EDITOR'S LETTERMerryn Somerset Webb
Uber loses £3bn a year. It isn’t entirely clear how those losses will turn into profits. Its revenue growth has been slowing. The level of disclosure in its “enormous and vague” pre-listing prospectus was, as Rett Wallace of Triton puts it, “woeful”.
So, given these ropey fundamentals, what is the company worth? The short answer is not as much as Morgan Stanley reckoned it was before Uber hit the market last week, and not as much as investors felt happy paying for it before it floated. The shares fell by 18% in the first two days of trading and, according to Bloomberg, most of those who bought Uber privately “in the last three years are under water on their investment”.
John looks at this and points out that it might have implications for the funds you hold that have unlisted investments in these (the number of these keeps rising). Might more of them, and hence your fund, be overvalued? But it has implications for listed stocks, too. Might the Uber initial public offering (IPO) mark a valuation high-water mark? The point at which investors stop being prepared to pay up for vague tech-based growth plans – and perhaps even the point at which they start asking newish firms to prioritise profits over building scale? Either way, it seems to us that the Uber catastrophe is just one more signal (to add to a large pile) suggesting that investors’ tolerance of extreme valuations is falling, something that suggests a period of lower market returns could lie ahead.
If that is the case, one thing that is going to be more important than ever for investors is keeping costs down (the lower your returns the more your costs matter). Good news, then, that across the industry costs are becoming both more transparent and lower. There is still some way to go – too many active funds still charge too much; too many of those “active” funds are still index trackers in disguise; and too many funds are still not 100% clear on their charges (The Daily Telegraph claims to have found nearly 100 funds with overall costs higher than advertised). Nonetheless, the idea that the age of high costs is over has taken hold. Some are even beginning to suggest that fees should fall below zero: fund managers should pay us to be allowed to manage our money. How’s that for progress?
Costs are also something to remember to be careful of not just when you are accumulating wealth but when you are using it up as well – and particularly when you move your pension into drawdown. Research from AJ Bell notes that charges for this can range from 0.4% to 1.6% a year. Start with £100,000, draw £5,000 a year from 65; keep doing so until 88 and you will lose £32,000 more in fees to the highest-cost provider than the lowest. Real money.
Finally, last week I wrote here about how you might start preparing for a (still quite unlikely) majority Labour government. I promised you more on the subject. For the beginning of our thinking on this, David Stevenson looks at a few investment funds he reckons could prosper in a UK run by semi-socialists. Then turn to our cover story. I’m pretty sure that whatever Jeremy Corbyn might or might not do, it will have no effect whatsoever on the great North American cannabis boom.