Happy New Year and welcome to 2017. I don't know about you but as an investor I'm quite glad to see the back of 2016 as on the whole at the headline index level returns were good it was not an easy year for investors generally with all the twists and turns and volatility. Indeed with all the noise and fear around it would have been easy for investors to panic out at the bottom or waste time and money trying to hedge, although no doubt some super clever market timers or traders with very focussed portfolios may well have done extremely well if they timed all that perfectly.
With that said I'm pleased to be able to report that the Compound Income Scores portfolio (CIS) had another positive month in December with a total return of +4.15%, although this lagged slightly behind the return of 5% for the month from the FTSE All Share which I use as a benchmark.
For the year this left the CIS up by 4.34% but this was way behind the 16.75% produced by the FTSE All Share, although the portfolio is still ahead of the index by 9.5% since inception or a little over 5% per annum on an annualised basis based on the short 1.75 years so far.
In absolute terms it has produced a total return of 21.05% since inception which works out at 11.5% per annum on an annualised basis. This may not seem that spectacular but I would regard it as satisfactory against the real returns of 5 to 6% which have been seen from investing in UK Equities over the very long term. This is a figure I would use to judge my own performance in the long run as my own portfolio and that of the CIS differs substantially from the headline FTSE indices.
On performance comparisons and Benchmarks I note what Ed Croft on Stockopedia had to say in his NAPS annual review and his thoughts about an equally weighted benchmark, which would be pretty easy to do, so I hope they do go ahead and introduce those. Aside from that I also note that his random set of 100 portfolios of 90+ Stocks on the Stockopedia stock ranks did between -5% & +5%, see histogram below.
One other crumb of comfort I take in this years performance is this report which says that Neil Woodford and his highly popular income fund underperformed the FTSE All Share index by 13.56% with a total return of 3.19%. So at least I can say the CIS Portfolio beat Neil Woodford on a one year view. This just bears out the point that any portfolio which is markedly different from the index in terms of its make up will be likely to diverge from it significantly in both directions - that is to be expected. So overall while the returns seem a bit disappointing this year on the face of it, I take some comfort from the above and I don't get too hung up about performance relative to the benchmark in individual years as it is a marathon and not a sprint.
As to 2017 my crystal ball is a bit frosted up at the moment, but at least for now it seems that investors are giving Trump and his policies the benefit of the doubt and seem to be discounting a pick up in growth and inflation which may or may not be helpful to equities depending on the extent of it. They do however seem to be ignoring some of the risks to World trade and the potential for further protest votes against other political regimes in the year ahead, but as ever time will tell. For now it seems an economic slowdown in the US has been postponed and the market timing indicators I follow are still positive, so it seem sensible to keep calm and carry on investing in equities. Good luck with your investing in 2017.
Finally please note this report and these returns are based on the Compound Income Scores which are designed to help identify attractive income growth stocks and an associated portfolio. These are a subscription based, although they are currently closed to new subcribers. If you would like to add your name to the list for when they are next available for subscription then please get in touch using the contact form.
..or part three of the IT's a Christmas Carol Tale. So here it is Merry Christmas everybody's having fun, here's to the future now it's only just begun! The party is in full swing and the revellers are enjoying themselves but to recap the investment trust I mentioned in the last couple of posts continues to languish on a 20% or so discount. This is despite a decent long term track record, a 4%+ yield which I forgot to mention has increased for 29 years in a row too. Come on what is it I hear you cry - well we will get to that.
First lets look at the issue of performance which I also mentioned in the bear points yesterday. In terms of performance if we take the last three or five years and the underlying Net Asset Value Performance (NAV), this has been slightly ahead of the FTSE All Share, which is good, but toward the lower end of the sector performance, which is not so good. We also saw yesterday in share price terms that holders had underperformed the index over the last 10 year which is disappointing. Now some of this may be explained by discount movements and the drag of the expensive debt which I also mentioned yesterday and will come on to again in a moment.
Before that lets take a look at the Asset Allocation which I mentioned in the bear points as being unusual for its sector, the UK Equity Income Sector. In addition to the UK equities that they hold which are split 50/50 between FTSE and Mid / Smaller Companies they also hold around 30% of the fund in UK Property. Now this may or may not appeal, but personally I quite like exposure to equities and property as a way of growing and protecting my capital and income from the ravages of inflation. Now may be you are wary of property right now and that might put you off, but I'm not going to debate that here I'll just let their track record in this area (shown below) speak for itself.
That track record equates to an annualised total return of 13% according to the managers in the Annual report and accounts. This compares to an all in cost of the expensive debt that I mentioned (which they used to finance the properties) of around 9%. This figure is arrived at because apparently the two debentures which carry coupons of 9 3/8% & 11% were issued at a premium. Now of course if they wanted to repay these or refinance these in the short term the would also have to pay a premium which in last years reports and accounts was put at around £12m over te £40m book or par value. This is why the discount which is often stated with debt at par can be lower if you adjust the debt to market value.
