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By Annabel Brodie-Smith
Welcome back. I hope you had a great summer.
It’s September - time to go back to school and time for a new investment term.
Despite the markets flying high, we continue to climb the never-ending wall of investment worries, from the more familiar concerns over Brexit and Trump to the recent threat of North Korea’s nuclear capacity. So it’s an opportune time for Andrew Bell, CEO of the large global investment company, Witan, to take us through the opportunities and headwinds that face us as investors and explain why Witan remains fully invested and even decided to increase its borrowing recently.
Over the summer we’ve been working away on the dividend information on our website. UK investment trusts now can pay dividends from capital profits as well as from the income they receive from their own portfolio. A small number of investment companies are paying dividends from capital profits for a specific purpose, so on our site we now show for each member company whether the dividend was paid from income or capital.
We also hear from four member companies, European Assets, Securities Trust of Scotland, JPMorgan Global Growth and Income, and Martin Currie Asia Unconstrained about why they introduced this new policy and the benefits for shareholders.
On enhanced dividend information, we have also introduced the revenue reserve for each company (the undistributed income that the company keeps as reserves). This is the ‘rainy day fund’ that investment companies can use to top up dividends in leaner times, which is made up of income that has been earned in previous years but not paid out.
"Despite the markets flying high, we continue to climb the never-ending wall of investment worries"
– Annabel Brodie-Smith, AIC
You can also see the dividend cover (the number of years the current revenue reserves can last, based on paying the last full financial year of dividends).
Teenagers across the country will understandably be excited about starting university soon. However, a recent study from the Institute for Fiscal Studies revealed that the average debt students will have on graduation is a staggering £50,000. We look at how parents and grandparents can save with investment companies to ease the financial burden of university costs.
Finally, the 8th annual VCT and EIS Investor Forum organised by AngelNews will be taking place on 24th November in London. The forum allows private investors to meet with the VCT and EIS fund management community and there is a 25% discount on tickets until the end of September. For more information and to register please follow the link below.
The 2017 Nex Exchange VCT and EIS Investor Forum (London)
See you next month – it feels like autumn has already arrived!
Communications Director, AIC
Where to go from here?
Andrew Bell, CEO of Witan Investment Trust, discusses how to make sense of the current global outlook
Andrew Bell, Chief Executive Officer, Witan Investment Trust
Over the past year the world has put on an impressive display of sang-froid in the face of some extraordinary political developments. Although the ultimate real world consequences of the Brexit vote and the Trump incumbency at the White House are not yet apparent, real facts tend to outshine fake slogans most of the time.
Global growth is spreading
The facts show that global growth has become more widely spread in 2017, without yet having accelerated from the relatively muted pace that has characterised the recovery from the financial crisis in 2009. Europe and Japan are expected to deliver better growth than expected six months ago and despite the Brexit uncertainties and the squeeze on consumer incomes, the same applies to the UK.
Although the consensus expects relatively unexciting growth of 1-2% from all three next year there is a degree of consistency in the forecasts which (together with relative stability in US growth at the 2%+ level and a cyclical upswing in many emerging markets) gives some fundamental reinforcement to the double-digit rises seen in many equity markets this year.
"Europe and Japan are expected to deliver better growth than expected six months ago and . . . the same applies to the UK"
– Andrew Bell, Witan Investment Trust
A dilemma for investors
The contrast between fairly benign economic news and historically high equity valuations presents investors with a dilemma. They want to make a return on their money at a time when traditional parking places for cash (such as bonds and bank deposits) offer at best low returns.
However, equity markets offer a range of risks (many companies are seeing their businesses disrupted by technological change and valuations offer limited protection against tactical disappointments) and relatively few windfalls from a “dartboard” approach to investing.
"The mood music from the world’s central banks appears better suited to the slow dances and uncertain steps that mark the end of the party than earlier revelry"
– Andrew Bell, Witan Investment Trust
Since guessing the direction of indices is both binary and difficult this is an environment which should play to the ability of active managers who can be selective in their approach (and who are having a better time in 2017 than last year).
We see our managers as combining the professions of chef and entomologist so that we have the ability to see the fly without dismissing the merits of the soup.
The role of central banks
The mood music from the world’s central banks appears better suited to the slow dances and uncertain steps that mark the end of the party than earlier revelry, with monetary policy either being tightened or no longer acting as a propulsive force for markets.
Nonetheless, the relatively subdued behaviour of inflation, even in economies closer to full capacity, is permitting a patient approach from those with their hands on the interest rate levers so rises in base rates so far range between gradual and invisible.
The slowdown and potential reversal of quantitative easing measures represents a greater uncertainty. The policy itself is unprecedented so the effects of reduced bond purchases or even net sales by the central banks are hard to model, particularly when government bond yields are so low.
The central banks are adopting a cautious approach to tightening but when the brakes are applied there is an increased risk of collision with the windscreen, so seatbelts and airbags should be kept in good order.
