Polar Capital Technology - Portfolio Purchase

My need for income generation is now much reduced following the start of my state pension and therefore I will begin to tilt my strategy more towards growth.

In January 2017, I added Scottish Mortgage to my SIPP and have recently topped up the holding. Earlier this year I added Mid Wynd to my ISA and this week I have added a third tech-focussed trust Polar Capital Technology.

Launched in 1996, the trust has grown rapidly and now has assets under management of over £1.7bn. It is a global trust however 70% of the holdings are listed in the US. The trust is managed by a team and led by Ben Rogoff since 2006.

The trust has 107 holdings (currently) and the top 15 account for 50% of the portfolio and include Microsoft, Alphabet (Google), Apple, Facebook, Tencent, Amazon and Intel. These tech companies are fundamentally transforming the way we live our lives in a similar way to the impact of the industrial revolution.

The combined market cap. of the so-called FAANG stocks - Facebook, Apple, Amazon, Netflix and Google - now exceeds the total annual GDP of the UK. I believe the long term growth prospects for this sector offer investors significant rewards. Yes, these tech stocks have done well since the market turmoil of 2008/09 and there is likely to be some volatility but I see no reason why the sectors ability to disrupt and grow should not continue.

3 Yr Comparison v Scottish Mortgage
(click to enlarge)

Over the last five years the trust has delivered a total return of 201% compared with 162% for the DJ World Technology Index.

Here's a link to the latest monthly factsheet (pdf). The trust is due to report full year results in July.

For me, these three holdings which includes SMT and Mid Wynd will account for around 15% of my portfolio (SIPP/ISA). Some investors will avoid technology investments as they are perceived to be higher risk global equity options but maybe in the long run it is higher risk not to hold the sort of companies which are shaping the future. Of course these holdings will mostly be covered in a low cost global index fund and the likes of Vanguard Lifestrategy will continue to be my core holding and my tech trusts forming part of a wider, diverse portfolio.

My initial purchase price is at £12.50 which represents a 2% discount to NAV and as with SMT, I will look to top up during periods of share price weakness down the line.

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!

Brexit Vote Revisited

One of the benefits of having my own blog is the opportunity to have a say on anything I like.  Of course most of the articles I write are on investments and personal finance related matters. A couple of years back I wanted to put down some of my thoughts on the Brexit debate and outcome. At times it seems like the country has spoken of little else since then and now at the second anniversary there will be more media debate and analysis so apologies in advance and if this subject is a real turn-off ...feel free to skip.

So, June 24th 2016 and I was very surprised at the outcome given all the dire warnings of immediate economic armageddon if we voted to leave from just about every establishment figure from George Osbourne (who?), Mark Carney, Christine Lagarde from the MFI, Barak Obama and a host of so called experts and economists.  Indeed we were told there would need to be an emergency budget the day after if we voted 'Leave'.

Here is my last post which summed up my thoughts on the matter shortly after the referendum.

The Treasury estimated that up to 820,000 jobs would disappear within two years of a vote to leave. Two years on and the reality is that more Brits are in work than at any time since records began. There are now over 1.5 million more jobs created since the referendum...currently ~32 million.

The Democratic Process

In years past, one way to resolve an issue would be an armed battle between two sides. I think we have moved on a little since then and most sensible people would agree that this method is a bit crude and unsophisticated and maybe the better solution is to debate the issues and then have a vote. Of course, the vote must be free and fair and everyone affected should take part. This is democracy and it only works if both sides agree beforehand to accept the outcome...if one side does not accept the outcome then we may well return to the old ways of doing things.

We have a general election every five years. There are some close results, sometimes within just one or two votes either way and there could be several recounts but it is traditional that one person is elected and the losers accept the decision of the voters. They can redouble their efforts next time round.

So, there was a debate in Parliament in June 2015 on whether to hold a referendum and after all the debates, the MPs overwhelmingly voted by 544 to 53 to hold a referendum on whether we should leave or remain in the EU. This was also supported by the House of Lords. It would be decided by a simple majority of 50% +1. There would be a simple question - "Should the UK remain a member of the EU or leave the EU?". Everyone aged 18 or over could vote.

The government sent out a leaflet before the referendum advocating a vote for 'Remain' with a promise that it would implement the decision of the electorate.

