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As one gets older, one’s recollection of past events and dates blurs. But November 2007 stands out for me — the month I published my first Adventurous Investor column. Fourteen years on, I’m still here on the frontiers of investing, kicking the tyres on the latest exotic ideas in the industry.
In one of my early columns I questioned whether fund managers were guilty of constantly “alighting on some weird and wonderful ‘new’ idea, taking a quick punt and then running around to the next ‘big thing’”. But can that charge also be laid at my door? With the pandemic leaving me working from home, I have had ample opportunity to do some digging in recent months to see how my adventurous ideas have fared over the years.
I’ve broken down this audit into winners and losers — and what both can tell us about risks and opportunities. First, the misses.
My most painful admission is that my love of geographical frontiers — especially Africa — has been an entirely unrewarding exercise. Over the years I’ve championed funds and stocks such as the Africa Opportunity Fund, Atlas Mara (African banking) and Agriterra (African agriculture) and all have serially disappointed in their own idiosyncratic ways.
One lesson is that it is fiendishly difficult in these frontier markets to find well-managed businesses with liquid stock quotes and a good record. Another is that timescales matter. I still think Africa will surprise us all over the long term, but a local investment might well end up going nowhere for another decade. If I’m honest, I think picking individual countries is a dangerous business: experience suggests you’re much better off sticking with an active fund such as BlackRock Frontiers, which will do all the hard work for you.
Another miss has been what one could call uncorrelated, illiquid closed end funds. The idea was to find funds that invest in esoteric stuff, mostly to generate an income, and which would not move in step with the wider stock market. Lots of names come to mind, probably most notoriously the catastrophe bond specialist CatCo, which crashed and burnt when multiple natural disasters hit the US seaboard states in 2017.
The lesson here is that you can find exotic, uncorrelated stuff, but that doesn’t make it a good investment. If an unusual sector or strategy is going to pay you a big fat regular dividend cheque, be sure that its business model is robust and those cash flows are reliable.
Another big miss has been alternative finance, specifically peer-to-peer lending. Disruptive start-ups such as Zopa and RateSetter promised to shake up saving and lending and this encouraged the emergence of wannabes such as TrustBuddy, a Nordic-based lender. TrustBuddy failed spectacularly, while Zopa turned into a digital bank and RateSetter was purchased by Metro Bank. The P2P sector is still alive but it’s a pale shadow of its former self. The lesson? Not all disruptive trends smash the incumbents, especially if the regulators grow suspicious.
I confess that my crystal ball-gazing skills have frequently fallen short. In September 2016 I foretold a 15-20 per cent correction for US and UK stock markets as a result of Donald Trump’s election win. The following year I highlighted the potential for stem cell technologies — particularly via the medium of umbilical cord blood — as a way of revolutionising reproduction, with businesses such as China Cord Blood and Widecells as the front runners. The latter is long gone, while the former has seen its share price go nowhere for years.
Looking over my columns, one standout has been my love affair with value as a way of investing and my focus on cheap funds. But over the years I’ve come to realise that buying cheap stuff after a detailed research process is the easy part. Far harder is identifying the catalysts that will move the share price higher.
This brings me to the wins. That idea of buying cheap growth has paid off — sometimes. Back in June 2012, for instance, I observed that some of the biggest names in tech, such as Google ($288 at that point) looked reasonable. I still think that applies to some of tech titans today, such as Facebook and Google.
I’ve also been a fervent believer in backing biotech. Again, that’s largely paid off. I took a liking early on to an innovative investment trust called Battle against Cancer IT and liked it even more when the Wellcome Foundation’s venture capital arm backed into it and turned it into Syncona. The shares have doubled over the intervening period and in my opinion have much further to go.
Another category I continue to favour is the specialist funds spinning out intellectual property (IP) from universities and research labs. I’ve long championed the IP Group which snapped up another of my favourites, Imperial Innovations. But there are obvious risks. With a collapsing share price, IP spinout Allied Minds should act as warning that not every tech fund can ride the wave. Mercia Asset Management is probably my current favourite in this category.
