everyone else, but they must be bloody good at looking in the whites of directors’ eyes, and making calls about what is BS and what is brilliance.

 

But as a general rule of thumb, when thinking about what funds to pick – if you’re not sticking with index tracker cheapies, then ask yourself why. Because if there aren’t bandits on the horizon or razor-sharp proven stock pickers at the helm – what are you paying for?

 

P.S. Calling all small to medium business owners. We are doing a project for a firm and developing some ideas to help SMEs. If you own, have founded, or run a firm with up to 1,000 employees would you give me 20 minutes on the phone? Please email me if so.

 

 

*Disclaimer – although I grew up in Somerset, I think that hunting sucks, and anyone who gets a sense of triumph from shooting pheasants which seem to have about 6 brain cells apiece, is a bit of a pl0nker :0) But each to their own…

Related Questions

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  • I am 35 and working part time on a reasonable salary. I've recently taken out a Stocks & Shares ISA with Wealthify (from reading the recommendations on Boring Money) where I pay in £40 per month. However, I'm wondering if I should be doing more? Should I be diversifying and using more than just Wealthify? Or is it better to increase the amount into Wealthify?

    Holly | Sussex | 17/10/2018 | 0

    • Stocks and Shares ISA
    • Online Investment Platforms
    Lesley James's Response

  • I am 25 and starting to seriously financially plan out my future. I would really welcome a 'sense check' on my thinking as well as some help on which investment choices to make. My goals are: To invest for 15 years - my risk appetite is very high (i.e. I could afford to lose all my money). Goal 1 - More Important: To have an investment pot of £1,500,000. Goal 2 - Less Important: To be mortgage free. My plan is: 1) Open an annual Stocks and Shares ISA each of the next 15 years. 2) Open Share trading/dealing account. 3) Reduce my mortgage term to 6 years by 2025. I appreciate the above is a lot to go though, but I'd welcome any help and guidance.

    Mo | London | 15/10/2018 | 1

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  • The recent Metro article which Holly participated in has really inspired me and made me think that investing in shares is something which I would like to do. Unfortunately I am completely thrown about where to start. I would be grateful for any advice you could pass my way. Realistically, I would only have about 2k to invest, so any tips would be gratefully received.

    Sarah-Jane | London | 12/09/2018 | 3

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  • Is there a reason you don’t list Saga in your Best Buys? Additionally, I have purchased a few investment trust shares but can’t work out how the dividends are paid. Scottish Mortgage is an example. I wasn't given an option to choose how to receive the dividends. It would be useful if you could provide some clarity on how investment trusts pay their dividends.

    Carl | Buckinghamshire | 07/09/2018 | 1

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  • Any advice for two young people trying to get themselves a home? My girlfriend and I are saving for a house together. Currently house prices in our area are a ridiculous £300k. The max we can get from banks is about £220k, meaning somehow saving up a whopping £80k deposit. This would take us about 8 years (and house prices are increasing faster than we're saving!) That's not to mention solicitors fees, stamp duty, the cost of moving, furnishing the house, white goods, and any repairs or renovations. It all just seems impossible!!

    Joe | Buckinghamshire | 23/08/2018 | 0

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    Kate Fitzpatrick's Response

  • Can you advise me on the best approach when looking to invest in a product that offers compound interest? I’m thinking about funds rather than bank accounts. I also have 4 different pensions on the go. Should I keep them separate to diversify the risk? Or consolidate them? How will these pensions be treated when I retire? Will they be considered in aggregate by the tax man?

    Craig | Clackmannanshire | 16/08/2018 | 1

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  • I have about two thirds of my ISA in funds with Charles Stanley Direct and about one third left with St James's Place. I was planning to transfer the remaining one third to Charles Stanley Direct. However the recent platform price increases seem to put me in the worst position possible. I also have a private St James's Place pension. Would I be correct in thinking the fees are also high on this, and I could do better elsewhere? Can I transfer into an SIPP for example?

    Gerry | Bedfordshire | 15/08/2018 | 4

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  • I invested my money in a St James's Place managed fund, split into ISAs and bonds, after advice from an adviser who was a St James's Place partner. My investments have done reasonably well, but I've read disturbing reports about St James's Place. Should I have concerns? Should I have found an independent financial adviser?

    Glyn | Essex | 09/08/2018 | 6

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  • I wanted an investment trust with an income, so I put £10,000 into The Investment Company. It delivers a reliable quarterly dividend but the capital value has dropped by 10% since I invested 2 years ago. What are your favourite investment trusts?