Any way that is all a bit complicated and technical, but in this case it is not something you should have to worry about if you are prepared to buy and hold this one for the next 10 to 11 years or so. This is because in last years annual results the Chairman set out their plans to address the discount. Subsequently the AGM approved an ordinary resolution which requires the Board to put an Ordinary Resolution to Shareholders in 2024 in relation to the future direction of the Company, including proposals that provide an opportunity for any Shareholder to realise their investment in full at NAV, less costs, by 31 March 2027 at the latest. So with this in place you know you can look forward to the discount of 20% being closed over the next ten year which will give your returns around a 2% per annum tail wind. In addition as the debentures roll off in 2021 & 2026 any potential dilution from paying a premium to refinance them should have disappeared. Thus unlike most active funds which start off 1 to 2% behind due to costs this one in share price terms should at least be about 1% ahead if the discount reduced in a straight line, which odf course it probably won't.
Also Worth noting that to take advantage of the low rates for long term money, they have also borrowed £15 million from Santander UK plc for ten years at a rate of 4.5% p.a. including all costs. The money is being invested in properties with yields well above this, and it replaces the original £5 million loan arranged in February 2015. It enables them to look forward to their dividend prospects in the current
year with some confidence, although at the moment they said it was too early to make a forecast.
Summary & Conclusion
Sorry if that was all a bit boring and dull, but then it is a bit of a boring and dull idea and as I said before not one for Tiny Tim traders as it is unlikely to provide much excitement in the short term apart from the latest dividend of 2.6p which is due to go XD on 29/12/16. However, if you want some good Value & Income (VIN) from UK Equity & Property holdings then this could be a good one to lock away for the next tern years. In the meantime you should then be able to enjoy a 4% and likely growing yield which is now being paid out quarterly. If that has tempted you to join me as a shareholder in this one then I suggest you take a look at their website here and you should certainly take a look at the report and accounts which I attach below. Finally all that leaves is for me to wish you all a very Merry Christmas and a Happy and Prosperous New Year.
...or Part 2 of IT's a Christmas Carol. I left you yesterday with a look at the long term track record of this UK Investment Trust. Despite this track record and the shares currently yielding over 4% Mr. Market or Scrooge has seen fit to offer this one on a discount of a little over 20%. This may help to explain some of the share price underperformance in the last 10 years which is shown above and like yesterdays graph, is extracted from their report and accounts.
Currently there are a number of potential explanations for this discount which I'll mention in passing today before we take a look into the future with the final part of this trilogy. As I want to keep this brief I'll cover some of the bear points in bullet point form as follows:
Against that I think their Investment Philosophy seems quite sensible to me:
Our investment approach is shaped by six core beliefs. By following these principles we aim to maximise clients' portfolio returns while minimising their investment risk:
While on Portfolio construction they say:
"We like our portfolios to reflect the conviction behind our best investment ideas. Hence within UK equities we concentrate the holdings on between 30 and 40 stocks. Around 50% will be invested in small and mid cap stocks and 50% in FTSE 100 stocks. Our portfolios tend to have a higher than average yield compared to the overall index. Individual sector weightings reflect our stock selection process. However we do tilt sector positions in accordance with our macroeconomic views. Each portfolio is regularly reviewed by the investment team."
I also note that the two main investment managers between them own around £15m of stock, while the Chairman has around £1.9m so their interests should be aligned with shareholders. I'll ave more to say on that in the final part when we look into the future.
So there is a brief update on the current position, with a lot to like but equally, quite a few issues that help to perhaps explain why this one is a little unloved by Scrooge, despite their best efforts, a bit like Bob Cratchit in a Christmas Carol. Now if that has not put you off do check back for the third and final instalment when I'll take a look into the future and how this might resolve in a profitable fashion. However, be warned if you are a Tiny Tim trader don't come back expecting to find short term gains this is very much a long term buy and hold story which will hopefully stand the test of time like the original Christmas Carol.
...about an Investment Trust based on the Dicken's story which is popular at this time of year. So without further ado here is the first part teaser of the ghost of Christmas past as it were. So as it is the festive season and as they say a picture paints a thousand words - I'll leave you today with a picture of the past of this Trust. Hopefully see you back here later this week for the present and the future installments if this has whetted your appetite?
With the fall in Sterling this year investing Overseas has been a profitable strateguy this year. However, with the rapid rise in the US$ and the general view that US Equities look expensive I wouldn't personally be chasing US equities or looking to add US exposure just now.
Personally I'm still more tempted by some of the value on offer in Emerging Markets given the falls in some of their currencies and the valuations on offer. I wrote some pieces on this last year which you can access here and indeed the JP Morgan Global Emerging Markets Income Trust (JEMI) has worked nicely for me this year.
Looking at the performance of Emerging markets this year you might think you have missed it. I did however read another interesting piece the other day from Research Associates talking about this called - The Emerging Markets Hat Trick: Time to Throw Your Hat In?
So there you go some food for thought on potential asset allocatio decisions. In the meantime as it's approaching Christmas and the market is getting quiet and I'm feeling generous I might see if I can do a few investment trust specials again next week which could provide a few more Christmas Crackers for you. So don't forget to check back next week in between all your parties etc. - cheers.