The British have always been poor at teaching money skills in school, so my first lessons in investment came from Mary Poppins — the film, not a nanny.
In a moment of turbulence, George Banks decides to dissuade his children, Jane and Michael, from spending tuppence to feed London’s pigeons and instead introduces them to the wonders of finance. He sings they should allow the bank’s directors to invest that tuppence “as propriety demands” in:
Railways through Africa
Dams across the Nile
Fleets of ocean greyhounds
Majestic, self-amortising canals
Plantations of ripening tea.
Though a bird lover, I did take this to heart, once owning shares in a tea plantation. Casting aside the havoc that ensues when Banks’s children ignore his sage words, this portfolio tells you much about how the wealthy invested back then — and how they generally still invest today.
For the past eight years my team has managed the Mid Wynd International investment trust. Like several trusts, it has its roots in Dundee jute mills. Fortunes made by mill-owning families were invested in international equities, the first Dundee-based trust being the Scottish American investment trust launched by Robert Fleming in 1873, which invested in railways across the US.
Why did these trusts tend to invest so much of their money outside the UK? It was not because they worried about the value of the pound — that was fixed to the gold price. Presumably, it was because they saw greater potential return on investment if shareholders took a long-term view.
Chosen prudently and wisely, the international businesses Banks cites would have been little troubled by the kind of currency crisis and interest rate rises we are seeing today. There should be little cause for panic if you have a sensible, globally balanced portfolio — arguably one that nearer reflects the equity global index, which attributes only 5 per cent to the UK. Even then, there are some things you can do to build investment resilience.
The big change over the past month has been the jump to much higher interest rates. This is true everywhere bar Japan. Some central banks have yet to announce rate rises, but the 10-year bond yields tell you where things are heading.
UK 10-year gilt yields have risen the most, from just under 2 per cent two months ago to 4.1 per cent on Wednesday. US and European rates have also risen — in the US from 2.8 per cent to 3.9 per cent and in Germany from 0.8 per cent to 2.2 per cent. Any company whose interest payments are more than, say, a quarter of operating profit might be feeling the squeeze, especially if they have bonds in issue that need refinancing soon. This is not a time to be owning deeply indebted companies or what are known as ‘bond proxies’ — leveraged real estate, for instance.
Then there is inflation. This has two impacts. It squeezes margins for manufacturing businesses and damages the spending power of consumers. These inflation effects are lower for US businesses than for their counterparts in the UK or the eurozone. The fall in the price of Brent crude, from more than $120 a barrel last year to about $87 on Wednesday, leaves US consumers with a bit more cash but has no such benefit for consumers paying for petrol in sterling and euros.
If you own cyclical companies you have probably seen them punished and may just have to hold on, as timing the bottom of the market is so difficult. Otherwise, perhaps watch and wait. Announcements of even quite small margin pressures from companies whose costs are rising faster than their prices are prompting big share price reactions, and that will create opportunities — and, indeed, has already done so.
And what about currency moves? Sterling has fallen by 21 per cent against the dollar over the past year, but the euro has fallen by 16 per cent and the yen by 20 per cent. Most large global companies win on the roundabouts what they lose on the swings, as they have costs and sales in a range of currency blocks. However, US companies might be starting to worry that their cost bases are becoming less competitive — and Japanese companies, for instance, might start to believe they can get back to the export-led growth they enjoyed many decades ago.
We look for companies with pricing power whose input costs are not shooting through the roof. So we would avoid luxury European carmakers, for example, because, though their products have theoretically become cheaper to export, they still need to buy steel and oil in dollars — and passing on costs is not easy.
Listen further to Banks and you will hear him getting excited about economic gloom:
Think of the foreclosures . . .
Bankruptcies! Debtor sales!
Opportunities!
The recent fall in sterling may make UK equities look cheap compared with their US equivalents. A fall in sterling suits British exporters, and it is hard to think of a more successful one than the world leader in Scotch whisky, Diageo — whose stock I have bought on recent declines.
According to Bloomberg, this now trades on 27 times prospective earnings with a 2 per cent yield. An equivalent US company is Brown-Forman, a leader in Tennessee bourbon, which trades on 35 times earnings with a 1 per cent yield. The British company should benefit from the fall in sterling, increasing its margins on exports, while the US company should see the reverse effects on its exports.
Of course, the message you were supposed to take from Mary Poppins was to go fly a kite with your children. Invest like those 19th-century jute millionaires — build a balanced global portfolio, with quality companies, taking the long view — and you might be able to do that.
Simon Edelsten is co-manager of the Mid Wynd International investment trust and Artemis Global Select fund
