Monday, 11 June 2018

Become A Dragon - Owning Shares

Why do some people own shares on the stockmarket? Maybe you are exploring investing for the first time and want to understand a little more about it. Many people are fed up with the low returns on cash savings and are looking at options for a better return with stocks & shares.


Whether we agree with the system or not, the fact remains that here in the UK we live in a developed capitalist economic system. It is predominantly a self regulated system with minimal intervention from the state. This is the opposite of a communist system which operates in the likes of Cuba and North Korea where the economy is largely run by the state which controls the means of production.

Under our system therefore, capital is valued more than labour and those who set up and own a business usually make much more money than the employees of that business. Capitalism has provided us with our smart phone from the likes of Apple or Samsung for example, Google which we all use to search the web (and more), advances in drugs and medicine which is helping us all to live longer, from Amazon we have the Kindle e-reader and more recently the voice-activated Echo speaker with Alexa, we now have the electric car and just around the corner is the driverless car and the promise of our online shop delivered by drones! A lot of people criticise the system but continue to buy into many of the latest must-have technology.

The stockmarket is basically a product of a capitalist system. It is a place where a business can be listed and basically enables the business owner to raise capital in return for a share of the future profits in the business. Therefore the owner does not need to risk his/her own savings or borrow money secured on his own house for example.

Many will be familiar with the popular TV programme 'Dragon's Den' where someone with a new business idea will 'pitch' this to the Dragons who hold all the cash and who may, if they like the business and see potential to make money, agree to invest their own money in return for quite a substantial share of the business.

Become A Dragon

Anyone with some capital, therefore, can become a 'dragon'. They may not wish to take a punt on a new start up but can buy shares in the many hundreds of established companies listed on the London Stock Exchange known as the FTSE. They then become a part owner of that company and they will share in the future success of the business as the share price rises and may also receive regular dividend payments.

I guess many new investors who 'dabble' with stocks & shares do not think of themselves as part owners of a company but more likely they are taking a punt on the share price rising and making a profit at some point when the shares are sold. They probably regard it as an online transaction carried out via their online broker and possibly not much different to an online purchase from their favourite retailer.

Here's a short extract from an interview with Warren Buffett, possibly the most successful investor of the past 60 years:
"Imagine you’re buying an ownership stake in the convenience store around the corner from your house. Automatically you’ll think about the competition, suppliers, prices, etc. You’ll have to think both about the specific location as well as its competitive position in the market.
Similarly, while buying stocks, you need to think about all these things – just as the people running the business do.
When you buy a stock, you’re not just buying a piece of paper or a ticker symbol. Buying the stock of a company is buying an ownership stake in a BUSINESS".

Think Big

It is therefore possible for anyone to become a part owner in some of the largest companies in the world such as Facebook ($550bn), Apple ($950bn) and Amazon ($800bn) which are listed on the US stockmarket NASDAQ.

With the introduction of the low-cost online brokers and access to the internet, it is fairly simple to open an account and buy into any of the large, well-established global businesses. Certainly it is far easier than starting your own company from scratch.

Buffett's again..." Owning a profitable, growing business is one of the few paths to wealth. It’s something anyone can do today with a meager amount of savings. You can start a business or buy one (Buffett often refers to farms or apartment buildings). Or you can take a simpler approach by buying a portion of a business through the stock market".
"Owning a decently profitable business over a long period of time will compound your net worth. And you can diversify into multiple businesses (via an index fund) to increase your chance of success. A savvy investor might try to buy shares of businesses for less than they’re worth".
The returns from owning a small share in a company or more commonly many companies held via collective investments will far exceed the return from holding cash in a deposit account. Over the past 50 years the average annual return from equities after inflation has been 5% each year compared to just 1.2% from cash (according to Barcap Equity Gilt study). That means a sum of £10,000 invested in 1968 would now be worth £90,000 whereas the same amount in a savings account now worth only £18,000.

Invest or would think this would be a no-brainer yet only a small percentage of the population actively choose to invest on the markets. Many think it's far too gambling at the casino or say they just do not understand finance. They would probably go to great lengths to research their next phone deal, holiday or car purchase but will not think to put the same time and effort into understanding something which could enhance their wealth and lifestyle in a fundamental way.
One of the reasons for running this personal finance blog is to help those who want to understand this important subject get an understanding of the basics. Of course some people will sadly never grasp finance and I am not naive to believe investing is for everyone, many just do not have any spare cash to invest, for others to some extent it will depend on temperament and the ability to remain patient but I am sure there are many people who could do a decent job of it if they put in a little time and effort. 

