By Annabel Brodie-Smith
We have boldly taken ‘the bear by the claws’ this month, by asking Chris Colunga, Manager of BlackRock Emerging Europe to give his views on Russia and Emerging Europe.
Relations with Russia have gone from bad to worse following the Salisbury poisonings of the Skripals and Donald Trump introduced sanctions against Russia this week. It’s interesting to hear that Chris Colunga believes there are plenty of positives about Russia and “Whilst the current situation isolates Russia further, we do not think it will have a meaningful impact on the Russian economy.” This could be good news for contrarian investors and those brave (or thrill-seeking!) investors like myself who have a stake in Russia and are prepared to ride the rollercoaster of excitement and surprises.
Our journalist investment expert, Ian Cowie reminds us it’s time to get out our duster and spring clean our savings and investments this month. Don’t forget that: “Setting aside a little time to spring clean your portfolio, perhaps over one of the bank holiday weekends, could prove a wise investment to minimise risk and maximise rewards.”
Are you holding out for a hero? The 21 dividend heroes, those investment companies that have increased their dividends every year for more than 20 years, are back this month. Four of these companies have now increased their dividend for more than half a century. There are also four new joiners to the next generation of dividend heroes: Standard Life UK Smaller Companies, Henderson Far East Income, HICL Infrastructure and MedicX.
Following on from our special issue celebrating 150 years of investment companies last month, we are looking at the investment companies with the longest portfolio holdings. Who could guess that the longest holding we are aware of is owned by Bankers Investment Trust, which has held HSBC in the portfolio for 129 years. It’s listed in their first report and accounts in 1889 – it doesn’t get much more long-term that that!
See you next month.
Communications Director, AIC
Recovering from a lost decade
By Chris Colunga, Portfolio Manager, BlackRock Emerging Europe plc
Chris Colunga, Portfolio Manager, BlackRock Emerging Europe plc
Capital at risk: All financial investments involve an element of risk. Therefore, the value of your investment and any income from it will vary and your initial investment amount cannot be guaranteed.
Emerging Europe is just beginning to leave behind a lost decade of performance. The strong gains of 2016 and 2017 still leave the MSCI EM Europe 10/40 index more than 40% below its pre-crisis peak (Bloomberg, March 2018). Emerging Europe valuations are still below historical trends, investor positioning remains light, and we believe the region has the potential to benefit from several positive developments.
BlackRock Emerging Europe plc aims to achieve long-term capital growth by investing in companies that do business primarily in Eastern Europe, Russia, Central Asia and Turkey. At the end of 2017, Russia accounted for most of its assets, with a 54.1% allocation (BlackRock, December 2017) as we sought to take advantage of the positive monetary and fiscal policies in the country.
An improving economy, record low inflation and the potential for the market to re-rate higher on lower interest rates support our positive stance on Russia, despite concern about the recent escalation in sanctions weighing on market sentiment (Bloomberg, March 2018). Whilst the current situation isolates Russia further, we do not think it will have a meaningful impact on the Russian economy and we maintain the overweight position in the country on the back of domestic improvements and monetary support. Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation.
"Whilst the current situation isolates Russia further, we do not think it will have a meaningful impact on the Russian economy"
Chris Colunga, Portfolio Manager, BlackRock Emerging Europe plc
Inflation continues to fall in Russia and at 2.2% is well below the Central Bank’s 4% target (Trading Economics, March 2018). For a country that saw inflation peak at 16.9% three years ago (as before), this is a remarkable achievement.
"Our view is that much of the negative investor sentiment has already been priced into stock valuations"
Chris Colunga, Portfolio Manager, BlackRock Emerging Europe plc
The Russian economy appears in good shape; wages are rising and consumer sentiment is positive, which suggests room for interest rates to be cut from very high levels in the past. This would bring down the cost of borrowing for corporates, decrease mortgage rates and potentially increase the demand for real estate. Please note there is no guarantee that any forecasts made will come to pass.
Our view is that much of the negative investor sentiment has already been priced into stock valuations, meaning there are plenty of attractively priced, high dividend-paying companies in Russia.
Please remember that capital growth values may fluctuate and the level of income may vary from time to time and is not guaranteed.