    Fran | Greater London | 08/08/2018 | 3

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    Mark Dampier's Response

  • Is there an average number of funds that one should ideally hold? I have in excess of 20. I am happy with my portfolio and coverage, but wonder if I have too many funds. The second part to the question is how long should you leave an underperforming fund?

    Richard | Hertfordshire | 06/08/2018 | 3

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    Holly Mackay's Response

  • I'm 24 and would like to begin investing. Am I better off using a robo advisor such as Wealthify/Wealthsimple or a fund such as Vanguard LifeStrategy?

    Amanda | Greater London | 06/08/2018 | 6

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    Holly Mackay's Response

  • I have cash saved in ISAs and savings accounts - probably a 30% deposit on a property - first time buyer. I am at least 12 months away from getting a permanent job, so at least 12 months away from buying a property. What can I do with the cash in the meantime? Best just to leave it in cash for now, or invest a portion in stocks and shares ISAs?

    Malti | London | 25/07/2018 | 2

    • Stocks and Shares ISA
    • Lifetime ISA
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    Holly Mackay's Response

  • I am 73 and cautious. There are two areas that your advice would be helpful..what if you just spend thousands on buying the gold standard footsie companies like shell and the rest and keep them for five years and then cash them in ?

    DB | UK | 24/07/2018 | 6

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  • I'm nearly 30 and looking to open a private ready made pension, and also an investment ISA for retirement funds or towards a property, but very unsure what risk level to choose (low to medium, or medium to high)? Any comments or advice welcome.

    Susan | WMD | 24/07/2018 | 1

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    Cherry Reynard's Response

  • I hope you can help. I recently consolidated two modest pensions into a SIPP in readiness to start UPFLS drawdown in May (2018). Whilst I was hoping for growth in my investments I wasn’t expecting it to rocket and now find I could well be looking at exceeding the lifetime allowance, possibly even before my first annual drawdown in May, and I’m unsure what, if anything, I should do.

    John | LDN | 03/07/2018 | 1

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    Richard Allum, MD of The Paraplanners's Response

  • What are the differences between income and accumulation income funds? How do you declare income reinvested in a fund on your tax return?

    C | 05/06/2018 | 0

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    Helena Wardle's Response

  • I would like to open a Junior shares ISA for my Grandson for about £50/month. How do I go about it and can you recommend some reliable companies?

    Roger | SRY | 26/04/2018 | 1

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    Founder and CEO's Response

  • Can you recommend some very basic books for a 69-year-old widow who is now having to manage her money? Thanks

    Martha | 12/04/2018 | 0

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    Helena Wardle, Chartered Financial Planner, Sterling and Law's Response

  • I just found your web site (recommended in Andy Bell's book on Do It Yourself investing). Could you say why you do not review Halifax Share Dealing in your list of ISA providers? Is there anything wrong with this ISA provider for you not to include it?

    Gerald | 11/04/2018 | 0

    • Shares
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  • Hi, I've got an old D.B. pension, approximate value £12k. I would like to invest & top up each month. Who would you recommend? Also I would like to make an investment, & don't know where to start? Thanks

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  • I am post-divorce with a good settlement which I have only partially invested. Are there any courses you can recommend? I have sat in a number of meetings with accountants and financial advisers feeling somewhat patronised! I am sure that there are plenty of women in a similar position to me (aged 55!).

    Ellie | 14/03/2018 | 3

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  • How can I find a good financial adviser?

    Byron | Greater London | 01/03/2018 | 0

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  • I am in the very lucky position of just having received a gift of £800k which I want to invest for our retirement. My husband and I are in our late 40s and aim to retire in around five years. We have 11 more years of school fees to fund, then hopefully university fees for two after that. I've put together a plan for us - can you have a look and see if it makes sense?

    Fiona | UK | 18/01/2018 | 6

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  • We have four grandchildren (2 English living in UK, and 2 Irish living in Eire). We have decided to start savings plans for their futures. Their ages are 18yrs, 11yrs, 8yrs and 4yrs respectively. My age is 75yrs, and my wife is a little older. What should we do, please?

    John | BKM | 01/01/2018 | 1

    • Junior ISA
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    Martin's Response

  • Given the recent poor performance in Woodford Equity Income, do you think I should sell it or wait for the fund to recover?

    Jenna | Con | 17/12/2017 | 3

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    Mark Dampier's Response

  • How do I start investing, buy stocks, bitcoins, etc with £100.00?

