IN THE LAND OF GODS AND GODDESSES, AND ANCIENT CITIES

Blog January 10th 2014

One day recently, I checked T.B. Wise Income’s entry on the Bestinvest website. Bestinvest had this to say - ‘Bestinvest research covers the funds we currently highlight and the most popular funds chosen by our clients over the years. T.B. Wise Income does not fall into either of these categories at present’. Following the link, I discovered that in the Flexible sector, which contains 132 funds, including Wise Investment and Wise Income, Bestinvest recommend three funds: Jupiter Merlin Growth Portfolio, Strategic Assets and the Trojan fund. I thought it would be useful to compare the Wise funds with these much larger, highly rated alternatives, to find out what it is that they have and we don’t. The analysis follows, after a digression.

Digression on Investment Company Names

The names of the companies whose funds we are about to look at all contain references to Greek and Roman mythology, which led me to wonder how investment companies come to be named. In a business as dull, abstract and potentially frightening as investment, it’s helpful to be able to project a strong visual image of strength, longevity and competence. There are themes in naming investment companies, varying from responsible-sounding (Prudential, Scottish Widows, Legal & General), to place-names in the City of London (Threadneedle, Throgmorton, Framlington) but the overall favourite appears to be characters from classical myth (Neptune, Artemis, Jupiter, Midas, Troy).

Jupiter or Jove, you may remember, was the king of the gods in Roman mythology. His earlier, Greek name was Zeus. Jupiter was married to his twin sister Juno (Hera), as well as having a large number of other liaisons. Jupiter came to power by physically removing his father, Chronos, who had overthrown his own father, Uranus, by similar means. Appropriately, the planet to which the god Jupiter gave his name is by far the largest in the solar system.

Artemis was the goddess of hunting and wild animals. Following the hunting theme, Artemis the company have branded themselves ‘Artemis, the profit hunters.’ You might expect their advertising to feature a beautiful and perhaps rather scantily-clad young goddess, gliding through the woods surrounded by deer and fauns, but Artemis have refrained from taking this rather obvious sexist opportunity, and the hunter of their advertisement is human, male, white, almost certainly British, and wears tweeds, cloth cap, rucksack and on occasion, short baggy trousers. The profit he is hunting resembles a graph, with a pair of eyes at one end, and claws at the other.

Troy was a town in Asia Minor which historians believe was burned to the ground by the Greeks (Achaeans) during the thirteenth century B.C. The trouble began when Eris, the goddess of strife, barred from a wedding party, threw a golden ball in among the guests, on which had been written the inscription ‘for the most beautiful’. Unable to agree which of them deserved the prize, three goddesses were advised to visit , a prince of Troy, to ask for his judgement. A prophesy at Paris’ birth had foretold that he would bring about the destruction of Troy, so he had been sent off to be brought up by shepherds on the slopes of Mount Ida, and not told of his royal origins. Paris 1

couldn’t decide between the goddesses, as all three were perfectly beautiful, or maybe he didn’t want to offend two goddesses by choosing the other one.

To help with his decision, each goddess in turn made Paris an offer. Diana (Athena) offered him wisdom, fame and success in battle. Juno (Hera) offered him political power and control of the known world. Venus (Aphrodite) offered him the love of the most beautiful woman on earth, whose name was Helen. Paris chose the beautiful woman. Helen was already married, to , the king of a Greek city-state called . However, at the moment of Paris’ arrival at Sparta, Helen was struck by an arrow from the bow of Cupid, who had been sent by Venus, fell instantly in love with Paris, and went to Troy without a backward glance. The Greeks invaded in force, and camped for ten years outside the walls of Troy. Finally, they defeated the Trojans by a trick. The Greeks sailed away, leaving behind a large, hollow wooden horse as a parting gift to the Trojans, who, rejoicing that the long war was finally over, broke down the walls of their city, and hauled the horse inside. That night, the Greeks, who had been hiding in their ships behind a nearly island, returned, and helped by the thirty warriors who’d been hiding inside the horse, massacred the Trojans and burnt their city to the ground.

This story is an object-lesson in how not to make decisions. Clearly Paris’ father, King , should have either had the child Paris killed, or taken a chance and brought him up at court. And why did the goddesses decide on a shepherd-boy to settle their differences? Why did Paris choose Helen? With either of the other two alternatives, he would not have been short of marriage options. Why did the other Trojans agree to the abduction of Helen, which was sure to provoke the Greeks, who were looking for an excuse to go to war with them? Why didn’t they come to a compromise before ten years were up? And finally, why did they fall for such an obvious trick?

To sum up:

Jupiter- pagan deity who divided his time between quarrelling with his wife, having adulterous relationships and hurling thunderbolts at people.

Artemis - radiantly beautiful goddess who became a public-school caricature in tweeds.

Troy - city state in modern Turkey which was destroyed as a result of bad decision-making and general stubbornness.

The name Wise Investment, which isn’t derived from classical mythology, has a twofold origin. Mainly, it is a statement of what we are trying to do. Also, it is a play on the first letter of the surname of the two original partners, which begins with a Y. We were two Ys, Judith and I, so when we designed our logo, we made the trunk and branches of the tree from two capital Ys, one above the other. The original idea came from a rhyme which I heard when I was a child -‘2Ys UR, 2Ys UB, ICUR, 2Ys 4 me’ (Too wise you are, too wise you be, I see you are too wise for me).

Time now to return to the matter in hand, a look at funds in the IMA Flexible sector.