Greek banking sector
The Emerging Europe story has much more to it than Russia alone, however. The financial sector in Greece, for example, offers exciting investment opportunities thanks to a successful third bailout. Our view is that it is still much cheaper than its peers, reflecting its recent difficulties and providing room for substantial improvement as the situation normalises.
The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Source: BlackRock, as at 31 March 2018. Pound Sterling. BlackRock performance figures are calculated on a total return basis with net income reinvested including management & operating charges and any performance fees.
The recent successful conclusion of the Third Bailout Review coupled with the successful government bond issuance is providing the government with increased funding at lower rates and reassuring investors.
Whilst there will be volatility through the remainder of the program, we believe it will ultimately end with a successful conclusion and higher valuations. This, coupled with an acceleration of GDP growth, should prove helpful to stock performance. Please note there is no guarantee that any forecast made will come to pass.
"Romania is growing considerably faster than India, and Turkey is growing faster than China"
Chris Colunga, Portfolio Manager, BlackRock Emerging Europe plc
Elsewhere, economies in Eastern Europe are having their best year for a decade. In the Czech, Hungarian and Polish economies inflationary pressures continue to build on the back of rising wages and low unemployment, giving the potential for the region’s banking sector to break away from the destructive low rate environment as inflationary pressures could allow them to increase lending spreads (BlackRock, March 2018). Furthermore, Romania is growing considerably faster than India, and Turkey is growing faster than China (Bloomberg, March 2018).
Clearly, politics and macroeconomic events continue to shape investment opportunities in Emerging Europe. This is undoubtedly a volatile region but over the last nine years since BlackRock took over the management of the Trust, we have seen political events such as the Ukraine war, broad sanctions on Russia, a failed coup in Turkey, European Union investigations on Poland, yet the share price has more than doubled and returns have significantly outperformed the benchmark (as before).
"We have seen political events such as the Ukraine war, broad sanctions on Russia, a failed coup in Turkey, European Union investigations on Poland, yet the share price has more than doubled"
Chris Colunga, Portfolio Manager, BlackRock Emerging Europe plc
The region represents a diverse opportunity and as such is a useful addition to investors’ portfolios in our view. As Emerging Europe makes up its lost decade, there is a structural opportunity for long-term growth in this forgotten part of the world. To find out more visit here.
The opinions expressed are as of April 2018 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative. There is no guarantee that any forecasts made will come to pass.
Please note you may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust specific risks: Overseas investment will be affected by movements in currency exchange rates. Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation. Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall. The Trust’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Trust’s may not be able to realise the investment at the latest market price or at a price considered fair.
BlackRock have not considered the suitability of this investment against your individual needs and risk tolerance.
To ensure you understand whether our products are suitable, please read the Key Investor Documents (KIDs) and the Annual and Half Yearly Reports available at blackrock.co.uk/its which detail more information about the risk profiles of the investments. We recommend you seek independent professional advice prior to investing.
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A new tax year
Ian Cowie explains how investors can spring clean their portfolios
April sees the start of a new tax year and a good time to spring clean your savings and investments. Money never sleeps and stock markets rarely stand still, so it makes sense to regularly review your investment companies’ shares to ensure they continue to reflect your requirements for risk and reward - as well as other factors that might be important to you.
Performance is a prime consideration for many people and total returns are easy to assess on the AIC’s website. Simply go to theaic.co.uk and click on ‘Find and compare investment companies’ to see up-to-date data on all AIC member companies.
You can search by company name or TIDM - each company’s stock market ‘ticker’. For example, Worldwide Healthcare, one of my longest-held shares, has a TIDM of WWH. Among other information such as ‘Objective’ and ‘Management Group’, you can now see its AIC Sector; in this case, ‘Sector Specialist: Biotechnology and Healthcare’.
Clicking on the sector enables you to examine each company’s share price total return performance over the last year, five and 10 years - along with its sector averages and the same information for each of its comparable rivals. Clicking on the downward-facing arrow alongside each time period will present the companies below in descending order, with the highest returns at the top.
As a medium to long-term investor, I am pleased to see Worldwide Healthcare remains top-performer over five years but less pleased to see it has been pipped for first-place over one year by Syncona and also pushed into second-place over the last decade by Biotech Growth. Each AIC sector table also includes important information, such as “NAV” - or net asset value per share; and “Discount/premium %” - or the percentage difference between NAV and the share price.
