Adventurous investment: my 14 years of success and failure


As we age, the memory of past events and dates fades. But November 2007 stood out for me – the month I published my first column on adventurous investors. Fourteen years later, I’m still here on the frontiers of investing, kicking the tires on the latest exotic ideas in the industry.

In one of my early columns, I asked if fund managers were guilty of constantly “landing on a weird and wonderful ‘new’ idea, taking a quick punt, and then running to the next” big thing ” “. But can this accusation also be brought to my door? With the pandemic leaving me to work from home, I’ve had ample opportunity to dig in the past few months to see how my adventurous ideas have evolved over the years.

I broke this audit down into winners and losers – and what the two can tell us about the risks and the opportunities. First the failures.

My most painful admission is that my love of geographic borders – especially Africa – has been a totally thankless exercise. Over the years I have championed funds and actions such as the Africa Opportunity Fund, Atlas Mara (African bank) and Agriterra (African agriculture) and all of them have serial disappointed in their own way.

One lesson is that it is devilishly difficult in these frontier markets to find well-run companies with liquid stock quotes and a good track record. Another is that deadlines are important. I still think Africa will surprise us in the long run, but a local investment might just end up doing nothing for a decade. If I’m being honest, I think picking individual countries is a dangerous business: experience suggests that you’d be much better off sticking with an active fund like BlackRock Frontiers, which will do all the hard work for you.

Another failure has been what you might call uncorrelated and illiquid closed funds. The idea was to find funds that invest in esoteric stuff, primarily to generate income, and that would not keep pace with the larger stock market. Many names come to mind, probably most notoriously the CatCo catastrophe bond specialist, which crashed and burned down when multiple natural disasters hit the US coast states in 2017.

The lesson here is that you can find some exotic, uncorrelated stuff, but that doesn’t make it a good investment. If an unusual industry or strategy is going to pay you a big, regular dividend check, make sure it has a solid business model and reliable cash flow.

Another big hiccup has been alternative finance, particularly peer-to-peer lending. Disruptive startups like Zopa and RateSetter have vowed to shake up savings and lending, which has spurred the emergence of aspirants like TrustBuddy, a Nordic-based lender. TrustBuddy failed spectacularly, as Zopa transformed into a digital bank and RateSetter was bought by Metro Bank. The P2P sector is still alive but it is only a pale shadow of itself. Lesson? Not all disruptive trends overwhelm incumbents, especially if regulators become suspicious.

I admit that my crystal ball observation skills have often been insufficient. In September 2016, I predicted a 15-20% correction for the US and UK stock markets following Donald Trump’s election victory. The following year, I highlighted the potential of stem cell technologies – especially via umbilical cord blood – as a means to revolutionize reproduction, with companies like China Cord Blood and Widecells in the lead. The latter is long gone, while the former has seen its share price nowhere for years.

Going through my columns, one of the things that stood out was my love affair with value as a medium of investment and my interest in cheap funds. But over the years, I’ve found that buying inexpensive products after a detailed research process is the easiest part. It is much more difficult to identify the catalysts that will drive the share price up.

This brings me to victories. This idea of ​​buying growth on the cheap has paid off, sometimes. In June 2012, for example, I observed that some of the biggest names in tech, such as Google ($ 288 at the time) seemed reasonable. I still think this applies to some of the tech titans today, such as Facebook and Google.

I have also been a strong believer in supporting biotechnology. Again, it is well paid. I liked an innovative investment trust very early on called Battle against Cancer IT and liked it even more when the venture capital arm of the Wellcome Foundation got involved and turned it into Syncona. Shares have doubled in the intervening period and in my opinion there is still a long way to go.

Another category that I continue to favor is that of specialized funds that disseminate the intellectual property (IP) of universities and research laboratories. I have long defended the IP group which won another of my favorites, Imperial Innovations. But there are obvious risks. With a crashing share price, IP spinout Allied Minds should warn that not all tech funds can ride the wave. Mercia Asset Management is probably my current favorite in this category.

Over the past 13 years, I have generally supported investing in emerging markets, even if it is a roller coaster ride. By the way, it should be noted that EM has been a better bet for me than my frontier ideas such as Africa. Asia received special attention. My favorite vehicle, the Schroders Asian Total Return fund, has almost doubled in price since October 2016.

On the other hand, I have always been cautious about China, but I found myself facing a country where valuations collapsed as in June 2012. Then, I suggested investing in the fund. Fidelity China Special Situations. It then went from 75p to 323p per share. For the record, I found myself staring at China in late 2021 (especially the big names in tech) despite the appalling political backdrop.

Another big win has been my continued support for private equity funds, which have proven to be increasingly popular with private investors. I have championed names like Hg Capital and ICG Enterprise and continue to do so. Another bright spot was infrastructure funds – I gave favorable mentions to companies like HICL and INPP in August 2009, when they were still bringing in well over 5%. While they’ve turned out to be a bit boring and predictable since then, I still think they’re a great alternative to bonds in these uncertain and inflationary times.

Honorable mention should go to these exotic left-wing ideas that have paid off – and two stand out. In 2012, I argued that litigation finance and in particular Burford (valued at 105p at the time) were worth investigating. Despite his many struggles with short sellers, his stock price is 786 pence and I still think that overall his model is worth it.

Speaking of punts, my late arrival to the crypto party and in particular my enthusiasm for Ethereum seems less embarrassing now than in 2018, after the price of Ethereum quintupled.

This all brings me to my final category – ideas still at an early stage, prognosis unknown. The most obvious example is my enthusiasm for resource stocks. I have long argued that oil will rebound above $ 70 and then move above $ 100. This led to big wins such as retail bonds issued by companies like Premier Oil and EnQuest when prices hit rock bottom.

There were also some very big hiccups. Riverstone Energy, a publicly traded private energy company that has been a terrible investment, could now turn into something much more interesting. My steadfast defense of America’s shale oil and gas producers throughout the past decade was also seriously ill-timed.

Funds investing in uranium miners have been through a terrible time since the global financial crisis, but I think the tide has finally turned (check out the rise in Yellow Cake’s share price) while the price of carbon – accessible via ETFs from companies like Wisdom Tree and HANetf – seems to me to be going in the right direction: upwards. I am still for a long time Yellow Cake (a uranium holding company), Carbon ETFs and American oil companies (currently Diamondback Energy).

I should also mention a great topic that has a lot more to do: passive funds. Since early 2008, I have suggested that adventurous types should not only study index funds and ETFs, but also multi-index fund providers (such as 7IM) and DIY strategies involving lazy portfolios that don’t only offer a handful of ETFs (now commonly provided by online robot advisers).

That said, my enthusiasm has been tempered by caution about so-called “black box” strategies such as smart beta, which have largely failed. I think the same is now true for ETFs on the ESG theme (environment, social and governance). They’ve become incredibly trendy, but come with the same risks as the smart beta trend of the past decade. Ethical buyers, beware.

After completing my review, should I conclude that the future is dull and boring, including a mix of unadventurous ETFs in a simple, low-cost index portfolio? Yes and no. I think a lackluster core ETF portfolio makes sense alongside a satellite portfolio of adventurous ideas, many of which in closed-end funds.

But getting decent returns from a “boring” core portfolio is going to get more difficult. We will all need to keep looking for alternative ideas, whether it’s private equity, emerging markets or digital assets.

David Stevenson is an active private investor. Among the stocks mentioned, he owns Syncona, IP Group, Schroders Asian Total Return, Fidelity China Special Situations, Hg Capital, Yellow Cake and Diamondback Energy. E-mail: [email protected]. Twitter: @advinvestor


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