I subscribe to the philosophy of legendary investor Ben Graham who said “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

I was completely unaware of the stockmarket until I was in my 30s. It was never talked about in my immediate or extended family and was not covered at school. Most of what I now know has been acquired through a process of experimentation combined with an ongoing interest in learning from others with more experience. Some of the blogs I follow (see right) hold a great wealth of investing knowledge which I find invaluable.
I believe in keeping things fairly simple..have a basic strategy, hold low cost global index funds to capture the whole market, match your allocation mix to your timeframe and temperament, maintain a realistic expectation of future returns, hold through thick and thin and don't second-guess the market (as I often do!), automate as much as possible and make use of tax breaks and free money from employers/'s not really rocket science.
Over to you...why do you invest? Is it rewarding? Was it difficult to settle on a strategy? Leave a comment below and share your experience with others.

Tuesday, 5 June 2018

Equities Outperform Bonds?

As I now invest directly with Baillie Gifford, I received my glossy version of the Scottish Mortgage annual report which thumped on the doormat last week. SMT are one of the best performing investment trusts having grown net assets by 269% over the past decade compared to 150% for the FTSE All-World Index. Share price return is even more impressive and had I invested £10,000 of my pension fund in SMT when I retired 10 years back, it would now be worth £43,000.

SMT 10 Yr Chart

I am always fascinated to learn some insight into the approach of the managers and how they go about achieving this performance. One thing that caught my attention was their focus on the search for great companies and the methodology behind this search.

The joint managers, Anderson and Slater outline their core beliefs and how these have evolved over the past five years.

The fundamental attraction of investing in equities is the asymetric payoff structure - you can make far more if you're right about a stock than you can lose if you are wrong. The managers have long believed in the impact of holding a small number of exceptional companies. However they were surprised by how narrowly returns have been shown to extend within the market.

Recent research shows that over 50% of the excess return (over bonds) from equities came from a small percentage of the total market. The outsized return from less than 1 in 20 exceptional stocks dominate the payoff structure.

These exceptional performers include the likes of Apple, Microsoft, General Motors, Procter & Gamble, Coca Cola and Amazon

The core task of the managers therefore is to identify such companies at an early stage and then hold for an extended period. All of SMTs top ten holdings have been held for at least 5 years and two for more than a decade - Amazon & Kering.

The Research

I have dug a little deeper and see the research (pdf link) in question is Henrik Bessembinder's "Do Stocks Outperform Treasury Bills?"

The question may appear  nonsensical - every novice investor knows that equities provide a much better return than bonds over time. However the research established that 58% of stocks listed on the US market returned less than one-month Treasuries (equivalent to UK government bonds) and the entire outperformance over the 90 year period of 1926 to 2015 can be attributed to the best 4% of listed stocks.

Just 86 top performing stocks which together account for 0.3% of the total have delivered over half of the wealth creation. The top 1,000 stocks - just under 4% - account for all of the wealth creation and the other 96% have together generated a return which matches the one-month Treasury Bills.


The research helps us to understand why non-diversified portfolio are prone to the risk they will not contain the few stocks which generate the large returns. Active strategies which tend to be poorly diversified most often lead to underperformance.

So whilst overall stocks outperform Treasuries (bonds), most individual stocks don't. The positive stockmarket outperformance is down to a small percentage of stocks.

My Take

This research conducted in 2017 is based on the US markets but the principles will no doubt apply worldwide. Therefore to be sure to capture the returns provided by these handful of exceptional companies you need to hold the whole market i.e. index fund.

The alternative would be to engage a managed fund such as Scottish Mortgage which has the potential to identify these companies with some accuracy. If successful, this should be a winning strategy as the returns will not be held back by holding stocks which underperform.

I will continue to hedge my bets by holding my core Lifestrategy global index and also my actively managed satellites such as Scottish Mortgage.

Leave a comment below if you have any thoughts or suggestions relating to this research.

Sunday, 3 June 2018

Capital Gearing - Full Yr Results

The aim of this trust is firstly to preserve capital and then to achieve capital growth in absolute terms rather than relative to a particular stock market index, principally through a wide variety of investments including variable weightings of  investment trusts, cash, bonds, index-linked securities and commodities when it is considered appropriate.

It is just over a year since the trust was added to my portfolio as a 'safe house' for some of the proceeds from various share sales.

There are a few trusts which offer to preserve capital such as Ruffer, Personal Assets and RIT Capital Partners. They all work on the principle that accepting a more solid but lower return from a diverse asset mix is a price worth paying for the peace of mind from not suffering potential losses from riskier or more concentrated assets.


The trust has recently announced results for the full year to 5th April 2018 (link via Investegate). Net assets per share have increased by just 0.1% and this is only the second year since 1982 in which growth has failed to match inflation. This was partly due to the recovery of sterling.


The focus of this holding is capital preservation rather than income. Last year the dividend was 20p however this year revenues have almost doubled and as they can only retain a maximum of 15% of revenue, the board have proposed an increase to 21p plus a special dividend of 6p making 27p for the year. The yield however is still less than 1.0%.

3 Yr Comparison -v- RIT and Personal Assets
(click to enlarge)

Asset Allocation

Over the past year the weighting for UK gilts has reduced in favour of US treasury TIPS. In addition the fund has significantly increased exposure to European property such as Residential Secure Income, Triple Point Social Housing, Vonovia and Deutche Wohnen. Property currently represents a higher proportion of the portfolio than traditional equities.

