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TINA

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
G3lc
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TINA

#331500

Postby G3lc » August 7th, 2020, 9:58 am

As a private investor with a 5 year - 10 year or 20+ years time frame, what is the significance of TINA (there is no alternative) to our investing in the Stock Market, and an explanation for todays prices.

The pension funds have to find a place to put money on a regular basis.

While it is appreciated property is an alternative, the same could be said for property prices/rents.

As private investors do we have an advantage of some sort, and is perhaps TINA is a good thing?

tjh290633
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Re: TINA

#331508

Postby tjh290633 » August 7th, 2020, 10:35 am

G3lc wrote:As a private investor with a 5 year - 10 year or 20+ years time frame, what is the significance of TINA (there is no alternative) to our investing in the Stock Market, and an explanation for todays prices.

The pension funds have to find a place to put money on a regular basis.

While it is appreciated property is an alternative, the same could be said for property prices/rents.

As private investors do we have an advantage of some sort, and is perhaps TINA is a good thing?

Pension funds have to invest to provide for the promised income for defined benefit pensioners. They can invest in a variety of things, be it retail property, student accommodation, warehousing, ordinary shares, gilts, etc. Usually, for pensions in payment, they will have invested in a range of fixed interest securities with maturities and cash flow to meet their obligations. With the current level of interest rates, that is prohibitively expensive, so they have to look elsewhere.

Funds for defined contribution pensioners usually accept the market movements on a caveat emptor basis.

There are always securities paying out fairly reliable income, like preference shares, company debt issues, etc, so they have to widen their scope. Likewise, not all equities are hit by doom and gloom. It is not difficult to find enough shares with respectable and reliable yields to make an income portfolio, to sit alongside some bonds of one sort or another and property.

Perhaps as private investors we do have the flexibility to adjust our portfolios to suit conditions. We may have to grin and bear the reductions in dividends, if immediate income is your primary focus, but the market will recover, despite dire prognostications, wailing and gnashing of teeth by commentators.

TJH

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Re: TINA

#331533

Postby Alaric » August 7th, 2020, 11:57 am

tjh290633 wrote:Usually, for pensions in payment, they will have invested in a range of fixed interest securities with maturities and cash flow to meet their obligations. With the current level of interest rates, that is prohibitively expensive, so they have to look elsewhere.


An ever increasing number of defined benefit pension funds are not only closed to new entrants, but also new accrual. Thus apart from inflation and longevity, the benefit outgo even for those not yet retired is now well defined. Accounting rules tend to force the assets to held in fixed interest and indexed linked securities rather than equity based. The poor returns on these increase the paper deficits and require ever higher deficiency payments from employers.

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Re: TINA

#331544

Postby WorkShy » August 7th, 2020, 12:54 pm

Alaric wrote:
tjh290633 wrote:Usually, for pensions in payment, they will have invested in a range of fixed interest securities with maturities and cash flow to meet their obligations. With the current level of interest rates, that is prohibitively expensive, so they have to look elsewhere.


An ever increasing number of defined benefit pension funds are not only closed to new entrants, but also new accrual. Thus apart from inflation and longevity, the benefit outgo even for those not yet retired is now well defined. Accounting rules tend to force the assets to held in fixed interest and indexed linked securities rather than equity based. The poor returns on these increase the paper deficits and require ever higher deficiency payments from employers.

Accounting standards require DB pension liabiltiies to discounted off the Gilt curve. So holding a 100% portfolio of Gilts would not generate a poor return. A duration and convexity matched portfolio of Gilts would be an very good replicating hedge for their liabilties. Long duration Gilts have returned about 9%/annum over the past two decades, compared to 3.8% total return for the dog that is the FTSE ASX. This is what UK DB pension funds should have had all along in their portfolio.

At the start of this year, the £2.1trillion liability of the private sector DB pension funds was only 70% duration hedged with UK Gilts and inv grade bonds (duration is about 21). Most the residual part of the portfolio was in UK equities and commercial property. With 20 year duration Gilts having returned around 15% YTD, the FTSE down 20% and commercial property down 15%, that has resulted in a widening of the funding gap of over £150bn. That's about 8% of the FTSE100 or 7% of the ASX market cap. Essentially, some UK companies are now just DB pension funds constantly sucking the life out of old, tired companies with obsolete business models. UK equity performance is now to some degree a play on rising Gilt yields.

