When I formed our fund management company Minerva Money Management five years ago I was naively unaware of just how restrictive fund management really is. By restrictive, what I am referring to are the regulations governing fund management.
When we launched our first fund, the CCM Intelligent Wealth Fund, on 16 April 2018, I was full of hope and aspiration to turn our fund into a very successful one and, well, to pretty much conquer the world of fund management. My goal was to lead a change in fund management to one of complete transparency, high ethical standards, modern, innovative fund management and market-beating investment returns. I wanted to show the investment world how to build a highly successful fund without resorting to all of the well-publicised bad practices of fund management.
Unfortunately I have found it a profoundly frustrating time managing our fund which is technically known as a NURS which is a type of OEIC or collective investment scheme. So why have I been so frustrated? Well for the following primary reasons.
- The coronavirus pandemic lockdown and its effect on global share prices
- Government financial interventions
- The US stock market bubble in technology stocks
- FCA regulations
With hindsight the timing of our fund launch couldn’t have been worse. During the first year of our fund in October-December 2018 world stock markets fell 10%-15%. 2019 was a good year for the fund and we ended it in the top quartile, very nearly making the top decile of international equity funds when measured against our comparator benchmark, . However, in 2020 the coronavirus pandemic struck. Because our fund has been defensively positioned for some time, it performed relatively well during the world stock market crash between February-March 2020. So losses on our fund were much lower than other funds in our sector.
However, since March stock markets have rallied strongly, particularly the S&P 500 Index and the NASDAQ Index. The problem is that although our fund has a technology bias, we have been reluctant to invest much into US equities because it is clear that there is a bubble in US technology stocks. The last time there was a bubble of this magnitude was the dotcom bubble of the late nineties and early noughties.
The problem this time is that the bubble is being fuelled by government financial intervention which is on an unprecedented scale. This has resulted in excessive optimism with the US stock market, in particular, soaring and not factoring in any potentially bad news such as a large scale resurgence in Covid-19 cases, no vaccine cure and a potential economic depression. All of these negatives factors are a very real possibility. It has created an unreal, unsustainable position of governments running the economy and not businesses. Such an approach cannot last long term.
In my experience stock markets cannot remain divorced from reality long term. Every bubble eventually bursts. This bubble will burst, only this time it will be spectacular. The country that will suffer the most is the US because its stock market is the most over-valued one of all. The only question is when, not if. As the great economist Keynes said in the 1930s: “Markets can stay irrationallonger than youcan staysolvent.” … Youcanbe right that amarketor sector is overvalued but wrong on the timing.
So the CCM Intelligent Wealth Fund has under-performed its comparator benchmark, the Investment Association global sector, since April this year. This resulted in our fund slumping to fourth quartile performance over the April-June quarter.
On the surface it looks as though our fund performance has been very poor but in reality it is only because we have remained very defensive. As I write this blog in early August, 25% of our fund is invested in low risk asset classes such as cash, bonds and gold exchange traded funds (ETFs). Gold is arguably not low risk but at this stage of the long term economic cycle and during internationally challenging times, such as the current coronavirus pandemic, gold is considered a safe haven. It is also a hedge against inflation which is forecast to return.
Whilst I cannot predict when it will happen, a very large fall in US share prices is highly probable because the current over-valuation of US stocks is the highest it has ever been during my lifetime on practically any metric you choose to measure it against.
Our intention is to sell all of our low risk assets once we experience the next stock market crash and re-invest the money into highly under-valued shares. That’s when our patience will be rewarded.
So where is the 75% balance of our fund invested? Largely in under-valued small and medium-sized stocks internationally which are represented by the seven themes of the fund. We are increasingly reducing our holdings in US shares and re-investing into under-valued stock markets in countries such as the UK, South Korea, China, Japan and Emerging Markets. We are simply finding that US shares are way too expensive. It does make it very challenging for us because, of course, the US is home to many of the world’s greatest technology companies. Nonetheless, we think our approach will pay off over the longer term.
The other major frustration of mine is regulation. Unfortunately, UK financial services has become massively over-regulated in recent years. It is simply astounding just how much extra regulation the FCA has adopted from primarily EU-led regulations since we voted to Brexit.
Some of the fund’s restrictions include the following;
- Maximum of 20% invested in cash
- Maximum of 10% invested in individual shares, investment trusts or ETFs (of which a number of US ETFs are ineligible altogether)
- Maximum of 10% invested in unauthorised investments including private equity
- Maximum of 35% invested in a collective investment scheme
- Investment is Silver ETFs is disallowed
- Investment in Bitcoin is disallowed
- Hedging by shorting and going long is virtually impossible
The problem with such a restrictive approach is that you have to constantly ensure you are not breaching any limits or investing in prohibited investments rather than purely investing in a manner to obtain the highest possible returns for investors.
Take the 20% restriction on investing in cash for starters. When world stock markets started to crash in February I wanted to shift most of our fund into cash but we were not allowed to do so. A world stock market crash then followed.
Whenever we have a highly successful investment, if its value grows to more than 10% of the fund, we have to sell some of the holding until it is below 10%. Why sell an excellent investment when its value keeps rising steeply?
I do understand these regulations are introduced in order to protect investors by reducing risk but the effect of the rules is to prohibit fund managers from obtaining better investment returns. So the effect of the regulations becomes counter-productive.
In spite of the frustrations I have experienced during the first 28 months of the fund’s existence I remain as optimistic as ever. I know our fund is jam-packed with a wide array of excellent under-valued shares in mostly under-valued stock markets and it is set to grow substantially if, and when, the next stock market crash happens. Of course only time will tell.
So if you are already invested in the CCM Intelligent Wealth Fund do keep the faith. If you haven’t yet invested in it now could be an excellent time to invest in the fund. You know it makes sense.
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