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IN THE LAND OF GODS, GODDESSES, ANCIENT CITIES and HIDDEN MESSAGES IN TREES continued;

The tables that follow compare the performance of five funds, the three that Bestinvest recommend, and Wise Investment and Wise Income, which they don’t. The figures shown are fund size, Morningstar star rating (out of a possible five stars) Morningstar overall rating, performance over one, three and five years to the latest available date (December 16th, 2013) and in brackets, league table position in the Flexible sector over those periods.

Fund name Size (£m) Morningstar Morning Performance % (rank, Stars Star years) Rating 1 3 5 Jupiter Merlin 14.3 18.1 78.7 Growth Portfolio 1,953 4 Gold (72) (60) (39) Troy Trojan -4.0 9.1 47.4 2,474 3 Unrated (127) (94) (85) Artemis Strategic 15.0 18.1 1,012 3 Unrated N/A Assets (66) (62) T.B. Wise 23.9 32.4 112.9 35 5 Unrated Investment (7) (9) (5) T.B. Wise 23.7 40.4 107.7 33 5 Unrated Income (8) (2) (9) Total funds in 132 109 94 sector

Performance

Bestinvest’s three selections are among the largest funds in our sector, but their performance has been at best dull over all periods up to five years. This five-year period has been dominated by Quantitative Easing (Q.E.), a process whereby central banks print money, with the aim of boosting asset prices and increasing confidence, leading in time to an economic recovery. The one thing you needed to understand during this five-year period was that central banks would continue to pursue this policy until they could see results, and that in the end it would work. They did, and it has – and owning the type of assets that would benefit from Q.E. has been overall the right strategy for investors to pursue.

In their different ways, it seems that the managers of the Jupiter, Artemis and Troy funds are sceptical of Q.E. If so, they are –in my view - both right and wrong. They are right in the sense that Q.E. is likely to have unpleasant consequences. Financially, the biggest risk is inflation. Inflation can be defined as ‘too much money chasing too few goods.’ Following Q.E., there is a lot more money than there was, but it isn’t chasing anything – the velocity of money is still subdued. As and when the velocity of money, the speed at which it moves round the financial system, picks up, we could be facing a serious inflation problem.

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Q.E. has another major defect. A policy which sets out to support the prices of assets favours people who own assets – the rich – at the expense of those who don’t – the poor. Q.E. has been run alongside austerity, another policy which tends to favour the better off. Austerity caps the salaries of low-paid public sector workers, cuts services like public libraries, and curtails benefits. Austerity brings tax rises, which marginally affect rich people, but are more than offset by gains in other areas. In other words, a policy of Q.E. run alongside austerity increases the gap between the ‘haves’ and the ‘have-nots’, creating a more bitter and divided society. The thing that is holding back the U.K.’s economic recovery is the fact that the majority of people haven’t noticed it yet, because the ‘wealth effect’ of Q.E. hasn’t affected them. That will only change when - if - real wages start to increase.

I have no doubt that we will reap the bitter harvest of Q.E. in due course, but meanwhile, it has achieved what it set out to do. Those investors who failed to avail themselves of the gains that have been on offer over the last five years, have missed an opportunity that won’t be repeated.

Volatility

In evaluating funds, Bestinvest consider volatility as well as performance. I think of volatility as the amount of distance actually covered in travelling from one place to another. A sober man walks in a straight line, and goes from Place A to Place B by the shortest route. A drunken man staggers from side to side, travelling further to cover the same distance. Low volatility of returns, the relatively straight-line movement of the sober man, is a quality that is highly prized by analysts. The three-year volatility of the five funds in the table is as follows (lowest=least volatile first) – Troy Trojan, 1.8, Jupiter Merlin Growth Portfolio, 2.8, T.B. Wise Income, 3.0, Artemis Strategic Assets, 3.1, T.B. Wise Investment, 3.5. Least volatile fund in sector, 1.1, most volatile fund in sector, 4.9. The Troy fund is notably less volatile than the others, which are roughly similar1.

Warren Buffett makes an important point about volatility, which is worth bearing in mind. The price volatility of an asset may be caused by the failings of the market and its changing perceptions of value, rather than by any weakness in the asset. He tells us that if the asset we own is sound, we should welcome volatility which will tend to work in our favour. This viewpoint is not popular among today’s fund analysts.

Our sense is that in the wake of the recent crisis, Bestinvest and other analysts place more emphasis on funds which seek to preserve capital than ones where the focus is more on growing capital. The returns from the Troy fund illustrate how difficult a capital-preservation strategy has been to manage in the last couple of years, when lower-risk assets became expensive, and therefore, paradoxically, more risky. Cash, gilts, index-linked gilts, the shares of large, conservatively managed companies, and gold, have all struggled to make any headway recently - particularly gold, which has fallen in value by almost 40% from its September 2011 peak. However, value is returning to all these sectors, and cautious strategies could be the unexpected successes of 2014.

1 All the above figures were taken from Investment Week, dated 16th December 2013.

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Wise Investment and Wise Income didn’t do well in the 2007-09 crisis. The funds I managed did notably well in the 2000-03 sell-off, when the stock market halved, but that is ancient history now. In 07-09, the Jupiter fund did well, and the Troy fund was outstanding. The Artemis fund wasn’t launched until 2010. In spite of their performance over the last five years, we accept that our funds won’t be considered investable by the majority of analysts until we have shown our ability to preserve value in a major sell-off. We relish the challenge, but hope it won’t come along just yet.

PLEASE NOTE - THIS BLOG CONTAINS THE PERSONAL VIEWS OF TONY YARROW, AND SHOULD NOT BE SEEN AS FINANCIAL OR INVESTMENT ADVICE.

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