"As a medium to long-term investor, I am pleased to see Worldwide Healthcare remains top-performer over five years"
The column headed “Gearing” shows how much each investment company is borrowing to invest, which can increase both gains and losses, so may provide an indication of risks being taken in pursuit of rewards. The “AIC ongoing charge” provides a measure, expressed as a percentage of NAV, of the regular, recurring costs of running an investment company.
"It is important to consider whether your portfolio of investment companies remains sufficiently diversified over different commercial and geographical sectors to diminish your exposure to setbacks or failure in any one industry or country"
Income or yield is another important consideration for many investors. On the right hand side of each AIC sector table, you can see a column headed “Dividend Yield %” - showing annual dividends expressed as a percentage of the current share price. For example, if a company has paid an interim dividend of 2p with a final dividend of 3p and its share price is currently £1.25, the dividend yield would be 4%; that is, a total of 5p divided by 125p to give a yield of 4%. The column headed “5 yr dividend growth (%) p.a.” shows how income distributions have risen.
More generally, it is important to consider whether your portfolio of investment companies remains sufficiently diversified over different commercial and geographical sectors to diminish your exposure to setbacks or failure in any one industry or country.
For example, technology shares - such as Facebook, Amazon, Netflix and Google (sometimes called the FANGs) - have enjoyed strong returns recently but also suffered a setback after the president of the United States of America criticised some of their employment and tax policies. Closer to home, Brexit negotiations continue to influence many British share prices for good or ill.
Even good news can create problems of success. For example, if a share price rises above a company’s NAV, the shares are said to “trade at a premium” which may prompt some investors to worry it is “priced for perfection” and thus vulnerable to disappointment. If a company or sector has done very well, it may make sense to consider whether it is time to take profits and utilise your annual capital gains tax allowance, which enables individuals to take profits of up to £11,700 tax-free during 2018/2019.
"Setting aside a little time to spring clean your portfolio, perhaps over one of the bank holiday weekends, could prove a wise investment to minimise risk and maximise rewards"
As share prices rise and fall - driven by brokers’ tips, company announcements, news events and other factors - it is important to regularly review whether your portfolio continues to accurately reflect your requirements for income and growth or a mixture of both. Setting aside a little time to spring clean your portfolio, perhaps over one of the bank holiday weekends, could prove a wise investment to minimise risk and maximise rewards.
Ian Cowie is a columnist at The Sunday Times
The investment companies that have raised their dividend for 20 consecutive years, and those that are almost there
The AIC has published its list of dividend heroes, those investment companies that have increased their dividend consecutively each year for 20 years or more. There are now 21 dividend heroes as Invesco Income Growth announced its 20th consecutive year of dividend increases in June 2017.
Those investment companies that are leading the pack include, City of London Investment Trust, Bankers Investment Trust and Alliance Trust, who have all increased their dividends every year for 51 years, followed by Caledonia Investments who have increased their dividend for 50 years.
So far in 2018, nine dividend hero investment companies have announced a further year of dividend increases. In March, Alliance Trust achieved 51 years of consecutive dividend increases, and Foreign & Colonial Investment Trust, increased their dividend for 47 consecutive years. Bankers Investment Trust announced their 51st year of dividend increases at the start of the year and other companies that have announced so far this year include: Brunner Investment Trust, who’ve raised their dividend for the 46th consecutive year; JPMorgan Claverhouse, who’ve increased for 45 consecutive years; Witan Investment Trust, 43 years; Scottish American, 38 years; Merchants Trust, 36 years and Temple Bar, 34 years of consecutive dividend increases.
A full list of dividend heroes is available on the next page.
Further dividend information for each member company including the investment company’s dividend history is available on www.theaic.co.uk. 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 also publishes 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.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies, said: “We now have four dividend hero investment companies with more than half a century of dividend increases, an enviable achievement. There are 21 dividend hero investment companies in total which have increased their dividends each year for at least 20 years or longer.
“Investment companies have an important structural advantage, namely, they can squirrel away up to 15% of the income they receive each year to boost their dividends in tougher times. Whilst markets have seen volatility since the start of the year, interest rates remain historically low and income is very much in demand, with many investors relying on regular dividends for everyday spending and bills.”
