French philosopher Simone Weil once said the future is made of the same stuff as the present. So I’m going to abstain from any 2022 futurology and will instead pose five questions most private investors would be well served to ponder as we go into the new year.
From tech to VCTs
Do US technology growth stocks have much further to run? The average price/earnings (p/e) ratio of the FAANGs (Facebook, Apple, Amazon, Netflix and Google) is over 40. They may be overvalued by traditional metrics, but the continued flow of money into them shows investors don’t care.
If the secular drivers pushing these types of shares higher stay in place, it has implications for UK venture capital trusts (VCTs). These tax-efficient venture funds are not the same as the US tech giants. They have their own unique selling points. However, if tech trends remain strong, I think UK investors will put even more money into the next round of VCTs. Most of the experts I’ve spoken to in the field believe the first quarter of 2021 will be a bumper year.
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Conversely, if you think the US initial public offering (IPO) pipeline will shut and tech stocks will tank, now is probably not a great time to be backing VCTs.
Consider alternatives
Are you ready to take the plunge into alternatives? There has been an explosion of alternative funds listing on the UK market, ranging from renewables and infrastructure funds to music royalty funds and shipping funds. There are also veteran private equity funds such as HgCapital, Harbourvest, and Oakley Capital. Institutions and wealth advisers remain dominant on their share registers, but their managers have reported increasing interest from private investors. The consensus among most institutions is that anything between 10% and 40% of their portfolios can be exposed to alternatives, and private equity specifically. By contrast I would suspect most private investors have less than 5% exposure to private equity in their portfolios.
Time for the UK to shine
UK-focused funds had a decent 2021, but will they do better in 2022? The average UK-focused fund returned 18% compared to 12.5% for global equity funds in 2021, according to Numis. UK all-companies funds returned 16.6%, and UK smaller-cap funds 21%. But, over the last five years, global equity funds have delivered a 102% total share price return while UK funds have produced returns of 54%. Most strategists believe the UK equity market is undervalued and UK equities are certainly under-owned by most large institutions.
ETFs go active
Will you consider an actively managed exchange traded fund (ETF)? ETFs are largely thought of as passive investment vehicles that track an index and that certainly used to be the case. However, the growth of thematic funds has paved the way for more concentrated portfolios of stocks – sometimes comprising no more than 30 to 50 shares – whose indices tend to be actively constructed. The next step was to get an active manager to run the portfolio. A few active ETFs have emerged in the UK and Europe, but I expect an increase in issuance in 2022. They are already a big thing in the US: roughly two thirds of all the ETFs launched in 2021 were actively managed.
Getting into crypto
My last question pertains to the most alternative asset class out there: cryptocurrencies or digital money. How will UK private investors choose to build their exposure to these investments? Many are interested but don’t know how. Do they hold the currencies directly or in a diversified fund, or invest instead in the new digital infrastructure behind them? I believe it won’t be long before someone launches an investment trust or active ETF that invests in and across currencies and the decentralised finance system behind them.
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