Brewdog beer is just one of the alternative equity investments with a young buzz
As interest rates flat-line and inflation starts to soar, a new tribe of investors is fast emerging; the adventurous millennials.
Digital trading platforms are reporting a marked increase in the number of active young investors using their services. The Share Centre has reported a 16 per cent year-on-year rise in the number of trades occurring in tax-efficient Isas held by millennials.
It points to a quiet revolution in how young people are managing their money. Fed up with bad savings rates and adverse economic headwinds, many millennials are taking matters into their own hands and using their smartphone to find (and manage) riskier investments.
Gonçalo de Vasconcelos, co-founder of equity investment platform SyndicateRoom, said: “Many young people are having to look at alternative routes to get the capital growth they need to reach their financial goals in today’s low-yield economic environment. As part of this move, many are willing to take on additional risk in order to meet their goals.”
Part of this shift online is also down to generation Y’s mistrust of the mainstream banking sector following the financial crash, with many preferring to put their faith in digital-only start-ups.
Digital bank Monzo has raised £22m from online crowdfunding and a similar approach by Brewdog has just seen the firm sign a £200m private equity deal
Mark Carney, governor of the Bank of England, said these so-called “fin tech” companies have the potential to “democratise” the world of money. Speaking at a conference in London this week, he said: “Consumers can get more choice and keener pricing…and financial services could become more inclusive, with people better connected, more informed and increasingly empowered.”
At the end of March, the mobile bank Monzo attracted more funding from its tech-savvy investors, worth £2.5m. It brings the total amount raised by the challenger bank from both private investors and venture capital to £22m.
And Brewdog, Scotland’s most successful crowdfunding story, reached new highs this week, with US private equity firm TSG Consumer Partners investing more than £200 million in the firm for a 22.3 per cent stake, pushing BrewDog’s value to more than £1bn. An investor who backed Brewdog through its “Equity For Punks” scheme since 2010 would see their the value of their stake rise by 2,800 per cent, but the craft brewery’s 55,000 crowd-funders will be barred from selling any more than 15 per cent of their shares, up to a maximum of 40 shares.
Recent research from equity investing platform SyndicateRoom found millennials are also twice as likely to choose so-called “early stage” investing, such as venture capital or enterprise investment schemes, than the over-50s, with the vast majority satisfied that a portfolio of diversified early-stage equities would help them achieve their financial goals.
But are millennials getting ahead of themselves by chasing high-risk investments? The Share Centre said that its young Isa investors were increasingly drawn to “get rich quick” trades, investing in volatile mining shares such as Centamin and Kodal Minerals as well as oil stocks like Ascent Resources and 88 Energy.
Graham Spooner, investment research analyst at the Share Centre, said: “Millennials will one day be considered ‘middle-aged’ and may perhaps question whether this strategy was suitable. When thinking about their future, and of course if they decide to move towards a more balanced portfolio, I would suggest that mid-cap companies could be the answer.
“As the blue chips of the future, mid-caps could provide millennials not only with growth potential, but the element of risk that they are clearly craving, without going to the extremes.”
“Even the best fund managers only get it right 50 – 60% of the time – both crowdfunding and individual trading have significant risks”
Adrian Lowcock, investment director at fund management firm Architas, said the problem with making individual trades was that most investors “lose a lot of money before they find success”.
“You need to diversify because you don’t know what will be successful. When you trade in high volumes, you introduce lots of chances to be wrong, and even the best fund managers make mistakes, typically only making the correct calls 50 – 60 per cent of the time.”
Mr Lowcock encouraged young investors to seek out small cap funds investing for the long-term, rather than ploughing all their cash directly into companies via early-stage investing or equity crowdfunding.
“Most companies don’t get to the FTSE 100. Venture capital is hugely risky, and the amount of due diligence has been hugely underestimated. Crowdfunding as a whole has yet to see a recessionary cycle in really tough markets with rising interest rates and tighter monetary policy, so we haven’t yet seen how this sector operates under pressure.”
He also urged caution over piling into technology stocks, a natural fit for young investors, while stopping short of forecasting a recurrence of the dot com bubble which saw highly valued tech stocks fail or crash in the early 2000s. “We now have a situation where the share price of Tesla is higher than General Motors despite it not making a profit or nearly as many cars. Every time you see an expensive share, that’s a huge amount of future returns you won’t see because it’s already factored into the price.”
Netflix, Tesla and Amazon can be sexy stocks to young investors, but fund managers have a mixed view on them
James Clunie of Jupiter Investments has warned of similar dangers with what he calls “glamour stocks”. Speaking at a recent event, the head of strategy for Absolute Return at Jupiter said stocks such as TESLA and Netflix are superficially attractive, with investors tending to extrapolate growth for years to come, but are at risk of overpaying. “These companies buy & acquire, buy & acquire…but they are borrowing to acquire growth, and are very fashionable right now, so the valuations are high.”
However, other high profile fund managers fervently champion cutting edge technology, most notably James Anderson of Scottish Mortgage Investment Trust. His high-conviction strategy of investing in the likes of Tesla, Amazon and Facebook has seen the trust return 172 per cent over the past five years, with the trust joining the FTSE 100 for the first time in late March.
First published in the Herald on Sat 15 April. Nothing in this article constitutes financial advice, and you are advised to do in-depth research and/or seek expert help, either through a financial adviser or an online investment platform, before making any investment decisions. Young Money Blog does not necessarily support the funds or strategies mentioned in this article.