Over the past 13 years I’ve generally been supportive of investing in emerging markets, even though it’s a rollercoaster ride. On a side note, it’s worth noting that EM has been a better bet for me than my frontier ideas such as Africa. Asia has been a particular focus. My favourite vehicle, Schroders Asian Total Return fund, has nearly doubled in price since October 2016.
By contrast I’ve been consistently cautious about China, but I’ve found myself warming to the country when valuations crash as they did in June 2012. Then, I suggested investing in the Fidelity China Special Situations fund. It has subsequently gone up from 75p to 323p a share. For the record I found myself looking again at China as 2021 drew to a close (especially the big tech names) despite the dreadful political backdrop.
Another big win has been my consistent backing for private equity funds, which have proved increasingly popular with private investors. I’ve championed names such as Hg Capital and ICG Enterprise and continue to do so. Infrastructure funds have been another bright spot — I gave favourable mentions to the likes of HICL and INPP back in August 2009 when they were still yielding well over 5 per cent. Although they’ve proved a little boring and predictable since, I still think they are a great bond alternative in these uncertain, inflationary times.
Honourable mention should go to those left-field, exotic ideas that have paid off — and two stand out. In 2012 I argued that litigation funding and especially Burford (valued at 105p at the time) was worth investigating. Despite its many travails with short sellers, its share price is 786p and I still think, on balance, its model is worth a punt.
Talking of punts, my late arrival to the crypto party and particularly my enthusiasm for ethereum looks less embarrassing now than it did in 2018, after ethereum’s price went up fivefold.
All of which brings me to my last category — ideas still at the early stage, prognosis unknown. The most obvious example is my enthusiasm for resource stocks. I’ve long argued that oil will rebound above $70 and then breach $100. That has driven some big wins such as retail bonds issued by companies like Premier Oil and EnQuest when prices hit rock bottom.
There have also been some very big duds. Riverstone Energy, a listed private equity energy firm which has been a terrible investment, might now be turning into something much more interesting. My constant championing of US shale oil and gas producers throughout the last decade was also very poorly timed.
Funds investing in uranium miners have had a terrible time since the global financial crisis but I think the tide has now finally turned (check out Yellow Cake’s rising share price) while the price of carbon — accessible through ETFs from companies like Wisdom Tree and HANetf — to me looks to be heading in the right direction: upwards. I’m still long Yellow Cake (a uranium holding company), Carbon ETFs and US oil companies (currently Diamondback Energy).
I should also mention a big theme that has a lot further to run: passive funds. From the start in 2008 I have suggested adventurous types should not only investigate index tracking funds and ETFs but also multi-index fund providers (such as 7IM) and DIY strategies involving lazy portfolios which boast just a handful of ETFs (now commonly provided by online robo advisers).
That said, my enthusiasm has been tempered by caution about so-called “black box” strategies such as smart beta, which have by and large failed. I think the same is true now for ETFs on the theme of ESG (environmental, social and governance). They have become incredibly fashionable, but pose the same risks as the smart beta trend in the last decade. Ethical buyers beware.
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So having completed my review, should I conclude that the future is drab and boring, comprising a mix of unadventurous ETFs in a simple, low-cost indexing portfolio? Yes and no. I think a core portfolio of dull ETFs makes sense alongside a satellite portfolio of adventurous ideas, many of them in closed-end funds.
But squeezing decent returns from a core “boring” portfolio is going to get harder. We will all need to continue to look at alternative ideas, whether private equity, emerging markets or digital assets.
David Stevenson is an active private investor. Among the securities mentioned he holds Syncona, IP Group, Schroders Asian Total Return, Fidelity China Special Situations, Hg Capital, Yellow Cake and Diamondback Energy. Email: adventurous@ft.com. Twitter: @advinvestor
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