While dividend income may not be at the top of everyone’s list of pleasures, it is clearly an important element of the long-term total returns generated through equity investment.
While income has and will always been in demand, the policy response to the Global Financial Crisis (GFC) has made it more difficult to find.
Savings accounts, government securities and bonds offer meagre returns by historical standards and while interest rates are likely to edge up further, the search for income from other sources looks set to continue.
In the investment companies sector the quest for income has proved to be something of a boon, with a steady flow of new and secondary issues from an ever increasing range of alternative strategies.
Be it infrastructure, renewable energy, property, specialist lending, platform lending, leasing, structured finance, music royalties or battery storage, the key component has been the promise of a dividend yield of at least 5 per cent and often considerably more.
As an investor who really likes to buy assets for less than their worth, the notion of paying a premium to asset value has rarely appealed, yet that is usually the case with IPOs as the issue costs are deducted from the offer price.While there have been some new conventional equity trust issues, the alternatives have accounted for two-thirds of all fund raisings since the GFC.
As the manager of a fund with a long-term capital growth objective I don’t have an overriding requirement for income, so in many respects this alternative new issue boom has passed me by.
I do, of course, recognise the importance of a good dividend discipline but believe that superior long-term total returns can be achieved from exposure to both a growing dividend stream and the growth in corporate earnings.
In other words my primary focus is on conventional equity invested trusts, although I will, at times, consider fallen angel alternatives if I can perceive a catalyst for change.
Following a typically quiet summer it was no great surprise to see the new issue printing presses whirring back into action, such that at the last count the number of prospective new and secondary fund raisings was in the high teens.
It was, however, somewhat surprising that the list included a relatively high proportion of conventional equity trusts. At the time of writing only one of these issues, Mobius Emerging Markets, has closed, while roadshows continue on the others.
Despite falling short of its initial target the Mobius trust still raised £100m, which must be viewed as a success given the prevailing poor sentiment towards emerging markets and augurs well for the other launches assuming stable market conditions in the coming weeks.
As an investor who really likes to buy assets for less than their worth, the notion of paying a premium to asset value has rarely appealed, yet that is usually the case with IPOs as the issue costs are deducted from the offer price.
A notable exception to this rule is the Smithson Investment Trust where the manager, Fundsmith, is covering the costs so that every £10 invested buys £10 of exposure to the investment strategy.
Smithson will invest globally in small and mid-capitalisation equities. The new trust is a logical and pragmatic extension to the large-cap process employed by the open-ended Fundsmith Equity fund, which is simply too big to invest in relatively smaller companies (I say relatively here because the average size of the companies it likes for the new trust is more than £7bn).
It’s logical because the companies that have outperformed the strong track record of the open-ended fund are most commonly small and mid-cap businesses and pragmatic because the closed-end structure of an investment company will facilitate better liquidity and portfolio management.
My portfolios have always had a structural bias towards smaller companies trusts, both in the UK and overseas, and I intend to support the issue as I believe that the long-term returns will be attractive. This bias is probably anchored in my time as a broker when Professors Dimson and Marsh of the London Business School extolled the virtues of the smaller companies effect in 1986.
Herds of investors were so compelled by their findings that smaller company share prices soared in value before Black Monday and the crash of 1987.
Suffice to say that with so many burnt fingers around it took considerable time to repair the damage, demonstrating once again the perils of following the herd.
Looking at the valuations of small and mid-cap indices against large caps, as things stand today there appears to be relatively good value in the major developed markets, so the Smithson launch doesn’t strike me as the sort that rings the bell for the top of the market (famous last words notwithstanding).
Nor is it a ‘me too‘ product, as there is only one other truly global smaller companies investment trust available at present.
In conclusion, while I will continue to be highly selective in backing new issues I do welcome the increased activity which suggests that demand and interest in investment companies is in the ascendency.
Peter Walls is manager of Unicorn Mastertrust
