Market Pulse
Friday, October 18, 2024
Welcome to this week's Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
Our three stories this week:
1. VCTs: Find Out What They Mean to Me
2. We, Robot: Musk’s Event Disappoints
3. The Saver’s Dilemma: Bonds vs Cash
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
This week, we were thrilled to announce the launch of Venture Capital Trusts on the Sidekick platform, the first of our alternative investment offerings. Sophisticated and high-net-worth investors can now register for priority access and get started for just £3,000. Today, I want to briefly look at the logic behind VCTs and how investors can think through their risks and rewards.
As the name suggests, VCTs operate in the venture capital space, where investors fund startups and other early-stage private companies. Because these companies typically have significantly less operating history than publicly listed firms, VC investing is risky. By one academic estimate, as many as 75% of startups never return cash to their investors.
Since the rewards for backing successful startups can be lucrative, however, VC returns can be attractive. While estimates vary, data provider Preqin found that VC funds achieved a median net internal return of 22.7% between 2009 and 2019. Unfortunately, this space has long been out of reach for everyday investors, largely thanks to high minimums and opaque private deals.
That’s where VCTs come in. VCTs were formed by the UK government in 1995 to incentivise eligible retail investors to invest in early-stage private companies in the UK. When combined with lower investment minimums and economic incentives, this structure can make VC investing more appealing than traditional options.
What’s more, investing in VCTs can also come with significant tax benefits, including up to 30% upfront income tax relief (so long as you hold your shares for at least 5 years). Investing in startups in a tax-advantaged manner has proven a powerful combination. Based on the most recent statistics, more than £1 billion was invested in VCTs in both 2022 and 2023.
We shouldn’t downplay the risks of VCT investing. Notably, because the underlying assets are illiquid, investors might have to sell shares at a significant discount to underlying asset values if they need to exit their investment quickly.
But although these funds aren’t suitable for all investors, there’s a reason that both venture capital investing and tax optimisation are key tools for the ultra-wealthy. For everyday investors, VCTs can offer a rare opportunity to combine these tools in a single accessible structure.
Elon Musk can be accused of many things, but lacking vision is not one of them. At Tesla’s long-awaited ’We, Robot’ event last week, Musk laid out a vision of the future featuring autonomous taxis, buses, and even humanoid robots. But despite his impressive goals, the execution of Musk’s vision still seems a long way off.
Musk’s assurance that Tesla vehicles will soon be completely self-driving has been a perennial promise since at least 2016. And while Tesla has rolled out incredibly impressive technological improvements since then, truly autonomous driving has yet to arrive. In fact, Bloomberg reporting indicates that Tesla’s humanoid robots were being remote-controlled by employees during the event, something not disclosed by Musk.
The event’s lack of substance was also highlighted by the astounding technological feat achieved this weekend by SpaceX, another Musk company. Using giant mechanical arms, SpaceX managed to catch a rocket booster as it fell to earth, which Musk rightly called ‘science fiction without the fiction.’ The contrast with Tesla’s focus on showmanship is sharp.
Our thesis on the automotive industry has long been that increasing vehicle commoditisation will make technology the defining differentiator. Musk remains a visionary entrepreneur, and there is little doubt that Tesla continues to push the cutting-edge of EV tech. Amidst growing competition from legacy car companies and low-cost Chinese entrants, however, Tesla’s focus needs to be on superior execution of existing product lines.
To that end, ambitious projects like autonomous taxis and humanoid robots may be unhelpful distractions. With any luck, market reaction to the event, which saw shares decline about 8%, will encourage the firm to renew focus on what should be their primary objective: making world-class, technologically sophisticated, and attractively priced electric vehicles that customers love.
Note: We hold Tesla in our Flagship investment portfolio.
A basic principle of fixed-income mathematics is that as interest rates rise, bond prices tend to fall. The reason is simple and intuitive. If you purchase a bond yielding 5% only for prevailing interest rates to rise to 6%, your old bond is less attractive than new ones. Therefore, you’ll have to lower the bond’s asking price in order to sell it.
This dynamic results in a double-edged sword for savers. When rates are high, investment-grade corporate and government bonds can be an attractive way to earn yield while focusing on capital preservation. But if rates rise even higher, those same bonds can be subject to falling market prices.
As a result, cash savings vehicles like money market funds and savings accounts can often be more attractive to savers in a rising rate environment. Because these vehicles have a stable par value, they don’t fluctuate as market instruments do. In fact, off the back of the Fed’s interest rate hiking cycle, US money market funds now hold a record $6.5 trillion.
But as global interest rates begin to fall, this trend is starting to reverse. The prospect of high rates combined with potentially increasing market prices is drawing savers back into bond funds. US fixed-income ETFs saw a record $93 billion of inflows in Q2 2024, with mutual funds seeing another $30 billion.
Ultimately, savers may see less benefit from appreciating bond positions than they expect. Owing to a resilient global economy and worries over resurgent inflation, the pace of rate cuts may be moderate. Given the unlikelihood of any rate increases for the time being, however, we anticipate a continued gradual shift from stable-value vehicles to market instruments for savers.
Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.
