Tesco is one of Britain’s most widely-owned shares as well as one of the most
widely-frequented chains. So the 48pc plunge in its share price during the
year from a starting point of 334p to last week’s 178p was a jolt. Small
investors weren’t the only losers. Legendary stockpicker Warren Buffet said
in early October his large holding in the grocer had been a “huge mistake”.
Some shrewd analysts had seen the writing on the wall. Terry Smith, famously
outspoken fund manager and critic of many cherished businesses and City
institutions, had been avoiding Tesco for years – on the basis of the
longstanding fall in the return on capital it was delivering to
shareholders.
In a video interview for Telegraph Money (watch it on
telegraph.co.uk/investing) in October he explained how his holdings needed
to demonstrate return on capital, something other investors appeared happy
to overlook. “If you look at Tesco in the years under Terry Leahy [chief
executive from 1997 to 2010] you saw a graph of steadily rising earnings per
share. But there was an equally steadily falling return on capital. More and
more capital was being deployed at lower rates of return.”
He added that the return of capital Tesco was generating arose largely on
older projects and investments. “Its newer ventures in China and the US were
dragging that average down, having a negative effect.”
Russian crisis as currency and market plunges
Lesson learned: The ‘stupidly cheap’ can still get much cheaper
Fans of Russian investments have for years pointed to statistical analysis
demonstrating that Russian stocks were very cheap in comparison with other
world markets. One measure is a PE ratio share prices versus earnings. Even
before the crisis, Russia’s market had a PE ratio of five compared to, for
instance, the British stock market’s 15. In other words British shares were
on average three times as dear.
Russia was cheap by other technical yardsticks, too. The book value of
businesses – what you’d get if you wound up a firm and sold the assets – was
on average higher than their market price. In Britain, though, this would be
very rare, with average businesses trading at twice its book value, based on
investors’ hopes of future returns.
But the plummeting price of oil triggered a Russian sell-off which made these
arguments at best academic. Russia funds popular with investors, such as
Neptune’s Russia and Greater Russia fund, have halved in value in a year.
That particular fund fell by more than 25pc in the week beginning December
10.
Relying too heavily on technical measures of value can backfire at the other
end of the scale, too. Bonds have been eye-wateringly expensive by most
measures all through the crisis. At the beginning of 2014 most pundits were
loudly warning investors to sell down bonds and move further into shares.
In fact the average fund investing in British Government bonds has returned
13pc in 2014, to date, compared to the average fund investing in British
shares where returns are less than 1pc.
Oil price slump
Lesson learned: Investment fads come to the fore when assets are highly
priced
The falling oil price triggered Russia’s crisis but many private investors
were more directly exposed to oil, thanks to the popularity in recent years
of specialist oil-focused funds.
As with other fashionable themes over the years – technology, pharmaceuticals,
new energy, individual emerging markets – these niche funds come to the fore
often after the boom. Oil-oriented funds popular with private investors
included Schroder Global Energy and Artemis Global Energy, both down by more
than 40pc in the past six months.
MFM Junior Oils, a fund launched in 2004, was a particularly specific play on
the oil price as it targeted companies involved in new oil discoveries and
technologies. As the price rose it boomed, returning 85pc in 2009, for
instance. But its fall has been even more spectacular. Over five years
investors have lost almost 50pc. With the oil price today lower than it was
when this fund was launched a decade ago, and still falling, it is difficult
to see how these losses could ever be restored.
Biotech surge
Lesson learned: Don’t be greedy, do take profits
Biotech shares rose strongly again during 2014 adding to a stonking run going
back five years or further. Will it continue? Who knows, but it’s safer to
take profits and rebalance your holdings after such dramatic wins.
Axa Framlington Biotech is the best known of the funds focusing on these
companies and is up 209pc over the past three years and 262pc over the past
five. If you’ve owned that or similar funds over the period your portfolio
could be heavily skewed.
Say in early 2010 you allocated 5pc of your Isa as your specialist biotech
play, choosing the Framlington fund. The rest of your portfolio mirrored the
make-up of the FTSE index of leading shares. Today, your biotech stake as a
proportion of your Isa would almost have tripled to 13pc of your Isa – too
much for an easy night’s sleep.
Similar conclusions could be drawn from the outperformance of other, narrowly
focused investments, such as funds invested in Indian stocks.
Launch of Woodford Investment Management
Lesson: The marketing of investments incurs costs which, ultimately,
erode savers’ returns
Few private investors could have missed the lavish advertising campaigns that
heralded the arrival of Woodford Investment Management and the launch of its
flagship Woodford Equity Income fund, which started trading on June 19.
Neil Woodford promises to run the fund along the lines of the hugely
successful portfolios he ran while at his previous employer, Invesco. In six
months it attracted £4bn and returned over 7pc, perhaps justifying the
decision of many loyal investors to follow Mr Woodford.
But someone pays for the advertising and marketing of investments whether it
is the fund firm itself or – as was mostly the case with the Woodford launch
– the brokers who will sell the fund on to savers. Either way, the cost
lands up with the end investor.
This is one reason why Telegraph Money continues to write regularly about
investment trusts. These cost-conscious, stock market listed funds rarely if
ever advertise.
Mortgage rates fall even further
Lesson: ‘expert’ forecasters and capital markets can be very wrong
In early 2014 the markets anticipated an earlier increase in Bank Rate and so
mortgage rates were believed to have hit the bottom. Brokers were telling
borrowers to hurry and lock into fixed rates while they could. For example,
a borrower wanting a fixed rate mortgage over five years and with 25pc to put
down would pay 3.3pc, down from 3.7pc in January 2013. As lenders and
markets anticipated an increase in rates, these deals increased in price to
3.7pc by May 2014.
But then markets were unfooted by a range of factors including grisly European
economic data and fears of deflation. So rates fell again. Now, says the
Bank of England, the average five-year fixed rate mortgage is at 3.2pc.
Top-end house prices come off the boil
Lesson learned: Government intervention through tax and other measures
can deliver an ‘out of the blue’ shock to asset prices
The overhaul of the stamp duty regime announced in the December 3 Autumn
Statement was welcome to most homebuyers. By abolishing the “slab effect” of
stamp duty – where the applicable rate of tax was charged on the entire
purchase price – the bill for buyers of properties under £930,000 was cut.
It wasn’t good news for more expensive property buyers and sellers, though.
In a video interview for Telegraph Money published on December 4, upmarket
London property investor Naomi Heaton warned of “complete and utter
collapse” in high-end prices.
Gary Hersham, managing director of upmarket agency Beauchamp Estates, said:
“It is in London’s £3m to £10m price band where the changes will have the
biggest impact: here the market will almost come to a halt.”
Early sisgns suggest they may be right. Analysts Rightmove, who compile a
predictive index based on average asking prices, said on December 15 that
prices in London had fallen an average £30,000 in four weeks.
– richard.dyson@telegraph.co.uk
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