Responding with conviction
Faced with this constellation of factors, Witan has remained fully invested, adding to our European and emerging market exposure earlier this year and with a global portfolio that is substantially different from our composite benchmark, reflecting our managers’ concentration on stocks that they hope will outperform rather than simply piggybacking the index.
We have also taken advantage of low borrowing costs by adding to our borrowings during the summer at a fixed rate of 2.74% for the next 37 years – we would be disappointed if equity returns fail to beat such a low hurdle in the medium to long term, even if (as is always the case with equities) patience is required at times.
Witan Investment Trust performance to 6 September 2017
Please remember that past performance is not a guide to future performance. Witan Investment Trust is an equity investment. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested.
This material is issued and approved by Witan Investment Services Limited (authorised and regulated by the Financial Conduct Authority) for informational purposes only and does not constitute a solicitation or a personal recommendation in any jurisdiction. Opinions expressed are current opinions as of the date of appearing in this material. No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness.
Capital and income
Investment companies paying dividends out of capital
Since a change to the tax rules in 2012, UK investment trusts have had the ability to pay dividends from capital profits.
The vast majority of investment companies pay dividends out of the income they receive from their own portfolio but a number of investment trusts are paying dividends from capital profits.
To help investors understand whether an investment company’s dividend is paid from income or capital profits, the Association of Investment Companies (AIC) has introduced enhanced dividend information for each member company on the AIC website.
This shows the investment company’s dividend history and highlights whether each dividend was paid from income or capital.
Revenue reserve & dividend cover
In addition to this information, the AIC website shows the revenue reserve of an investment company, the undistributed income that the company keeps as reserves shown in millions. This is the ‘rainy day fund’ that investment companies can use to top up dividends in leaner times, which is made up of income that has been earned in previous years but not paid out.
The AIC is also publishing the dividend cover, which shows the number of years the current revenue reserves can last based on paying the last full financial year of dividends.
Ian Sayers, Chief Executive of the Association of Investment Companies, said:
“Paying dividends from capital profits is an additional income advantage of investment companies. It helps meet shareholder demand for income in this low interest rate environment and potentially can lead to investment companies being rerated to trade on lower discounts, another benefit for shareholders.
"Clearly investment company boards have an important role to play overseeing any change in dividend policy and ensuring it is in shareholders’ best interests.
"It’s clear that the demand for income remains strong and we want to provide as much data as possible to help investors research investment companies that will meet their income needs"
– Ian Sayers, AIC
“We are now publishing enhanced dividend information on our website to help investors in their decision making. It’s clear that the demand for income remains strong and we want to provide as much data as possible to help investors research investment companies that will meet their income needs.”
To shed light on the decisions that investment companies have taken to pay income from capital, the AIC has collated comments from Sam Cosh, Manager of European Assets Trust; Nigel Wightman, Chairman of JPMorgan Global Growth & Income; Harry Wells, Chairman of Martin Currie Asia Unconstrained Trust and Rachel Beagles, Chairman of Securities Trust of Scotland.
European Assets Trust
Sam Cosh, Manager of European Assets Trust, said:
“European Assets is unique amongst investment companies in that it is a Dutch domiciled company but has a London listing. Until quite recently the Dutch tax rules differed from the UK rules in that all “reserves” are available for distribution to shareholders in the form of a dividend.
“Back in 2001, the board of European Assets adopted a “high distribution” policy and provided shareholders with an income calculated as a percentage of the year end net asset value. For the past seven years or so this has been at a rate of 6% per annum.
“Interest rates have been at historic lows for many years and have been falling for the best part of three decades, and bond yields have tumbled as a result. Investors have been seeking income from other assets for some time now.
“European Assets invests in smaller companies across Europe and these companies do not tend to be high dividend payers because they are growth businesses so tend not to find their way in to income seekers’ portfolios. The structure of European Assets allows the board to pay dividends from capital and by holding the trust, an income investor can diversify their own portfolio into an area that is typically not income producing.”
"The structure of European Assets allows the board to pay dividends from capital and by holding the trust, an income investor can diversify their own portfolio into an area that is typically not income producing"
– Sam Cosh, European Assets Trust
Securities Trust of Scotland
Rachel Beagles, Chairman of Securities Trust of Scotland, said:
“In July 2015 the board agreed that it was comfortable using its authority to enhance the annual dividend by distributing some capital profit by way of dividend, as necessary. In an unusual step, the board also announced the minimum total annual dividend for the financial year ahead to March 2016 - which was an 18.4% increase on the previous year, and a progressive policy thereafter.
Enhanced dividend information for Securities Trust of Scotland on www.theaic.co.uk as at 5 September 2017
“This offered our shareholders both an attractive yield, underwritten by retained revenue and capital reserves, and a level of income certainty that was prized during a time of market volatility and enduring low yields.