Dividend heroes. Dividend yield data source: Morningstar. *Please note Northern Investors Company is winding up.
Next generation of dividend heroes
This year, there are also four new joiners to the next generation of dividend heroes, those investment companies which have increased their dividend for over ten consecutive years but less than 20. They are: Standard Life UK Smaller Companies, Henderson Far East Income, HICL Infrastructure and MedicX.
Next generation of dividend heroes. Source: AIC using Morningstar.
Income strategy: new joiners comment
Harry Nimmo, manager of Standard Life UK Smaller Companies said: “The strength of the UK Smaller Companies Trust is its consistent approach to identifying and investing in tomorrow’s success stories today. Over the last 10 years, it has seen fledgling companies rising to be members of the FTSE 100 – take NMC Health or Hargreaves Lansdown for example. Our investment process has been unchanged for four economic cycles and our emphasis on risk aversion, resilience, growth and momentum has delivered capital growth and a rising dividend and still feels right for the future. While there may well be significant challenges in the short to medium term, we remain confident that this approach will ensure that patient investors will be rewarded in the longer term.”
Mike Kerley, manager of Henderson Far East Income said: “Asia remains an increasingly attractive source of income as improving corporate governance, record cash on corporate balance sheets and strong earnings growth fuel greater dividend payments. A wide-ranging reform agenda especially in North Asia has also contributed to changing attitudes within corporates towards minority shareholders. Asian companies paid a record amount of dividends in 2017 with the trend expected to continue into 2018.
“The strategy is very much focused on total return with equal emphasis on income and capital growth. To achieve this outcome, the portfolio offers a combination of high yield, sustainable cash-flow generating companies which offer good value alongside names that offer higher underlying growth and attractive valuations with lower current yield but a genuine move towards higher dividend growth potential. As these companies surprise positively on dividends, sending a strong signal about cash flow generation and management outlook, they tend to be strongly re-rated by the market.”
"Our investment process has been unchanged for four economic cycles and our emphasis on risk aversion, resilience, growth and momentum has delivered capital growth and a rising dividend and still feels right for the future"
Harry Nimmo, Standard Life UK Smaller Companies
Harry Seekings, Director, InfraRed Capital Partners, Investment Advisers to HICL Infrastructure said: “The delivery of long-term, stable income from a portfolio of infrastructure investments has been at the heart of HICL’s investment proposition since its inception in 2006. The company’s annual dividend has grown in each of the last 10 years and yield has typically been in the range of 4-6%. The Board has announced that the company is on track to deliver its dividend guidance of 7.85p per share for the year ending 31 March 2018 and has provided guidance for a further two years, demonstrating confidence in the portfolio.”
"Asia remains an increasingly attractive source of income as improving corporate governance, record cash on corporate balance sheets and strong earnings growth fuel greater dividend payments"
Mike Kerley, Henderson Far East Income
Which investment company has owned HSBC for over 120 years?
As the industry is marking 150 years since the launch of the first investment company, the AIC asked managers to comment on some of their longest portfolio holdings and explain the benefits of the closed-ended structure for long-term investing. The longest holding we are aware of is owned by Bankers Investment Trust, which has held HSBC in the portfolio for 129 years and it is listed in their first report and accounts in 1889.
Annabel Brodie-Smith, Communications Director, Association of Investment Companies said: “Investment companies are an ideal long-term savings vehicle and it makes sense that a lot of investment company managers are also taking a long-term view of their holdings in their portfolios – with one company retaining a holding for almost 130 years.
“The closed-ended structure of investment companies enables managers to take a long-term view of their portfolio, as they don’t have to worry about inflows and outflows of money like open-ended managers. For income seekers, investment companies can store up to 15% of income received each year to boost dividends when times are tough and this is particularly beneficial for those shareholders seeking a consistent dividend over the long term.”
"Investment companies are an ideal long-term savings vehicle"
Annabel Brodie-Smith, AIC
Manager comments from the Global sectors include: Alex Crooke, manager of Bankers Investment Trust; Bruce Stout, manager of Murray International; Catharine Flood, client service director of Scottish Mortgage Trust; James Dow, co-manager of Scottish American and Alasdair McKinnon, manager of The Scottish Investment Trust.
