Taking charge of your own finances

Retirement will be no fun without enough money to enjoy it. Unfortunately most of us are being kicked out of our company's defined benefit funds, can't rely too much on the government for help, don't understand the defined contribution funds we've been put into and are not saving enough anyway. To make matters worse we are being ripped off by a savings and retirement industry that is skimming of the top of our investment returns while giving us very little good advice or value.
This blog contains some of my thoughts on taking control of retirement and pension savings. It will look at ways of cutting costs by using cheap online stockbrokers and share dealing combined with cheap index funds and Exchange Traded Funds (ETFs) to build diversified portfolios. This is a work in progress so I welcome your thoughts.

Wednesday, November 23, 2011

Does 3i Offer Value?

One of the companies i have looked at over the years is 3i, a listed British private equity firm. Its shares have performed appallingly over the past years but I've occasionally looked at it with a view to seeing whether it's shares have been so hammered that it has become a classic value stock; one that sells at a discount to its intrinsic value with a nice margin of safety.
Each time I've looked at it I have held back mainly because it is difficult to assess the value of its underlying investments. The problem is as follows: You may think that the market value of the stock is at a decent discount to it its net asset value (NAV) but in fact the market valuation of the share may simply be an accurate forecast of the likely fall in asset values.
It was mainly for this reason that I have held off from buying 3i.
So I was interested to see this post looking at the firm by Neil Collins on FT Alphaville.

Morningstar shows the shares underperforming their benchmark over one month, three months, one year, three years and five years, and awards 3i its bottom rating. The current management is fobbing off the shareholders by raising the (unearned) dividend, but as Winterflood notes: “the fund’s strategy appears to be shifting on an anual basis”. The shares sell on a discount of 32 per cent to net asset value – assuming the NAV of a private equity house can be measured that accurately.
The raiders from Laxey Partners have noticed, and want shares in 3i infrastructure, a big part of 3i’s assets (and which, perversely, stands at a premium to NAV) to be distributed to the shareholders. Citiwire has an analysis here. The admirable Jim Grant has also noticed that the converse of a 32 per cent discount is the possibility of a 50 per cent gain if the £800m gap between price and NAV could be closed, by the management deciding that the shareholders could use the money better than it can. As he points out: “It would not be a characteristic move on the front office’s part, but it would be a profitable one for the stockholders.” Laxey’s idea would probably signal the end of 3i, but it beats anything that the management has come up with for more than a decade. Oddly, though, I don’t feel any urge to buy back the shares I sold two years ago.
Although Mr Collins feels no particular urge to buy the shares, I think the logic of his full post suggests that they may be worth looking at. There could well be value waiting to be unlocked.

Sunday, November 20, 2011

Niel Woodford on Recession and Japan

If you saw my previous post I looked at the views expressed by Merryn Sommerset Web saying that we are not facing a Japan-like situation in Europe.

Here is a big of a counter-argument from one of Britain's best value investors. He reckons that we are facing a deep recession and that bank deleveraging will lead to a Japan like situation. It makes for depressing reading.

U.K.’s No. 1 Fund Manager Says Europe, Britain Facing Recession - Businessweek:

"“The outlook for the European economy has deteriorated quite significantly,” said Woodford, manager of the Invesco Perpetual High Income Fund, which has 11.1 billion pounds ($17.7 billion) in assets. “I do expect the euro zone to be in recession next year and the U.K. economy could well be following suit.”

As for Japan, he thinks that:

“Bank deleveraging means a credit contraction, the sort of thing we saw in Japan.”

It is a frightening thought. Mr Woodford has positioned himself very conservatively with investments (according to Bloomberg) in AstraZeneca Plc, GlaxoSmithKline, Reynolds American Inc. and BAT

Saturday, November 19, 2011

Europe’s bleak, but it’s not the new Japan - FT.com

I've been thinking quite a lot lately about whether the western economies are facing a Japan-style decade of grinding deleveraging, deflation and slow economic growth.

If we are it has huge implications for what you invest in. If you expect a Japan-type situation then you want to be holding bonds. Even at pathetically poor yields, Japanese bonds have provided pretty good real returns (i.e. interest and the impact of deflation) because a given sum of money will buy more each year than it did the previous year.

But Japanese equities have done rather poorly over the past two decades. This is partly because companies have had a hard time. But it is also because in a period of deflation then you would expect the prices of most things, including assets, to fall. This includes property prices as well as the prices of shares.

So the question of whether we face a Japanese situation is basically trying to decide whether investors in Europe and America should be buying bonds or shares.

So I was interested in a recent piece in the FT by Merryn Somerset Webb, a personal finance writer who used to be a stockbroker and knows Japan particularly well.
Her thinking is that we face inflation and not deflation.

Europe’s bleak, but it’s not the new Japan - FT.com:
"Europe is going to have to. If the ECB and Germany want to keep the euro together under the current circumstances (no growth, high debt and an angry market), they are – as Société Générale’s Albert Edwards puts it – going to have choose between their “two most cherished ideals: the euro or hard money principles”.
Either they print oodles of money and use it to buy up every European sovereign bond in sight, or they wave goodbye to their dreams.
Might this eventually lead to very high inflation and even hyperinflation?
It could do: the history of huge fiscal deficits being dealt with by huge money printing programmes is not a happy one – which of course is why the German authorities aren’t that into the idea, and why they will want to demand a promise of fiscal union before they agree to it.
However, in the meantime, it should probably make you feel reasonably bullish for the prospects for the European market a year or a two out – and much more bullish than you might have felt about Japan in, say, 1993."

I have to say, I tend to agree with her that the bigger risk in Europe in time will be inflation. But we may still face a deflationary few years, especially in property and stock markets.
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