The bull market rolls on, and the fears of slowing economic growth at the end of 2018 have been forgotten.
As ever, economic predictions all too often represent a desire to join the consensus rather than stand out from the crowd and be counted, and that is as true of professionals in the International Monetary Fund and World Bank as it is of private sector economists in stockbroking offices.
The MSCI World index is up 10.8 per cent since the start of the year, the FTSE All-Share has gained 12.4 per cent, and the anti-Brexit portfolio – an update on which can be found in Table 1 – has risen by 13.3 per cent.
Table 1: Anti-Brexit portfolio update
Investment company | Initial investment as at end-December (£) | Share price total return over 2019 to date (%) | Cash value of YTD share price total return (£) | UK exposure – April 30 2019 (%) |
Witan | 25,000 | 13.5 | 28,365 | 35.5 |
Alliance | 25,000 | 14.4 | 28,598 | 14.3 |
Personal Assets | 15,000 | 5.2 | 15,783 | 11.7 |
Scottish Mortgage | 15,000 | 15.1 | 17,271 | 3 |
Worldwide Healthcare | 10,000 | 9.3 | 10,931 | 0 |
Polar Capital Technology | 10,000 | 23.3 | 12,333 | 2 |
Total portfolio performance | 100,000 | 13.3 | 113,281 | – |
FTSE All-Share | n/a | 12.4 | n/a | n/a |
MSCI World index | n/a | 10.8 | n/a | n/a |
Source: AIC/Morningstar. Copyright: Money Management
The UK has not yet reflected either the chaos of the Brexit negotiations, or the likely effect of Brexit on the balance of payments. But recent reports on capital investment shows a significant slowing of foreign direct investment, as a result of confusion over Brexit.
If this is only confusion, well and good, but if it is a reconsideration of the UK as the base for continental investment, that is another matter altogether.
A European history
The UK’s decision to join the EU in 1973 was based on a desire to free the country from the crippling effects of regular balance of payments crises, and the expectation that the larger continental market would transform Britain’s exporting capacity.
In that it failed, but it solved the problem through direct investment instead; Britain became the preferred base for international companies desiring to enter the continental European market, but without the complexity of continental European labour rules.
If Brexit changes those calculations, then the country is back to the stop-go years of the 1960/70s and, as already predicted by the government, a decline in the exchange rate is likely to follow. This is a major risk not yet reflected in portfolio returns.
But another risk is the escalating trade war between the world’s two largest economies. This comes at a time when the West needs to accept that we are already living in the Asian century; the Atlantic/European centuries have now passed into history.
Testing ground
So safety first should be the prevailing investment strategy. Fortunately, for those ignorant or frightened of investment trusts, the Association of Investment Companies has just issued a suite of programs that allows intermediaries and investors to test theories and strategies in real time, without any actual investment involved.
What is truly amazing is that, in what is a highly competitive industry, few commentators have asked why several investment companies have increased their dividends each year for periods of between 20 years to more than 50 years, with capital growth for good measure. What unit trust group or pension fund manager has done as well?
The AIC’s main program aims to make the search for reliable income an easier process. Income Finder enables investors to create a virtual portfolio of income-paying investment companies, track the dividend dates, and observe how much income they could receive over a year.
It will also show how this dividend growth translates into capital values, and enable investors to customise their investment company portfolio in terms of payments. This will allow them to either smooth monthly income over the year – ensuring there are no periods without dividend payments – or shape the income to meet their own needs.
Building blocks
Income Finder comprises four sections: Income Builder, Dividend Diary, My Income Portfolios, and Guides and Glossary.
Income Builder allows investors to create a portfolio of income-paying investment companies. Investors can sort and select investment trusts based on their dividend frequency, dividend yield, or the month in which dividends are paid. For first-time visitors to Income Builder, there is an interactive tutorial to help them get started.
Dividend Diary shows every investment company dividend payment date for each month from January 2016, helping investors find investment companies that are paying income in the months when they need it. Dividend Diary is updated as investment trusts announce new dividend payment dates, and investors also have the option to include or exclude special dividends in their search.
The My Income Portfolios section gives investors more information about the portfolios they have created, such as dividend cover, five-year dividend growth and the frequency of the dividends. Guides and Glossary provides a range of resources to help income seekers, including videos, articles and jargon busters.
More specifically, these guides show how the skill of an investment company uses compounding to supercharge income and capital growth. Compounding is simply earning interest, not only on the principal but also on the income earned from those original savings – and that from day one.
Table 2 outlines this in simple terms for the benefit of clients.
Table 2: Compound interest in action
| Capital (£) | Interest after 10 years (£) | Interest after 20 years (£) |
Simple interest at 5 per cent a year | 10,000 | 5,000 | 10,000 |
Compound interest at 5 per cent a year | 10,000 | 6,289 | 16,533 |
Source and Copyright: Money Management
Compound interest also shows the importance of the philosophy that underlies all genuine investment companies – invest for safe and growing income, and never risk the principal through stupidity or greed.
Independent investment companies of 19th or early 20th century foundations knew (and indeed still know) that investors only invest for income. Speculators trade for capital gains. But the excitement involved in such speculation was turned into investment theory, driven by the early use of inadequate computing power and a misunderstanding of how very few of the world’s thousands of equities would do better than average.
Most companies produce less than government bonds on an annual basis, so identifying businesses that will regularly pay increasing dividends is a necessary skill. Much more so than the search for alpha, or better-than-average beta, or other nonsense of efficient market theory or factor investing.
The world may look flat from our viewpoint, but it is not, as even the ancient Greeks knew. Investment success still entails finding, buying and holding better-than-average yielding investments.