    Claudette | BDF | 18/11/2017 | 1

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    Holly Mackay's Response

  • I am a 59 yr old retired lady with no income but I have reasonable equity..is it worth starting a pension or is it too late?

    LL | NFK | 10/11/2017 | 2

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    Cherry Reynard's Response

  • I am getting long in the tooth at 79, a little forgetful and I am going through a painful divorce. This has shattered my confidence and I need help.

    Richard | Kent | 05/11/2017 | 3

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    Holly Mackay's Response

  • Have you a review on Halifax stocks and shares isa

    Moira | LDN | 21/10/2017 | 3

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    Dr Richard Bradley's Response

  • My mother is 84 and has around £35,000 in cash, realised when she moved to a smaller house. She would like to invest it and draw income that would be slightly higher than the natural yield - say around £2,000. What is the best vehicle for that please?

    Ed | SXE | 18/09/2017 | 4

    • Stocks and Shares ISA
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    Danny Cox's Response

  • I have just sold my house and have a significant sum of money I want to invest. I may want to draw some income but also want to achieve capital growth. Are there funds that aim to achieve both or should I just invest for growth and draw money as I need to for income?

    Jon | SRY | 13/09/2017 | 1

    • Funds
    Peter Matthew's Response

  • I have a delightful 12 year old daughter and she has just opened her first bank account. I am dreadful with money but I would like to know what I should teach her so that she does not pick up my bad financial habits. Do you have some top tips of things to teach our children so they are wise and responsible with money please?

    Louise | Greater London | 11/09/2017 | 1

    • Junior ISA
    • Shares
    • Cash
    Lesley James's Response

  • I am interested in the Fund piece that Holly refers to in today's Money Supplement in the ST’s with 'Lindsell Train Global Equity'. I am looking for a fund for myself (54 yrs old) but also my son (19 yrs old). Is this fund suitable for either of us with an investment strategy of 10 years +.

    Richard | 22/01/2017 | 0

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    Holly Mackay's Response

  • I am confused about index funds, e.g. Vanguard Equity fund. Do they track an index or include the yield? In the case of Vanguard, their low cost is attractive but their portfolio is made up of other Vanguard funds. I assume these probably each carry a fee structure - is this correct?

    Robin | Gloucestershire | 03/09/2018 | 0

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    Mark Dampier's Response

  • Is it worth using a financial adviser when it comes to switching pensions funds, or should I do the research and pick the funds myself? I am no expert in stocks and shares.

    Helen | Dorset | 10/08/2018 | 4

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    Helena Wardle's Response

  • I've got £20,000 from an endowment policy (astonishing, I know), and I'm looking into how best to invest to get a reasonable return without excessive risk. Any thoughts much appreciated!!

    Penny | Peterborough | 09/08/2018 | 0

    • Stocks and Shares ISA
    • Cash
    • Online Investment Platforms
    • Life Insurance
    Danny Cox's Response

  • I am looking for a fund for myself (54 yrs old) but also my son (19 yrs old). Is this fund suitable for either of us with an investment strategy of 10 years +.

    | 29/05/2018 | 3

    • Robo Adviser
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    Holly Mackay's Response

  • I use H&L and although they are a bit 'plumy' on the phone I quite like their website and the costs are OK. So I was thinking of H&L for [my son]. I would be telling him to open these two funds and regularly invest and forget about them for 10 years!

    R | Greater London | 29/05/2018 | 1

    • Lifetime ISA
    • Robo Adviser
    • Online Investment Platforms
    • Funds
    Holly Mackay's Response

  • Given the recent poor performance in Woodford Equity Income, do you think I should sell it or wait for the fund to recover?

    | 29/05/2018 | 0

    • Funds
    Boring Money's Response

  • I have a bit of excess money to play around with and I have been looking at Investment funds. What is the typical % growth rate of an investment fund?

    David | Greater London | 07/09/2017 | 7

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    Cherry Reynard's Response

  • How risky is a Stocks and Shares ISA?

    Alexandra | Greater London | 06/09/2017 | 2

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    Holly Mackay's Response

  • Should I be even thinking about the stock market?

    Lysa | Greater London | 06/09/2017 | 0

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    Holly Mackay's Response

  • Pensions vs ISA - which one is best?

    Roderick | Greater London | 06/09/2017 | 0

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    Holly Mackay's Response

  • What funds could my millennial children invest in?

    Anthony | Greater London | 06/09/2017 | 1

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    Holly Mackay's Response