iShares EM Dividend UCITS ETF USD (Dist)

Catchy title, I know.

I wanted to invest some money, I didn't know where to put it, and GMO reckon Emerging Market Value is the only sector that's actually cheap right now.  Their market commentary makes sense to me, I know they've made some good macro calls in the past, such as the dotcom boom, the financial crisis, and they were pretty bullish at the point of the post-crisis lows in 2009, so I'm prepared to trust they know what they're talking about.

There isn't an ETF or fund that exactly captures what GMO are measuring as "Emerging Market Value", and I already have some generic Emerging Market funds invested in my pension and elsewhere, so I went for a dividend-focused ETF since the holdings seem quite different from a regular Emerging Market fund.  A lot more boring stuff rather than sexy tech companies, naturally.

The yield is a bit over 5%.  The expense ratio is a bit eye-watering at 0.69%, but hey ho. The ticker is SEDY.L.

This is now just under 7% of my portfolio. 

Aviva preference shares

I'm in something of a quandary.  I find myself with cash to invest, but almost every asset class looks overvalued.  I don't want to pile everything into the markets, but staying in cash is guaranteed to lose money after inflation - I'd like to invest some of it.  So I've returned to an old favourite: preference shares.  I've held some sort of bank prefs for over 10 years, initially Lloyds and more recently Natwest (which I still hold).  This time I've diversified very slightly and gone for Aviva - AV.A 8.75% prefs to be precise, at £1.51.

What's the upside?  That's easy: 8.75% per year for eternity (a yield of 5.8% based on my purchase price).  It certainly won't be any better than that - the problem with prefs is that the upside is capped.

What are the risks?  There are a few:

- Inflation.  Any inflation is going to eat into the real return, and will also depress the capital value.

- Interest rates.  5.8% is attractive while you can't get more than 1-2% from a bank account, but if bank accounts start paying decent rates of interest again then preference shares look less appealing.  That will affect the capital value.

- Aviva previously tried to cancel their prefs at par (£1).  They backed down though, compensated shareholders who sold into a depressed market, and promised they wouldn't try to do exactly that again, so I think the chances of a recurrence are low.  They said: "Under current regulation the preference shares will no longer count as regulatory capital in 2026. Aviva will work towards obtaining regulatory approval for the preference shares, or a suitable substitute, to qualify as capital from 2026 onwards.   If as we approach 2026 Aviva needs to reconsider this position, it will do so after taking into account the fair market value of the preference shares at that time."

- If Aviva itself fails as a company then the prefs will likely be worthless, assuming ordinary shareholders are wiped out.

I think those risks are fairly modest, and apart from the last one the downside is limited.  Even if they get cancelled at par in 2026 I'll still have got my money back via dividends and the capital return, for instance.

For now I've invested a modest amount but I plan to keep an eye on prices of these and similar preference shares and may build a more substantial holding in the future.

Plus 500 - sell or not?

 Should I sell Plus 500?

Share price is £14.58. Market cap £1.55bn.  Revenue and profit are quite lumpy.  Data for the last few years from their website:

Year ending 31 December	2015	2016	2017	2018	2019	H1 20
Revenues	$275.6m	$327.9m	$437.2m	$720.4m	$354.5m	$564.2m
Revenue Growth (%)	20%	19%	33%	65%	(51%)	281%
% active customer growth	29%	14%	103%	(4%)	(34%)	132%
EBITDA	$132.9m	$151.0m	$259.2m	$506.0m	$192.3m	$361.8m
EBITDA Margin (%)	48%	46%	59%	70%	54%	64%
Profit Before Tax	$127.9m	$152.0m	$253.4m	$503.0m	$189.3m	$363.2m
PBT Margin (%)	46%	46%	58%	70%	53%	64%
Net Profit	$96.6m	$117.2m	$199.7m	$379.0m	$151.7m	$320.0m
Net Profit Margin (%)	35%	36%	46%	53%	43%	57%

Average post-tax margin of 44%.  Average revenue $486m.  Obviously H1 2020 was extraordinary, we can't expect that to continue.  If we assume a return to the mean of the last 5 years then we can expect net profit of £160m per year, putting it on a P/E ratio of just under 10.

Their financial statements are very clean.  The balance sheet is free of intangible assets and goodwill - no acquisitions and they don't capitalize development costs for their software.  As a result these earnings translate directly into free cash flow and can be used for dividends and share buybacks.

All is not entirely rosy however.  Their margin tends to be higher when revenue is higher, so if revenue falls short of expectations then there is a proportionally greater impact on profit.  They have a high rate of customer churn and have to constantly spend money on marketing to attract new customers.

They are subject to a lot of regulation.  Selling CFDs to retail punters attracts a lot of scrutiny, for good reason - 80% of their customers lose money.  They've weathered various regulatory crack-downs in the past, but at some point the business they're in may simply become unsustainable.

At the end of all that I'm still sitting on the fence.  They look reasonably cheap at current levels, but the future is uncertain.  I don't think I want to hold these shares long-term.  I'm not convinced the company will still be around in 20 years time.  This isn't a business I particularly believe in - it's not offering a service that people need, it's simply leaching money from gullible members of the public.

Bank shares - really?

9 months into 2020 and I finally did something.  No, I haven't sold Plus 500 (though maybe I should - I was looking for £10 when I bought and it's currently north of £14) but instead put a modest sum into Barclays at £1.11.  Because obviously I have such a good history of investing in bank shares.

So, why Barclays?

• Bank shares on the whole look cheap.  Obviously there are reasons for that - Coronavirus, Brexit, etc...  But current economic forecasts should already be built into the banks' impairment charges, and they're still trading at a fraction of net tangible asset value.
• I was looking at Lloyds, but they are just so focused on the UK market they make me a bit nervous.  Barclays are more diversified geographically and by sector.  And they also trade at a bigger discount to net tangible asset vs Lloyds.

What I'm expecting:

• Bad news, impairments, decline in net asset value, no dividends for a while.  Probably a few nasty surprises I haven't thought of.  On the whole not a lot to look forward to - that's why they're cheap.

What I'm not expecting:

• Anything catastrophic/sudden enough that they'd need to raise capital.

In a couple of years hopefully we'll be back to some kind of normality and Barclays shares will trade closer to book - say, £2.50 or so.

2019 review

In 2019 I bought some Plus 500 shares, and did nothing else.

At year end in sterling I was up 13%, including dividends.  Not bad - except that the FTSE 100 beat that at about 15% (dividends included) and pretty much every other world market did even better.  Plus 500 did their bit, finishing up 80%, NWBD contributed a solid 16%, but Berkshire Hathaway let the side down with 8%.

In US dollars my portfolio was up a more respectable 18%, but the S&P 500 managed about 30% once you include dividends.  Having 75% of my portfolio in Berkshire Hathaway means I was never going to do well in a go-go year like this one.

I'm not at all sure that 2020 will be a good year for the markets.  US shares are looking very overvalued.  If there is a big decline then:

• Berkshire Hathaway shares will fall, but probably not as much as the wider market.
• NWBD should do OK.
• Plus 500 may do well.

So I see no need to mess with anything, and will likely continue to sit on my hands.