Letters to MoneyWeek: Taking issue with James Anderson
A selection of letters sent in to the MoneyWeek office, and their replies.
In your interview with James Anderson of Scottish Mortgage Investment Trust (MoneyWeek 879), he bewailed investors asking about investments that performed poorly, rather than which were a success.
As a trustee, I always ask why holdings have performed poorly and what decision our investment manager has made about them as a result. This is one of my key questions to ask an investment manager.
This is because you cannot stop managers talking of their successes, but talking about poor performers does three things:
1) it makes them think about why they are holding the investment;
2) it makes them question their view on the holding; and
3) it makes them confirm whether the investment fits withtheir strategy.
This reflection also provides far greater insight into their skills and thought processes than any comment on their successes, which simply confirms to them that their thinking is right.
I read your interview with James Anderson with great interest (MoneyWeek 879). I would say that your previous article suggesting a rebalancing of the IT portfolio helped me clarify my own thoughts about Scottish Mortgage and I am most grateful for that. I appreciate Anderson's comments about the insurance element in a portfolio and that is why I have retained 10% of my growth portfolio and 10% of my Sipp drawdown portfolio in Scottish Mortgage, which I believe is still a very good investment.
Please continue to take a dispassionate and professional approach to the MoneyWeek investment trust portfolio, there are amateurs out there (especially me!) who appreciate the clear thinking approach you and your team have to a balanced approach to investment.
The MoneyWeek investment trust portfolio is built with a number of different considerations in mind. Our interview with James Anderson and these letters from readers sum up two things that are important in picking funds for this or any portfolio.
First, we want managers who have strong views and invest accordingly, rather than holding a large number of stocks that look and behave like the wider market. Second, we aim to be diversified among different strategies in a way that means we have insurance against events not turning out as expected. We may not agree with the managers on everything, but that doesn't matter if their funds are complementary.
Scottish Mortgage's role in the portfolio is a good example of how this works. Anderson may be correct in his optimistic view of the tech sector. In that case, his fund should continue to do very well. Or he may be too confident, in which case we'd expect our other, more value-orientated trusts to pick up the slack.
Carillion is not the only risk
For many people who worked in the construction industry like myself, the demise of Carillion was no surprise (MoneyWeek 879). For years it adopted a cavalier attitude to its supply chain with payment terms averaging 120 days after valuation date. This could equate to five months before suppliers received any monies. This was against all government guidelines on prompt payment initiatives but that didn't seem to matter.
The supply chain, HM Revenue & Customs, VAT, the pensions scheme, shareholders and many others will be well and truly shafted here. That will have a knock on effect on every UK citizen. There should be a public enquiry.
Anybody can win a tender by putting in a bid on suicidal rates, but making money on slender margins is generally impossible. Something has to give. The government and local authority departments that engaged Carillion's services could not have carried out due diligence. They have failed in their duties to protect the taxpayer and supply chain up and down the country. Those in charge need "hauling over the coals" and heads should roll.
Worryingly, Carillion isn't on its own. There are at least four other major contractors who are financially on the brink. Their demise would be catastrophic to the construction industry. But while governments and local authorities continue to accept the lowest tender based on price rather than value and engineering, the inevitable will continue to happen.
Can we trust the accountants?
One of the dangers of auditing a large contracting company is that a key asset is often cash tied up in contractual claims and only an expert is able to assess how real the prospect of recovering that cash is. Generally speaking, claims are handled internally by quantity surveyors and they alone know the true real value and what they can realistically expect to recover. That is rarely likely to be the full amount and yet it's relatively simple for management to ignore the realistic forecast in favour of a rosier picture.
Never take the lowest bid
One serious problem for government projects (both national and local) is the requirement to take the lowest bid.I was an investment manager for an insurance company responsible for property development and the iron rule was never to take the lowest bid.
Often the bidder had just got it wrong or was intent on seeking extras as the project developed. Many years ago a lawyer for a local authority complained to me that this requirement was costing them a fortune in failed projects. Clearly no-one has learned. Now some publicity might get the message through.
We received many letters from readers about the collapse of Carillion last month. Taxpayers can only hope that this affair leads to improvements in the way in which the government engages contractors to carry out large projects for the public sector. However, there is also a lesson here for investors regarding the dangers of investing in firms such as these, where it may be unusually difficult for outsiders to understand the health of the underlying business.
In our article "Landlords: act quickly and pay your tax" (MoneyWeek 878) we wrote that "letting relief will apply [to any capital gains tax liability] in most cases and, if the landlord lived in the property at any point, private residence relief too". This was an editing error. Letting relief will only apply in some cases where properties have at some point been used as the landlord's only or main residence, not to all properties that have been let out. Sorry.
Writing to MoneyWeek
MoneyWeek welcomes letters and emails from readers, but unfortunately we are not able to publish or reply to all of them. We may edit letters prior to publication. All responses are for information only and should not be relied upon in making investment decisions.
Please note that our staff are unable to respond to personal investment queries, as MoneyWeek is not authorised to provide individual investment advice. Email us at email@example.com, or write to us at Editor, MoneyWeek, Dennis Publishing, 31-32 Alfred Place, London, WC1E 7DP.