What is more, everyone's vote counted unlike a general election when voting is on a constituency level and many votes are 'wasted'. In the referendum, every vote for and against in every part of the UK counted and when every vote had been counted the final figure was 'Remain' 16.1 million (48.1%) and for 'Leave' 17.4 million (51.9%). The turnout on the 23rd June was very high at over 72%. If the majority of 1.3 million people were to stand finger tip to finger tip, the line would stretch from the UK to the football World Cup in Russia. Here's the BBC results breakdown

The Aftermath

Like most people in the country, I was surprised by the outcome. I voted to leave but really did not expect the majority would vote to leave. I thought it may be close but I was of the opinion that it would be 55% remain similar to the referendum in Scotland in 2014.

I would have been disappointed but I would have accepted the outcome like a good democrat and moved on.

A year later and we had another general election which placed Brexit firmly at the top of the agenda. There was not much difference between Labour and Conservative.

"As we leave the EU, we will no longer be members of the single market or customs union" Conservative Manifesto 2017

Immediately after the election, John McDonnell said “I think people will interpret membership of the single market as not respecting that referendum.” This was consistent with Labour’s manifesto, which promised to retain the “benefits or the single market and the customs union” without being a member of either.

The Liberal Democrats offered an alternative to the main parties with their pledge of a second EU referendum on the Brexit deal.

The Tories increased their share of the vote to 42.4% but lost 13 seats and their majority, Labour narrowed the gap increasing their share to 40% and gained 30 seats and Lib Dems managed just 7.4% of the vote and a gain of 4 seats. The big losers were the SNP who lost 21 seats and UKIP who lost their only MP and managed just 1.8% of the vote compared to 13% in 2015.

Of course there has been much analysis and discussion post the referendum. I have seen articles which suggested 'leave' voters were too stupid to realise what they were voting for. I think what has caused most disappointment/sadness on a personal level is the refusal on the part of a hardcore of remain voters to accept the outcome. I can understand their disappointment and maybe shock/disbelief but surely the very essence of out democracy is that we accept the decision of the majority.

For sure those 33 million people who cast a vote cannot possibly have understood all the implications of the vote. For me, I guess mostly it was a 'gut feel' like so many other decisions in life which defy precise logical analysis. Yes I read the papers and listened to the TV debated in the lead up. I discussed with friends and relatives and researched online but at some point, maybe a month or so beforehand, I had more or less made my decision. I will not know until maybe 10 years after we have left (if we actually leave) whether it was a good decision or completely bonkers. If I had to vote again tomorrow, it would be exactly the same.

I am very much of the same opinion as MSE's Martin Lewis who made the point "The principle of our democratic process far outweighs any benefits from remaining in the EU" (Question Time 3/5/18)

There have been challenges in the courts, calls for the referendum to be run again, objections from the SNP who think the result should not apply to them because Scotland voted remain - even though a year earlier they lost their own referendum as Scotland voted to remain as a part of the UK.

There have been anti Brexit rallies in London, Oxford, Bristol and elsewhere and now we have a campaign from the usual suspects...Chuka Umunna, Anna Soubury, Lord Adonis, the Lib Dems/Greens for a 'people's vote' on the final deal organised by remainers whose motives I mistrust as I believe they really don't accept the decision of 2016 and don't want our elected MPs in Parliament (all elected after the referendum) to have the final say on whatever deal is agreed with the EU after 2 years of intense negotiations.

It is not surprising these anti-Brexit rallies are in London and university town as the clever people tended to vote remain. I noted at the time that 29 out of 30 areas with the most graduates voted 'Remain' whilst 28 out of 30 areas with the fewest graduates voted 'Leave'. I have seen figures which suggest as many as 80% of under 40s with a degree voted remain. However, when it comes to democracy, everyone's vote carries equal weight. Having a degree does not mean their vote is worth more and believing you know more than others does not confer a right to override the decision of the majority. 

The fact these people are persisting in their efforts to undermine the referendum reflects their misplaced sense of superiority and demonstrates how out of touch they are with ordinary people. Whilst purporting to promote liberal values, social mobility and inclusion these clever people hold in contempt the poorer working-class people from the North who despite all the warnings of dire consequences voted leave and refused to bow down to the so-called experts.

For me, a referendum on the final deal is a non-starter. It would undermine the 2016 referendum. If the Brexit vote was about anything, it was about sovereignty and returning power from the EU to our Parliament. Therefore it should be our elected MPs in the Commons who have the last word on the final deal when the negotiations are concluded.

I can accept that these people are not happy with the decision to leave. I can accept they genuinely believe that leaving the EU will be a disaster for our economy and jobs but it seems to me that just as I cannot possibly know how things will turn out after we leave, neither can the remainers...it may not be so good but also it may work out better than they fear. The most legitimate course in my humble opinion, would be to wait a reasonable time after we actually leave to see how things settle down and how our economy performs and if not happy after say 5 years, THEN start a campaign to rejoin the EU.