Manager comments from the UK sectors include: Nick Train, manager of Finsbury Growth & Income Trust; Mark Barnett, Head of UK Equities at Invesco Perpetual and manager of Perpetual Income & Growth Trust and Edinburgh Investment Trust; Simon Gergel, manager of The Merchants Trust; Guy Anderson, manager of The Mercantile Investment Trust and James Henderson, manager of Lowland Investment Company. Managers commenting from the North America and Europe sectors are Garrett Fish, manager of JPMorgan American Investment Trust and Tim Stevenson, manager of Henderson EuroTrust.
Global manager comments
Alex Crooke, manager of Bankers Investment Trust said: “The first set of Annual Accounts from Bankers Investment Trust in 1889 contains a fascinating list of portfolio holdings. While dominated by water companies, railroads, breweries and government bonds, a few names stand out. The Liebig's Extract of Meat Co was the owner of Fray Bentos pies and Oxo cubes and the enigmatic Gibraltar Railway Company must have been a limited network. However, one holding from 1889 still remains in the portfolio today and I believe has been held continuously; the Hong Kong & Shanghai Banking Corporation, now simply known as HSBC.
“There are few holdings with this tenure but many other companies we have held for over 30 years. Investment trusts by their nature are suited to a longer time horizon. Investment managers are essentially just custodians for a period of time and we hope to hand over the reins with all in fine order. Longer holding periods mean lower transaction costs and the ability to benefit from a company’s strategy and products over multiple economic cycles.”
Bruce Stout, manager of Murray International Trust said: “Today’s world of commerce, industry, finance and trade may be unrecognisable to that which prevailed in 1907 when The Scottish Western Investment Company (Murray International) was founded in Glasgow with an initial share capital of £500,000, but the investment philosophy has never wavered during over a century of constantly changing and often extremely challenging times.
“‘Steel and Railways’ in North and South America represented the vanguard of progress at the beginning of the 20th century, and Murray International’s original investment portfolio had a predominately transatlantic bias too, with a heavy emphasis on the bonds and preference stocks of railroad and tramway companies.
“Fast forward 100 years, and whilst the engines of growth may have changed, the investment spirit to seek out value in emerging markets remains as vibrant as ever. Current holdings such as Grupo Asur, Unilever Indonesia and Taiwan Semiconductor have been held in Murray International’s portfolio for over 10 years. Grupo Asur is the second largest holding and operates airports in Mexico. Through its presence in popular tourist destinations such as Cancun and Cozumel, the company benefits from the continuing rise in visitors to Mexico.
“Strongly cash generative, this business is well positioned to experience stronger growth as the global leisure industry continues to expand. Although we’ve held these companies in the portfolio for more than 10 years, we continue to do so in the belief that there’s still significant growth opportunities ahead. Murray International’s closed-ended structure helps us to take such a long-term view without any disruptive influences from external events such as short-term market volatility or fluctuating capital flows.”
"Fast forward 100 years, and whilst the engines of growth may have changed, the investment spirit to seek out value in emerging markets remains as vibrant as ever"
Bruce Stout, Murray International
Catharine Flood, client service director, Scottish Mortgage Investment Trust said: “Scottish Mortgage’s longest holding has been the Swedish industrial company, Atlas Copco, which has been continuously held in the portfolio since 1995. The company is one of Europe's highest quality engineering groups. Its flagship segments are its industrial compressors and vacuum businesses and it also possesses leading positions in industrial tools, and construction and mining equipment; these are combined with a strong after sales service business.
“Atlas Copco has an excellent record of generating returns, backed by strong cash flow generation and throughout the economic cycle cost controls. It has been a strong contributor to performance, generating a cumulative return of 4,370% for Scottish Mortgage, or 18% on an annualised basis, over the more than two decades for which it has been held.
“It is a good example of the returns which are possible from committed long term holdings in strong, growing businesses with durable competitive advantages, which are run by great management teams whose time horizons are aligned with those of our shareholders.”