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Re: TINA

#331550

Postby Alaric » August 7th, 2020, 1:23 pm

WorkShy wrote: So holding a 100% portfolio of Gilts would not generate a poor return.


If today an investment was made into newly issued UK Gilts, what income return would a purchaser get if held to maturity? Why would it exceed the coupon which has dropped below 2%? If Indexed Gilts are purchased, the coupon is next to nothing. Whilst the ultimate cash return is a punt on the RPI, even that isn't available at par, so the real return is negative.

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Re: TINA

#331565

Postby WorkShy » August 7th, 2020, 2:24 pm

Alaric wrote:If today an investment was made into newly issued UK Gilts, what income return would a purchaser get if held to maturity? Why would it exceed the coupon which has dropped below 2%? If Indexed Gilts are purchased, the coupon is next to nothing. Whilst the ultimate cash return is a punt on the RPI, even that isn't available at par, so the real return is negative.

It's not about return. This is asset-liability matching. Their liablity is defined off the Gilt curve. If the Gilt curve rallies 10bp, then with an average liability duration of 21, the liabilities grows by 2.1% (ignoring convexity adjustments which will make it larger). If the Gilt curve goes up by 10bp, the liabiity shrinks by 2.1%. Holding Gilts is the replicating hedge. Anything other than Gilts, they are creating a asset-liability mismatch, taking tracking error if you like.

The problem is the UK DB pension funds keep arguing that Gilt yields are too low and there are better ways to hedge the liability. The issue is that the've been totally wrong for 20 years and as Gilt yields fell the convexity adjustment just got bigger. Just think about the situation at the start of 2020. Total liability of all UK pension funds: £2.1tn of 21 year weighted duration. So £4.4tn of 10-year duration equivalents. Total size of all UK fixed rate Gilts and inv grade bonds (float weighted to exclude BoE holdings)=1.9tn of 10-year duration. Add in another £1tn for linkers in 10-year duration terms. Market just isn't big enough for their liability profile. They need to buy over £100bn Gilts just to get back to their underweight position at the start of the year (I hear Rishi has quite a few to go).

At some juncture they just needed to accept they were wrong, stop out, buy Gilts or lend swaps, and move on. Of course, it may be that Gilt yields are too low here but risk free real yields have been falling for hundreds of years. On occassions, after shocks like the 70s, real yields end up higher. That's the exception to the downtrend, not the norm.

My point is that these companies have now got a substantial exposure to Gilt yields that results in them losing money when Gilts rally. As a shareholder, I'd prefer my companies to focus on their expertise and not punt Gilts. I can do that professionally and personally rather better than them but that's not a high bar given the've been truly appalling at it.

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Re: TINA

#331570

Postby Alaric » August 7th, 2020, 2:36 pm

WorkShy wrote:It's not about return. This is asset-liability matching. Their liablity is defined off the Gilt curve


That rather depends what you mean by liability. What is paid out by a defined benefit scheme is a series of payments running into the future which are defined by scheme rules, inflation and longevity. You then have to decide how much to set aside today or what value to place on this cash flow outgo in a set of accounts and what to invest it in. How much to set aside today for an amount to be paid in the future is a function of what you can earn on the money set aside. That's regardless of how well or badly the cash flows match once you've made the investment.

I would make a distinction between "liability" being the amount needed to be paid out at some time in the future with the value placed on that liability.

If you value future cash flows at 1%, you place a somewhat higher value on them than if you use 5%. It doesn't change the cash flows. If you are forced to invest at 1%, you need more to invest than if you assumed and made 5%.

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Re: TINA

#331585

Postby Lootman » August 7th, 2020, 3:09 pm

WorkShy wrote: Long duration Gilts have returned about 9%/annum over the past two decades, compared to 3.8% total return for the dog that is the FTSE ASX.

Yes but that is something of a freakish comparison. The UK equity market has dramatically under-performed global equities, particularly US and emerging markets shares. So the real problem is that UK pension funds have been too UK-centric.

And the chosen time period is flattering there. UK shares peaked in 1999 and are still below that level now. The only return has been the dividends. And gilt yields were very high back then - I can recall regularly seeing gilts priced to give a yield-to-maturity of over 10% per annum. Clearly that cannot happen again from current levels.
WorkShy wrote:
Alaric wrote:If today an investment was made into newly issued UK Gilts, what income return would a purchaser get if held to maturity? Why would it exceed the coupon which has dropped below 2%? If Indexed Gilts are purchased, the coupon is next to nothing. Whilst the ultimate cash return is a punt on the RPI, even that isn't available at par, so the real return is negative.

