One mistake to avoid in this environment – being trapped in illiquid assets – Psigma’s Tom Becket

3rd June 2013

At Mindful Money, we think the following may be particularly appropriate given the current uncertain state of equity and bond markets globally.

Below Tom Becket, Chief Investment Officer, Psigma Investment Management​ considers the sorts of mistakes investors can make complete with one or two excellent quotes from a few other experts – though not experts from this era.

“Any man can make mistakes, but only an idiot persists in his error.”

Marcus Cicero

“Last week I was asked by a journalist about the key mistakes that an investor might make and lessons that should be learned from such misdemeanours. Obviously being pretty much perfect (note massive sarcasm) I struggled to come up with any sensible suggestions, but here below are the classic mistakes that have caused pointed fingers and sleepless nights in the last few years.

“The key lesson that I have learnt in my career is that just because something looks cheap, it doesn’t mean it can’t get cheaper. Beware the value traps! Every investor goes through a period of losing fingers catching falling knives and for me this was in Japan. As Keynes said, “the market can be irrational longer than you can stay solvent”. At the start of 2011 we started to aggressively build Japanese equity positions believing the market was outstandingly cheap. Sadly we were then hit by the Tōhoku earthquake and another 18 months of dire economic performance and falling markets. The key lesson would be to always expect the unexpected in asset markets, but also to ensure that you have a diversified portfolio. Do not allow any one risk to be a dominating influence on either volatility or performance, regardless of how cheap an investment might look.

“Another key lesson that I have learnt is to not fight the Central Banks. Listen to what they tell you, such as the lead-in period to Jean-Claude “la clune” Trichet’s “surprise” rate hike in mid-2008, when the former ECB chief telegraphed to markets that he would raise rates and nobody believed him. You also shouldn’t fight their power, particularly when they are acting in unison, as they seemingly are now. We have been guilty of selling assets too early believing that the Central Bankers, in our case the Bank of England, were wrong in their pursuit of lower Gilt yields. Our mistake in selling Gilts too quickly was made in the expectation that investors would not allow negative real yields (sub-inflation returns) in safe haven bonds, even in a panic. Of course they did. The lesson to be learnt is that when panic sets in, anything is possible; sometimes it is best to cast off the shackles of valuation discipline and play the momentum game.

“The classic mistake made by investors and the one area that the journalist particularly wanted me to elaborate on is that of illiquidity. Many investors were trapped in property funds in 2008 and regularly suffer through the illiquidity of small cap equities and small investment trusts. The lesson would be to always scale your exposure and think about what might happen in an extreme market dislocation – will you be able to get out when you really need to?

“We are currently extremely worried about some of the behemoth corporate bond funds, which have grown to a huge swollen size and might not be able to provide the liquidity that investors expect, were the sentiment towards the asset class to change quickly. We would advise that an investor should never hold more than 10% of a balanced portfolio in assets that are non-readily realisable. We currently only invest in 2 funds that are not daily dealing (total combined exposure 4%) and believe we could sell more than 90% of assets on any given day. We would also advise any investor to check with the unit trust manager about prior liquidity constraints and seek advice from an investment professional if unsure.”

19 thoughts on “One mistake to avoid in this environment – being trapped in illiquid assets – Psigma’s Tom Becket”

  1. JW says:

    Hi Shaun
    Well widening inequality and low wages is certainly Germanic, but alas that is probably as far as the analogy goes. House prices have been driven by ‘investment’ not ordinary people buying and selling. Except for some odd bright spots, the UK economic indicators are driven by ( generally) unproductive investments from elsewhere. Monetisation and financialisation continues, the ‘real’ economy drifts. Employment stats really are ‘mickey mouse’.
    I guess our three kids , 25-30yrs could be said to have started in ‘top 5-10%. One is employed and is doing OK financially ( eldest), the middle one is ‘self employed’ and just about keeping level., the youngest is ‘self employed’ and struggling. They are all well educated motivated. The spread is probably fairly typical and is definitely not represented in any published stats.
    You know where I think we are heading, the question is , will it be a fairly benign fuedal world, or will it disintegrate viciously under internal pressures?

    1. Anonymous says:

      Hi JW

      Yes the Germanic link disappears quite quickly when one starts looking at the trade balance if nothing else! As to the feudal world I both fear and believe it will be a troubled one. There will be a shortage of Atreides virtues but much less of a shortage of Harkonnen like behaviour.

  2. Forbin says:

    Hello Shaun,

    a couple of points

    1, the GDP figures as given are based on what , sex and drugs ?

    yes they have a value but I wouldnt say smoking pot made you more productive …..

    2, the employment trends are exceedingly worrysome – this is the Brasillianization of the UK, lots of underpaid low profit jobs with a few elites owning everything -this is not good for a functional democracy

    ( point: in the UK we live in a parliamentary democracy , not a true democratic system)

    3, the Banks are still failing and interest rates to the public bear no resemblance to the BoE rate

    4, in the end only HMG is fooling itself if it keeps using the “doctored” CPI figure

    Still the show goes on

    Forbin

    1. therrawbuzzin says:

      I’d say our system, which has all main parties offering the same policies, is electoral dictatorship, and since this allows govt. to abdicate all responsibility for its electorate, in favour of the ruling elite, it is hardly surprising, since they are greedy b’stards, that wages are not rising.