"Scottish Mortgage’s longest holding has been the Swedish industrial company, Atlas Copco, which has been continuously held in the portfolio since 1995"
Catharine Flood, Scottish Mortgage Investment Trust
James Dow, co-manager of Scottish American (SAINTS) said: “Scottish American’s longest continuous holding is SAP, a global software business headquartered in Germany. It was first purchased in 2004, when Baillie Gifford took over management of the trust, and it is still held today. Its software is embedded in the operations of thousands of companies worldwide and is vital to running their business on a day-to-day basis.
“What has always attracted us to SAP is its potential for long-term growth, combined with the stability of its earnings and the cash generative nature of its business model. Growth in its customer base and the use of its software have required only modest investments in capital expenditure, although the company has periodically made some large acquisitions. The result has been continuous growth in its dividend alongside growth in its earnings.
“This type of investment is fundamentally different from many traditional ‘income stocks’, such as big oil companies, where the dividend is in constant tension with the need for capital to grow. SAP’s dividends have not only grown healthily, they have also proven highly resilient over time. The ordinary dividend has increased every year since 2004, and the dividend yield on our purchase price is now well north of 4%. SAINTS’ shareholders have additionally enjoyed substantial capital appreciation over this period as the earnings and dividends have grown.
“It is a good example of the type of company the trust seeks to invest in, where there is a strong likelihood of a growing and dependable dividend. This ensures alignment with SAINTS’ own aim to deliver a growing income stream, and a dividend the trust’s shareholders can depend on whatever the economic or business climate.”
Alasdair McKinnon, manager of The Scottish Investment Trust said: “The Scottish Investment Trust has been around since 1887 and over its 131 years has weathered many market ups and downs, bubbles and busts.
“We look for unfashionable companies that can survive the down-cycles in their industry or environment - whatever the reason for them - and look to make returns when these survival qualities lead to success and recognition from the market. This requires patience - made possible to some extent by the closed-end nature of our investment trust structure.
“Though many of the companies that we held at the inception of the trust in 1887 have now disappeared or been amalgamated into larger entities through the decades, it is quite remarkable to note that we do in fact hold the modern equivalent of one of our first holdings, the Standard Bank of South Africa - having bought Standard Chartered Bank in May of 2016. We’ve held Standard Chartered for just two years to date.
“However, our longest held bank is French group BNP Paribas – which has been in the portfolio for 16 years. As contrarian investors this is a sector of some interest to us. Despite recovering from the lows of the 2008 crisis, financials, and banks in particular, remain attractively valued with high dividend yields.
“In a more settled regulatory environment after December’s Basel IV agreement, the outlook for cash returns to shareholders is now clearer. Additionally, lenders tend to benefit from higher interest rates, which improve profitability, so accelerated monetary tightening should be a positive overall. BNP Paribas is currently one of our ‘ugly duckling’ holdings.”
UK manager comments
Nick Train, manager of Finsbury Growth & Income Trust said: “Lindsell Train was appointed investment adviser to Finsbury Growth & Income Trust (FGT) in 2001. One of the first investments we made was into A.G. Barr, the maker of the wondrous IRN-BRU. This was and remains the number 1 soft drink in Scotland, making Scotland, as a result, one of the very few countries in the world where Coke is available but not the top seller.
“For decades Warren Buffett had been explaining the merits of investing in leading beverage brands – cost of ingredients very low: consumer loyalty to the brands very high. And we chose to follow his general advice by buying Barr, which is still in FGT’s portfolio 17 years later.
“The value of the shares has gone up nearly nine-fold since then, but the statistic I like is this: if you compare Barr’s 2017 dividend payment to our average book cost for the holding we are now earning a dividend yield of about 19% on the original investment. Only long-term equity investing can do this for you and closed-end investment trusts are some of the best designed vehicles for long-term equity investing.
“Barr has recently cut the sugar content of IRN-BRU so you have no excuse not to keep supping the nectar. We’ll see what that does for the shares over the next 17 years.”
Mark Barnett, Head of UK Equities at Invesco Perpetual and manager of Perpetual Income & Growth Investment Trust and The Edinburgh Investment Trust said: “I have been the portfolio manager of Perpetual Income and Growth Investment Trust for almost twenty years, having first taken the helm in 1999. During this period specific holdings and sector weightings have changed, though one constant has been my focus on finding companies that I believe will provide growing levels of return to investors.