It's not about return. This is asset-liability matching. Their liability is defined off the Gilt curve.

But another way that DB pension schemes assess their long-term viability is by assuming long-term returns from their portfolio. And many of them have wildly optimistic assumptions for those future return, say 7% per annum. They do this so they can get away with contributing less to the fund.

Now that might have been possible in the past via gilts and bonds, but to get that kind of return now from fixed income would require rates to decline forever and, as we have already seem in various markets, eventually those yields go negative, meaning that you are paying to hold them.

The great thing about being a private investor is that you are not subject to all these arbitrary rules. For my purposes I have about 10% in cash and 90% in equities. I have no use for bonds. And much of the share portfolio is in the US market which has done far better than the UK market. I don't look for a high dividend yield, but rather for a low or moderate dividend that is safe and growing.

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Re: TINA

#333279

Postby 1nvest » August 14th, 2020, 6:50 pm

We've transitioned from the state providing, to the state sponging. For centuries prior to 1932 the state would pay you for it to securely store your gold. Money and gold were interchangeable at a (mostly) fixed rate. There were periods of both inflation and deflation in around equal measure overall, broadly no inflation. Exchange gold into money, lend that money to the state (buy government bonds) and you'd be paid a average 3% or 4% interest, and at any time you could end that loan and convert the (larger amount of money)
back to gold. People could work and save in the knowledge that those savings would cover their retirement/whatever.

Nowadays, since 1931 when the UK broke away from the gold standard and the US stepped up to take over the helm, so savings etc. have been raided, seen as sources of state income, with a plethora of methods to extract wealth from others. Parliament and the State are nowadays more of a liability than a asset. To make matters worse the UK parliament gifted UK sovereignty away in the 1970's, and even very recently indicated that it did not want it back, that it in effect preferred to remain being the EU's UK regional assembly.

There is a alternative, and increasingly more are seeing that as the more appropriate forward direction. The US however will resist that as far as it can. When the US pledged to be responsible in return for its currency becoming the replacement for gold as the primary currency I guess it was pretty obvious that sooner or later that promise would be broken. When you can print/spend legally and freely and have promised to do so responsibly, sooner or later circumstances will see that pledge being broken.

Fundamentally we need to end the situation of the people appointing its representatives every five years, but where in the interim money dictates how that representative entity acts, and to restore a tangible backed currency, where the state acts in a manner for the benefit of the people, not the big businesses who contribute little and flight to whoever gives them the better terms.

Nominal GDP expansion is incredibly easy to achieve, just open the migration floodgates. What matters however is GDP per capita, along with instating pressures to slow/end the outflow of UK assets. For example a Chinese individual wishing to buy from the UK has to submit for permission to do so, whilst in the opposite direction its almost as though the UK would prefer to import rather than source domestically. Right down to even UK passport production levels :)

At the private/individual investor level old money (generational wealth) follows the 'a third, a third, a third' mantra, gold, art, land. Keynes art collection value over decades was indicated by Dimson et al to have compared to stock total returns. For most utilising the liquidity/ease of stocks is better than buying/holding/trading collections of collectables.
The UK equity market has dramatically under-performed global equities

The UK market as per the FT100 isn't representative of the UK, which is more of a global commodities (oil, mining) and banking/financials and pharmaceutical index. The FT250 is more representative of the UK, and that index has held up far more equally with others.

IMO the UK should

1. Reform Parliament. Eject the entity that prefers to be the EU's UK regional assembly and replace that with a body that doesn't take 45 minutes to make a single vote via walking around in circles.

2. Priorities the UK becoming self sufficient on the energy and food fronts.

3. Stem/kill the nominal GDP expansion based drive to instead focus upon GDP/capita expansion. For instance punitively high tariffs would see many of UK assets lost into the EU, rail, utilities, car manufacturing ...etc. being rapidly repatriated.

The UK after all has a population size that compares to the combined population of 15 EU member states, over half its number. The EU isn't Europe, 75% of Russia's population live in continental Europe as do a large number of Turks etc. Africa has great upside potential as do other non-EU. China, India ...etc. Those are the areas that the UK should be directing primary focus.


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