So far this year, markets have not responded significantly to the developing trade war, or America’s withdrawal as the leader of the western world, nor even the probability that there will be no deal for Britain with the EU.
Strong UK focus
Ignoring Brexit has paid off so far for many UK-based investors. New research from the Association of Investment Companies (AIC) reveals the top 20 most consistent investment companies over the past 10 years have a strong UK focus. Member companies were ranked by discrete annual returns and outperformance, benchmarked against the overall average investment company.
Seven out of the 20 in this year’s list are investment companies with a UK focus. This is more dominant than last year, when only five UK focused investment companies featured. Less surprisingly, the UK smaller companies sector is home to the majority of those UK-focused trusts.
Investment companies from the global sector are the second most commonly featured in this year’s list. Newcomers this year are Herald Investment Trust and Polar Capital Technology, both discussed in previous columns.
Annabel Brodie-Smith, communications director of the AIC, says: “It may be surprising that UK-focused companies dominate the most consistent outperforming investment companies list over the past 10 years. Concerns about Brexit and a UK economic slowdown are ever present, but UK investment companies, and particularly the UK smaller companies sector, have performed consistently well.
“This year, 11 investment company sectors are represented in the list, illustrating the wide range of investment company sectors available for investors to choose from. Investors should bear in mind that performance is just one criterion to consider when researching investment companies; they also need to look at other criteria, including portfolio composition, gearing, discounts and charges. Investors usually focus on the latest top performers, but consistent long-term past performance is key when considering potential investment companies.”
Britain and the EU
Brexit continues to loom large, however. The prime minister may have coerced what remains of her warring partners into a semblance of unity, but some of those 12 hours at Chequers could have more usefully been employed reading Sir Con O’Neill’s report on Britain’s European Economic Community (EEC) entry negotiations of 1972. Written for ministers right after the event, it was released to the public in 2000. During the 1970s, business and the political elite were terrified Britain was falling behind the six founding EEC members – Belgium, France, Italy, Luxembourg, France and West Germany – in economic growth, productivity and export success.
So while the feeling was that the UK had no choice but to join, the sense was that the size of the UK and Irish economies in relation to the six, together with the goodwill that still existed from victory in the second world war, meant they would be given favourable terms. Not a bit of it.
Rules of the game
This was not because of malice or political enmity, said Mr O’Neill, but because “almost every conceivable community policy is the result of a conflict of interest between members, and has embedded in it features representing a compromise between the interests”. If it were to be opened up just because the British had a strong argument, the whole laborious compromise would fall apart.
As Mr O’Neill reported, the UK was faced with the “acquis communautaire”, or accumulated laws of the EU, and told to swallow them whole. Since then, of course, the ‘acquis’ has expanded, as EU membership has grown, but this body of law is the very basis of all the deals, negotiations and compromises made between the parties. It cannot be unravelled, because to so would begin the disintegration of the EU itself.
Britain has never understood this, because it has never accepted that the second world war diminished the power and influence of all European countries, especially that of the UK itself. The EU was a political act, thought up during the war by Monnet and Schuman, to bring together old enemies for future security and strength.
Rigidity and flexibility
As such, the EU is not a negotiating body – as another country would be – but a legal treaty. So the EU is a legal construct, based on Roman law, or the judgments of emperors given over the many centuries of the empire’s existence. These were codified by emperor Justinian in the mid 500s AD, then adopted by the Catholic Church as the basis of ecclesiastical and lay law, and finally updated and forced on all continental European countries by Napoleon.
But the British mindset is very different. Based on Anglo-Saxon family law, common law practice is rather more flexible than Roman law or the Napoleonic code. The differences are summed up in a phrase once popular among bankers: on the continent, what is not allowed is forbidden, while in London, what is not forbidden is allowed.
Unity before prosperity
Unity, and not prosperity, is the key issue of EU negotiations. So the 27 EU members are determined, first, that there can be no cherry-picking by the British and, second, that whatever deal the British want has to be deliverable, or fit within an existing accepted pattern. This could be either of the Canadian or the European Economic Area type – the latter being the Norwegian deal.
Both country and political parties are split on what Britain wants, but the prime minister’s elegantly crafted compromise will not satisfy the EU. No one knows what will happen when Britain crashes out of the EU, but it might well bring about high inflation as the country faces up to the costs of the (still secret) promises made to the car manufacturers.
So this is the time to take profits on UK-focused investment companies, and especially those with smaller company remits. These may continue to do well, since the UK GDP is now split 80:20 in favour of services, rather than manufacturers, but a good rule of thumb for investment is “better safe than sorry”. And it is hard to believe that the Conservatives can do anything but lose the next election, and a return to our 1950s socialist past will not be good for business, large or small.
Fortunately, investment companies with global remits have also done well over the years, as Table 1 shows.
These are all AIC ‘dividend heroes’, with at least 20 years of consecutive dividend increases. Baillie Gifford, with its meritocratic partnership structure, is riding high at the moment as a manager. Generally, however, it is best not to buy investment companies at a premium to the net asset value, as these rarely last.
And as stated above by Ms Brodie-Smith, look at the portfolio composition of the chosen trust, as well as the accord between the board of directors and investment manager. All have interesting ideas as to their structure, investment remit, and way of reducing the equity risk element. But when things are bad, a solid and rising dividend is a great comfort to investors.