  3. Drf says:

    “One of the features of the credit crunch era in the UK has been the way
    that the output (Gross Domestic Product or GDP) numbers have told a
    different story to the employment ones.” Surely what this shows is what has always been known; if you start manipulating and lying then it becomes very difficult to stop. Eventually you drive yourself into a corner, and this is what usuually trips up all criminals – they begin to make mistakes with their lies, and the facts do not add up !!!

    1. therrawbuzzin says:

      Are you equating our politicoes to liars, thieves and swindlers? :)

      1. Drf says:

        Now would I do that?

  4. Anonymous says:

    I’m not convinced at all that gdp is a good measure for financial services ‘output’. Financial services is more about how much of the overall cake is taken and is mightily affected by the credit cycle.

    The puzzle is that no one seems to want to turn their minds to these broader issues. Perhaps it just doesn’t suit?

    1. Anonymous says:

      Hi Hotairmail

      When you use the GDP production/output variant there are obvious problems for the financial services industry. I would have more hope for the GDP Income variant (as in adding up what everyone is paid) if the UK kept it separately. But Nigel Lawson stopped that some time ago.

      We get various official reviews (there is one currently on the deflators) but they seem to just chat to the same old crew. I did wonder if the Kate Barker review on GDP and the Balance of Payments would contact me but it did not. Apparently according to it everything is just fine!

  5. Anonymous says:

    Hi Shaun. I don’t see how we can compare to 2008 wages as we have seen that 2008 was simply a debt fueled lie, pulling forward demand and calling it growth. This has a double effect as it artificially inflates 2008 wages and depresses wages after as demand drops because it was already pulled forward.

    1. Anonymous says:

      Hi Progrock

      I agree that the pre credit crunch period creates all sorts of problems. One issue is that the so-called profits of the banking sector were nothing of the sort. Also the fact that house price rises were not in the consumer inflation numbers made us think we were better off than we were.

      As you say we have been paying the price ever since.

  6. GusBmth says:

    Hi Shaun

    It’s as if the the UK ruling elites have drawn the conclusion that there are only a few high wage/ high productivity sectors in which the UK has a chance of being competitive. Hence, in their minds, the need for flexible labour markets for the rest of the economy to drive real wages down, on the basis that lower real wage rates = lower unemployment.

    It’s a way of thinking that panders to the vested interests of the wealthy elite; and in its defeatism appears to absolve the politicians of blame. Of course, they”ll encourage high value-added industries through tax incentives, but besides that, it’s as if their collective answer is ‘regrettably in a globally competitive world, that’s all we can do’.

    As an aside, it’s sadly ironic that we’re discussing falling productivity in the UK at a time of such technological change. The internet has transformed how we live our lives, but apparently has done little to improve productivity. Who would have thought that at the turn of the Century?

    1. Anonymous says:

      Hi GusBmth

      That particular economic model is also being applied to the periphery of the Euro area. It is almost as if the various establishments only have a plan A which just by chance suits them anyway!

      I agree with you on productivity where the internet should have improved things. I think that the truth is that we have little idea of services productivity partly because we are not that clear on what output is.

      1. GusBmth says:

        I’ve often wondered whether the efficient tax planning/tax dodging of large corporations has led to an under-reporting of economic activity in the UK. If that phenomenon has accelerated over the past few years, then it might account for part of the productivity puzzle. That seems particularly relevant for certain high tech services industries for example.

  7. Anonymous says:

    Excellent column, Shaun. With regard to the UK productivity
    puzzle I wonder what your opinion is regarding the views of the American
    economist Chris Martenson:

    http://rt.com/shows/boom-bust/171716-us-future-growth-bitcoin/

    He believes that the post-crisis world will be a lot different from the pre-crisis world simply because oil and other mineral fuels will be a lot more expensive going forward. On June 16 you critiqued the BoE study “The UK Productivity Puzzle”. Its authors mentioned that: “the growth of North Sea oil and gas extraction output has been in secular decline since around 2003 and this has slowed trend growth in labour productivity in this sector from a little under +1 percentage point to -2 percentage points per quarter.” However, surely more expensive energy would have productivity repercussions that extend way beyond the mining sector of the UK economy. What do you think, please? Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      Thanks for the video link which makes some interesting points. As to higher oil prices well at US $100+ per barrel that is hard to argue! But for the UK that hints at a 1970’s style environment where we did very badly….

      But yes further oil price rises would not only drive productivity lower but also give world economies another reverse. It would be quite a toxic mix so fingers crossed that someone can make cold fusion or it’s like work.

      1. therrawbuzzin says:

        Except, of course, an Independent Scotland’s

  8. Anonymous says:

    I suspect you’d find 1994 City IT wages & contract rates much lower than today in nominal terms.

    They jumped up 1996 – 1999 with year 2K work, and flattened post dotcom bust.

  9. Anonymous says:

    Hi Guys

    I agree with your point that some of the 2008 GDP was an illusion. Now who in out political class is going to tell everyone that?

    Putting it another way the boost to UK GDP that will come from September from the changes (coke&hookers, R&D double counting etc) is a way of hiding that. Of course reality remains more of a problem..

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