Of course, no one can predict the longer term consequences of leaving but so far it has been business as usual but then again we have not yet left. Of course there is no shortage of clever people who 'know' this will be a huge mistake and want to save us from a dire future. They are driven by fear of the unknown and prejudice which is understandable as they probably have more to lose than some other less educated people however for all their further education, in reality, they have no more insight into how things will turn out than the rest of us.

In..Out..Shake It All About..

I really believe that neither side will be served by an final outcome which is half in, half out...that would be the worst outcome for the UK. Many want us to remain as part of a customs union but that would mean we could not independently strike our own trade deals with other countries and therefore severely compromise our freedom as a sovereign country which I think was at the heart of what those voting for leave actually wanted. We therefore need to find a solution which results in independence and the UK becoming free to make our way and, of course, free to make mistakes just as it was before 1974.

At the end of the day, I believe the real division is not between those who voted one way or the other. I believe it is between those who respect democracy and those who persistently refuse to accept the outcome and are doing anything they can to delay, reverse, obstruct and generally undermine. This is not good for our country and for those involved in the negotiations with the EU. It is negative and I strongly believe with just 9 months to go, we need more people to look at the positives which could come out of all this if we approach things with confidence and optimism.

If the final outcome is a UK which is little different from how things were as members of the EU then we will all end up the poorer. Brexit must happen, democracy demands that the wishes of the 17.4 million people is respected...I do not like to think about the consequences if the relatively small but influential group of clever people get their way and we do not get what we voted for.

So, where are you with all this? Did you vote leave or remain? Did you know what you were voting for? Do you accept the outcome or are you not yet reconciled to leave? Have your say in the comments below...we still have freedom of speech, it's a democracy!

SIPP Drawdown - Year 6 Update

It's June, another 12 months have rolled by and time to review my SIPP drawdown portfolio at the end of its sixth anniversary. Here’s a link to the previous update of June 2017.

The original plan when I started drawdown in 2012 was to generate a rising natural income from which I would withdraw 4% income which I calculated should be sustainable over the longer term without depleting the capital. Three years later the plan was revised following the unexpected introduction of pension freedoms in April 2015.

I have also changed tack on how the income is generated. In the early years the plan was to focus on investment trusts and my Coventry BS PIBS which could generate a natural income of at least 4%. In the past couple of years my PIBS have been redeemed as expected and I have moved the portfolio to incorporate lower cost, globally diverse index funds and a focus more on total return. Therefore the Vanguard Lifestrategy funds have replaced some of my investment trusts.

Portfolio Changes

Over the past 12 months I have used most of the surplus cash to make some additions to my portfolio. Last year I added TR Property which I also hold in my ISA. More recently I added HSBC Global Strategy Balanced which is very similar to my VLS funds and, looking towards capital preservation, I have added Capital Gearing.  Finally, I have topped up my Scottish Mortgage holding by taking advantage of a dip in the share price earlier this year. Although this global growth trust represents a modest percentage of my portfolio it has made quite a significant contribution to the value over the past 18 months with a share price rise of 60%.

I will be reviewing my strategy as the state pension has now kicked in but it is possible I will dispose of my Edinburgh IT in the coming year due to poor performance over the past couple of years. I may also dispose of the iShares Corporate Bond ETF as this area is adequately covered by my VLS & HSBC funds.

I will review also whether I still need to hold a cash buffer of around £4,000 or 10% of Lifestrategy value which could be drawn for 'income' during bear market periods. If I can get by on just the state pension if necessary then I am thinking the cash buffer is surplus to requirements. On the other hand, it is always useful to hold some cash in the mix to take advantage of opportunities which will arise during the next downturn and pick up a couple of bargains.

Performance

There has been a little more volatility in the markets over the past few months and I expect there will be more to come until the outcome of Brexit negotiations becomes clearer. We are currently looking at the imposition of tariffs by the US and a possible trade war involving China, Canada, Mexico and the EU. The whole of 2017 was fairly plain sailing but there are always events to spook the markets and volatility has to be accepted as a part of investing.

So far this year the markets appear to brush aside the political uncertainty <cue market correction>. There was a brief dip in the FTSE below 7,000 in March followed by a quick rebound. Over the 12 months, the FTSE 100 has seen a modest increase of 1.4% from 7,524 to currently 7,631...just over 5% including dividends. My SIPP portfolio is now more fully invested compared to June 2017 and whilst there has been some drag from holding cash, it is pleasing to see a modest gain of 5.3% over the year. Over the longer period, the starting value in June 2012 was £62,000 and taking account of monies withdrawn, the portfolio has risen above £100,000.