The assets include a mix of

equities (13%)
index-linked bonds (41%)
pref/corp fixed interest (17%)
other funds (8%)
property (17%)
cash/gold (4%)

The geographic split is

UK 51%
US 28%
Europe 13%
Other 8%

Commenting on the past year, manager Peter Spiller said

"In our judgement, the most successful investment funds going forward will be those that take advantage of the new opportunities that have opened up over the last 35 years; thus having an asset allocation that looks more like those that prevailed in the 19th century than the later part of the 20th.  Obviously, investment funds are once again free from exchange controls and there are numerous opportunities to invest in either specific overseas markets or to use the expertise of fund managers to analyse where the best opportunities lie through a global fund.

More recently entire new asset classes have sprung up in the closed-ended sector.  Hedge funds and private equity were not available 35 years ago, although investors should be aware of complexity and high fees of both classes.  Infrastructure funds in PPI, solar & wind power assets; loan funds; and property, both traditional and niche, all provide opportunities for diversification of equity risk and of income.

In our opinion the most significant newcomer to the universe of potential investments is the index-linked government bond market.  This market offers some protection from what looks like the main threat to savings over the next few years, namely resurgent inflation.  And with the absence of exchange controls, the TIPS market is easily accessible and is far better value than UK inflation linked bonds"...and concludes

"Capital preservation is the key objective of current portfolio allocation, until valuations return to more ‘normal’ levels. An objective of merely preserving value sounds modest. However if it is achieved whilst asset prices are normalising it will represent a significant achievement and lay the foundation for potentially more exciting returns in the future".

I am reasonably content with my first full year. The current share price is £40 which is a modest advance of 3.6% on my purchase price. In addition I have received last years divi 0.5% and this year's to come of 0.7%. I am also encouraged to see the ongoing charges have reduced from 0.89% to 0.77%...every little helps.

The trust provides a good counter-balance to some of my racier holdings such as Scottish Mortgage and Mid Wynd and the proof of the pudding will be the combined return on the whole basket at the end of 5 years.

So, back to the bottom drawer with this one and review again at the same time next year.

Feel free to comment below if you have any thoughts on investments which aim to preserve capital.

Friday, 1 June 2018

Edinburgh IT - Final Results

Edinburgh is one of the largest investment trusts on the market with assets of over £1.6bn. It is managed by Mark Barnett.

The trust invests primarily in UK securities with the long term objective of achieving:

1. an increase of the Net Asset Value per share by more than the growth in the FTSE All-Share Index; and,
2. growth in dividends per share by more than the rate of UK inflation.

The trust holds just over 50% FTSE 100 companies, 28% second tier FTSE 250 and 8% of the portfolio comprise overseas listed holdings. This is probably not one for ethical investors - of the top 10 holdings, 3 are tobacco companies, 2 oil & gas and one aerospace/defence and these 6 holdings together account for just over 25% of the portfolio.

Edinburgh has been one of the cornerstones of my UK income portfolio held in both Sipp drawdown and ISA for many years. The sum of £1,000 invested in 2008 would now be worth £2,487.


It has recently issued results for the 12 months to 31st March 2018 (link via investegate).

This has not been a good year for Mr. Barnett. 

The Company's net asset value, including reinvested dividends, fell by -5.9% during the year, compared to gain of 1.2% (total return) for the benchmark FTSE All-Share Index. The trust has been adversely affected by holdings in a number of poorly performing companies such as Provident Financial, Capita, BT and a sell-off in tobacco stocks. There is more detail on this in the managers report. 

To be frank, I am quite capable of selecting my own portfolio of dogs at much less cost. I would hope with all the experience, research and analysis from a large team, the manager could do better than this.

Fortunately I hold this as one of a 'basket' of investment trusts and the returns from the likes of Finsbury, Scottish Mortgage and TR Property have compensated for the shortfall from EDIN.
Past Year - 3 of My UK Income Trusts
(click to enlarge)

Income per share over the year has increased by 5% to 29.3p. The board have proposed a final dividend of 9.2p making a total of 26.6p for the full year - an increase of 4.9% which is a small improvement on the previous year. Based on the current  price of 690p, the yield is therefore 3.8%.

Last year the trust underperformed the benchmark by -8% and this year it has fallen short by -6%. Over 10 years, the return is very good but over 5 years the record is below average and dividend growth is below par at just 2.5% p.a. This is the 4th year in charge for Mark Barnett after taking over from Neil Woodford in January 2014.

There are some managers who can consistently outperform the market but the evidence shows that over time most fail and this is why I have been moving a larger proportion of my portfolio into low cost index funds over the past couple of years.

Last year I trimmed back my holdings in this trust to give Mr Barnett a little more time to see if he is one of the few who can consistently beat the benchmark over the longer periods. I am now losing confidence and I think it will not be long before the remaining investment is sold and the proceeds reinvested elsewhere.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!