Tue. Jan 18th, 2022


As one grows older, one’s memory of past events and dates fades. But November 2007 stands out for me – the month I first published Adventurous investor column. Fourteen years later, I’m still here on the verge of investing, kicking the tires with the latest exotic ideas in the industry.

In one of my early columns, I questioned whether fund managers had ever blamed themselves for “stepping on a strange and wonderful ‘new’ idea, taking a quick point and then running around to the next ‘big thing'”. But can that complaint also be laid before me? With the pandemic that has made me work from home, I have had ample opportunity in recent months to dig to see how my adventurous ideas have fared over the years.

I’d split this audit into winners and losers – and what both of us can tell us about risks and opportunities. First the missed.

My most painful acknowledgment is that my love for geographical boundaries – especially Africa – has been a completely unrewarding exercise. Over the years, I have pursued funds and stocks such as the Africa Opportunity Fund, Atlas Mara (African Banking) and Agriterra (African Agriculture) and have seriously disappointed everyone in their own unique ways.

One lesson is that it is terribly difficult in these frontier markets to find well-run companies with liquid stock quotes and a good record. Another is that time scales matter. I still think Africa will surprise us all in the long run, but a local investment may not go anywhere for another decade. If I am honest, I think choosing individual countries is a dangerous business: experience suggests that you are much better off staying with an active fund like BlackRock Frontiers, which will do all the hard work for you.

Another mist was what one might call uncorrelated, illiquid closed-end funds. The idea was to find funds that invest in esoteric goods, mostly to generate an income, and that would not move in line with the broader stock market. Many names come to mind, probably the most infamous being the disaster disaster specialist CatCo, who crashed and burned when several natural disasters hit the U.S. coastal states in 2017.

The lesson here is that you can find exotic, uncorrelated things, but that does not make it a good investment. If an unusual sector or strategy is going to pay you a big fat regular dividend check, make sure its business model is robust and that cash flow is reliable.

Another big mistake was alternative financing, specifically peer-to-peer lending. Disruptive start-ups like Zopa and RateSetter promised to shake up savings and lending and this encouraged the rise of wannabes like TrustBuddy, a Nordic-based lender. TrustBuddy failed spectacularly, while Zopa turn into a digital bank and RateSetter was bought by Metro Bank. The P2P sector still alive, but it is a pale shadow of his former self. The lesson? Not all disruptive tendencies crush the incumbents, especially if the regulators become suspicious.

I confess that my crystal ball-watching skills often fell short. In September 2016, I predicted a 15-20 percent correction for US and UK stock markets due to Donald Trump’s election victory. The following year, I highlighted the potential for stem cell technologies – especially through the medium of umbilical cord blood – as a way to revolutionize reproduction, with businesses such as China Cord Blood and Widecells as the forerunners. The latter is long gone, while the former has had its share price going nowhere for years.

When I look over my columns, one of the standouts was my love affair with value as a way of investing and my focus on cheap funds. But over the years, I have come to realize that it is the easy part to buy cheap goods after a detailed research process. It is much more difficult to identify the catalysts that will cause the share price to rise higher.

That brings me to the victories. That idea of ​​buying cheap growth has borne fruit – sometimes. Back in June 2012, for example, I noticed that some of the biggest names in technology, like Google ($ 288 at the time) looked pretty good. I still think that applies today to some tech titans, like Facebook and Google.

I also had a fervent belief in supporting biotechnology. Again, this has largely paid off. I started liking an innovative investment trust called Battle against Cancer IT early on and liked it even more when the Wellcome Foundation’s venture capital arm backed it and turned it into Syncona. The shares have doubled over the interim period and in my opinion have much further to go.

Another category that I still advocate is the specialist funds that send out intellectual property (IP) from universities and research laboratories. I have been the champion for a long time IP Group which grabbed another of my favorites, Imperial Innovations. But there are obvious risks. With a collapsing share price, the IP turnaround of Allied Minds should act as a warning that not every technology fund can ride the wave. Mercia Asset Management is probably my current favorite in this category.