Returns have been mixed over the past year. Edinburgh -6% and HICL -10% have been the main underperformers. On the positive side are Scottish Mortgage +33% and Aberforth +13% and new addition TR Property +17%. My core holdings of Lifestrategy 60 & 40 have provided stability and an increase of £1,125 or 3.9% compared to 2017.

Here is the portfolio

(click to enlarge)

Comparisons

In June 2012 when I started this series on my drawdown journey, the FTSE 100 was 5,500 and has risen to 7,631 - a gain of 38.7%. If we add in average dividends of say 3.7%, this gives a rough total return of 61%

In June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £181 - a gain of 72.3% or annualised average of 9.0% p.a.

Taking account of the income withdrawn over the past 6 years of £19,400, the total return including income is 77% which is very satisfactory and works out at an average annualised return of 10.0% p.a.


Income

The original aim of the sipp drawdown was to generate and withdraw a steadily rising natural income from my investments trusts to keep pace with inflation.

Under the pension freedom changes which took effect from April 2015, I am now able to drawdown as much or as little as required. As my pension was my main source of taxable income, it made sense to reduce the pot by transferring the capital tax free to my ISA on the basis that it would be taxed when my state pension started. Over the past three years I have taken out £32,000 tax free. Some of this has been needed for income (£10,350) and the rest has been invested in my ISA to generate more tax-free returns.

I realise I have not recorded drawdown income taken from the portfolio so will factor this into future reports. The first full year was a modest £2,800 after year 1 and this has gradually risen to £3,600 which is a 28% uplift over the 6 years.

(click to enlarge)

Many of the income trusts have been sold and my PIBS redeemed so there is now less natural income. Over the past year this income reduced from £2,075 to just £1,395. This has been withdrawn plus a further £2,205 from the cash surplus making a total of £3,600 for this past year - a small increase on the previous year.

State Pension

I have relied upon income from my SIPP to supplement my ISA income and bridge the 10 year gap between early retirement at age 55 yrs and state pension. This part of the journey is now 'mission accomplished' whoo hoo!

My state pension has just  commenced and I will therefore be less reliant on the income from my SIPP for essential living costs and it will become more for discretionary spending or more likely remain invested. Unlike an annuity which, once purchased means the capital lump sum is lost forever, any residue in my SIPP will pass on to my children and grandkids..tax free if I go before 75 yrs and thereafter possibly 20% or tax free depending on circumstances. For those interested here's a link on the AJ Bell site.

I will receive a state pension of £8,450 over the coming year and as this is taxable, it will limit the tax free sums I can take from my SIPP to around £3,400. Any pension money withdrawn above this amount will be taxed at 20%. I have now plugged the additional income including cost of living increases into my s/sheet for the next 10 years...a total of around £100,000 which will be very welcome indeed.

I retired from paid employment at the age of 55 yrs and obviously at the start of the process there is some uncertainty on the big question of what is a sustainable level of income to draw down. My starting point was ~4.0% and since commencing drawdown this has been well within the average level of growth of 9% or so generated by the portfolio over the past decade which gives me more confidence that this level of drawdown could continue longer term if needed. Which leads to the next point....

.....nope..not for me....

Having been a saver all of my adult life and living well within my means, I find it quite a challenge to become a 'spender' now the extra funds are available! I possibly no longer need the 4% income from my pension as living expenses are covered by the state pension. Frugal Freddie is unlikely to morph overnight into Lavish Larry...I have not so far been looking online for deals on a Caribbean Cruise or along to the showrooms looking at a new Lamborghini so I now need to review my investment plans and decide how to proceed from here on. I will probably post a little more on this when I get used to the new situation.

Obviously I am reasonably happy with my first few years of self-managing a flexi-drawdown sipp portfolio. For the first 3 years, the dividend income predictably rolled in much as planned and importantly, increased each year a little ahead of inflation. For the past three years I have withdrawn significant lump sums tax free and placed the excess which I did not require for income in my ISA. Of course, there are no tax liabilities for all monies subsequently withdrawn from my ISA. I will have less need for income from my SIPP in the future and will therefore slim down some of the income-focussed investments and look at some global growth and possibly one or two 'themed' investments.

So, all in all, happy days!

If you are managing your SIPP drawdown or you are planning to do this, feel free to share your experience in the comments below.

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.

Capitalism

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".

Risk

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 save...you 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 risky...like 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.

Conclusion

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/pensions...it'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.

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.

Implications

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.

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.

Results

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.

Income

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.

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.

Results

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!