“In adopting this approach, the portfolio manager retains full flexibility and control over stock picking without sacrificing high quality companies poised to deliver a high total return over the long term in favour of yield.
“Earlier this year the board declared a fourth dividend of 1.6p, bringing the total dividend for the financial year ending 31 March 2017 to 5.95p a rise of 2.6% on the prior year. Just 0.21p per share was paid from retained revenue reserves.
“If necessary, going forward, the board will fund a portion of the dividend using capital reserves; the fact that the option is available within the investment trust structure offers a tangible benefit to our shareholders.”
JPMorgan Global Growth & Income
Nigel Wightman, Chairman of JPMorgan Global Growth & Income, said:
“In July 2016, the board decided to move to a new distribution policy of returning 4% of NAV to shareholders, each year, through quarterly dividends. As many investors continue to seek out investment opportunities which offer a reliable level of income alongside capital growth, we feel that the company remains as relevant as ever and has a role to play in easing the burden of an ultra-low interest rate world.
Enhanced dividend information for JPMorgan Global Growth & Income as at 5 September 2017
“This policy seems to have been well received with renewed interest in the company’s shares. The board has just announced that, in relation to the year commencing 1 July 2017, the company intends to pay dividends totaling 12.16p per share, which represents a yield of 4.01%. It is expected that such dividends will be paid by way of four equal distributions. This represents an increase of 24.1% over the total dividends of 9.8p paid in the year to 30th June 2017, reflecting the strong NAV growth over the year.
"The company remains as relevant as ever and has a role to play in easing the burden of an ultra-low interest rate world"
– Nigel Wightman, JPMorgan Global Growth & Income
“While the investment outlook is unquestionably mixed, the board believes the manager’s robust investment process and extensive internal research resources which remains unchanged following the revised distribution policy will continue to be able to identity attractively priced high quality companies in which to invest for our shareholders.”
Martin Currie Asia Unconstrained Trust
Harry Wells, Chairman of Martin Currie Asia Unconstrained Trust, said:
“In July, shareholders of the Martin Currie Asia Unconstrained Trust overwhelmingly voted in favour of a proposal to increase the dividend payment by introducing a distribution from capital. This increased the total annual dividend by 110% on the previous financial year. It is the board’s intention to repeat the capital distribution in future years to be paid on an annual basis along with the final dividend and set by reference to 2% of the prior year-end ex-income Net Asset Value (NAV). The board believes that the new dividend policy benefits existing shareholders, whilst making the shares attractive to new buyers and appealing to retail investors, who will be able to participate in the potential for capital growth.”
Saving for the next generation
How investment companies can help in providing for university costs
On Thursday 17th August, the waiting was over for teenagers across the country as they found out how they fared in their A level exams, and if they successfully achieved their place at their chosen university.
Average student debt is £50,000
As the next step for many after school, university gives students the opportunity to stand on their own two feet. However, a recent study from the Institute for Fiscal Studies revealed that the average debt students will have on graduation is a staggering £50,000. To ease the financial burden, some parents may choose to contribute to help their child finance university.
In a recent survey on student debt, the Association of Investment Companies (AIC) discovered that 64% of parents said they were planning to contribute or currently contribute to help their child finance university.
When asked the main way they were contributing or planning to contribute financially to help their child fund university, 55% of parents stated they would be using some of their cash savings, whilst 16% would be using all or most of their cash savings.
"64% of parents said they were planning to contribute or currently contribute to help their child finance university"
Ways of saving
With the total amount of debt students graduate with seemingly creeping higher, are parents who want to help contribute financially towards the cost of university missing a trick by focusing on cash savings?
The current low interest rate environment has had a significant impact on cash savings and parents may want to consider the stock market’s potential for long-term growth for part of their savings.
"If you had regularly invested £25 per month in the average investment company over the last 18 years, this would have grown to over £16,000, a third of the cost required to clear the average student’s debt"
– Annabel Brodie-Smith, AIC
Annabel Brodie-Smith, Communications Director, Association of Investment Companies said:
“With the arrival of A level results day, many parents of those waiting for their results will have already started planning how to help with the costs involved for university.
"However, for those with younger children it’s never too early to start thinking about saving for the considerable future expense of university.
“Our recent survey revealed that cash savings accounts were still king when it came to the main way parents saved specifically to help towards their child’s future, but it’s worth considering the benefits of investing in an investment company.
“An investment company gives investors access to the long-term potential of the stock market and, by investing in a range of companies on your behalf, they spread your risk and offer professional fund management.
“If you had regularly invested £25 per month in the average investment company over the last 18 years, this would have grown to over £16,000, a third of the cost required to clear the average student’s debt and £50 per month would have grown to over £32,000.
“For those parents who are fortunate to be able to save £100 a month over 18 years this would have grown to more than £65,000, enough to currently clear their child’s student debt and have some money left over.”
Monthly investment over 18 years to 31 July 2017