Over the past 13 years, I have generally supported investing in emerging markets, even if it’s a rollercoaster ride. On a synote, it is noteworthy that EM was a better bet for me than my border ideas like Africa. Asia was a particular focus. My favorite vehicle, Schroders Asian Total Return Fund, has almost doubled in price since October 2016.

On the other hand, I was consistently cautious about China, but I found that I felt the country warm when valuations collapsed like in June 2012. Then I proposed to invest in the Fidelity China Special Situations fund. It then rose from 75p to 323p per share. For the record, I looked at China again when 2021 came to an end (especially the big tech names) despite the terrible political background.

Another big win was my consistent support for private equity funds, which have become increasingly popular with private investors. I have advocated names like Hg Capital and ICG Enterprise and continue to do so. Infrastructure funds were another bright spot – I made a favorable mention to people like HICL and INPP in August 2009 when they still delivered more than 5 per cent. Although they have been a bit boring and predictable ever since, I still think they are an excellent mortgage alternative in these uncertain, inflationary times.

Honorable mention should go to that left-wing field, exotic ideas that have borne fruit – and two stand out. In 2012 I argued that litigation funding and especially Burford (valued at 105p at the time) was worth investigating. Despite its many problems with short sellers, its share price is 786p and I still think, by balance, its model is worth a point.

Speaking of points, my late arrival at the crypto party and especially my enthusiasm for ethereum now looks less embarrassing than in 2018, after ethereum’s price rose fivefold.

All this brings me to my last category – ideas still in the early stages, prognosis unknown. The most obvious example is my enthusiasm for resource stocks. I have long argued that oil will recover above $ 70 and then exceed $ 100. This has led to some major victories, such as retail bonds issued by companies such as Premier Oil and EnQuest when prices reached their lowest point.

There were also some very big duds. Riverstone Energy, a listed private equity energy company that was a terrible investment, can now turn into something much more interesting. My continued crackdown on U.S. shale oil and gas producers over the past decade has also been a very poor time.

Line chart of pennies per share showing yellow cake: increasing

Funds investing in uranium miners have had a terrible time since the global financial crisis, but I think the tide has now finally turned (look at Yellow Cake’s rising share price) while the price of carbon – accessible through ETFs of companies like Wisdom Tree and HANetf – to me it seems to be in the right direction: upwards. I have long been Yellow Cake (a uranium holding company), Carbon ETFs and US oil companies (currently Diamondback Energy).

I must also mention a major theme that has much more to it: passive funds. From the beginning in 2008, I suggested that adventurous types should not only explore index tracking funds and ETFs, but also multi-index fund providers (such as 7IM) and do-it-yourself strategies involving lazy portfolios boasting only a handful of ETFs (now commonly provided by online robo-advisors).

That said, my enthusiasm has been tempered by caution about so-called “black box” strategies such as smart beta, which have largely failed. I think the same goes now for ETFs on the theme of ESG (environment, social and governance). They have become incredibly fashionable, but carry the same risks as the smart beta trend of the past decade. Ethical buyers beware.

So to complete my review, should I conclude that the future is bleak and boring, consisting of a mix of unsavory ETFs in a simple, low-cost indexing portfolio? Yes and no. I think a core portfolio of dull ETFs makes sense along with a satellite portfolio of adventurous ideas, many of them in closed-end funds.

But it’s going to be harder to squeeze decent returns out of a core “boring” portfolio. We will all need to continue to look at alternative ideas, whether private equity, emerging markets or digital assets.

David Stevenson is an active private investor. Among the securities mentioned, he holds Syncona, IP Group, Schroders Asian Total Return, Fidelity China Special Situations, Hg Capital, Yellow Cake and Diamondback Energy. Email: adventurous@ft.com. Twitter: @advinvestor





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