“If I look back on my investments over the past two decades, one clear constant is the tobacco sector. The company has been distinctly overweight the sector for a number of years as this area of the market has proven itself proactive in its response to both shifting consumer trends and an increasingly hostile regulatory environment - remaining a rewarding source of income for the portfolio in a changing investment landscape.
"If I look back on my investments over the past two decades, one clear constant is the tobacco sector"
Mark Barnett, Perpetual Income & Growth Investment Trust and The Edinburgh Investment Trust
“Advertising restrictions, smoking bans and stigma could have spelled the end of a less resilient sector, but through consolidation, price hikes and the introduction of new technologies, the sector continues to deliver both earnings and dividend growth to shareholders. Indeed, British American Tobacco (BAT), a major holding, has been a strong income generator for the company over a number of years.
“A key advantage of holding cash generative stocks such as BAT within the investment trust structure is the company’s ability to store up to 15% of the income each year in reserve. This builds an income ‘cushion’ – helping to ensure the smooth payment of dividends in years where income may be harder to generate. The board of directors controls the company’s dividend per share with this in mind. Incidentally BAT is the portfolio’s largest holding at present and recently issued a 15% rise in its dividend for 2018. With shares in the sector trading at attractive valuations and continuing to provide solid income to shareholders, the sector remains a dominant theme in the portfolio.”
Simon Gergel, manager of The Merchants Trust, which has held Royal Dutch Shell for over 20 years said: “Royal Dutch Shell is the biggest holding in the portfolio. Our investment case in Shell has been based upon its ability to generate substantial cash flows over the oil price cycle, which allows the company to pay a high and progressive dividend to shareholders. Shell has been one of the best investments in the portfolio over the last two years, with a total return of around 90%.”
Guy Anderson, manager of The Mercantile Investment Trust said: “The long-term capital structure of investment trusts means one can invest in lesser-known companies where the shares are less liquid. If such companies then deliver growth as they attract the interest of a wider pool of investors, they may attract a higher rating, thereby enhancing the return to shareholders who bought them earlier in their life cycle. One such smaller company which Mercantile has held for more than 20 years is Vp plc, a specialist equipment rental group operating in a number of markets mainly in construction and infrastructure.
“Its leadership and management continuously develop the portfolio to concentrate on establishing market leadership in specialist, high return sectors. It is an innovator within its chosen markets and takes a long-term view to create substantial value for its shareholders, with around half of the shares being owned by the chairman. Over the last 20 years, it has delivered a total shareholder return of over 2,400%, far in excess of the broader market.”
James Henderson, manager of Lowland Investment Company said: “Wadworth has been in Lowland’s portfolio since 1968. The company is a brewery and pub company based in Devizes in Wiltshire, which started in 1852. It is a family controlled company run on a long-term basis and the brewery produces quality beers such as 6X and has a quality estate of managed pubs which gives it a substantial asset value. The value of the holding has increased 100 times and there have been dividend payments along the way as well. It is the only unquoted operating company in Lowland’s portfolio and it is valued at a discount to the most recent substantial traded price. It has been a very worthwhile long-term holding for Lowland.”
North America and Europe sectors manager comments
Garrett Fish, manager of JPMorgan American Investment Trust said: “There are over 20 holdings in the portfolio today that we have held for 10 years or more, which include Microsoft, Apple and Graco. While the majority of the longer-term holdings are within the large-cap space, there is also good representation from small-caps. The all-cap approach we use in this trust affords us the flexibility to hold on to names, even as they move up the market capitalisation spectrum.
“Microsoft is an example of a large-cap stock that has consistently featured among the largest overweight positions in the portfolio. The company has successfully grown its business all round and has done so within the context of a rapidly changing industrial landscape. Today, not only have the firm’s legacy assets, such as its license software business, held up well, recent earnings highlights included Microsoft’s strong execution in its cloud computing offering, Azure.
“Apple is another example of a longstanding overweight position within the portfolio. While Apple has delivered strong performance over the last decade, its shares remain attractively valued and the next upgrade cycle is expected to be the largest yet. Apple has been at the forefront of innovation over the past decade and disrupted its industry through the introduction of products such as the iPod, iPhone and the iPad.”
Tim Stevenson, manager of Henderson EuroTrust said: “We have held Sodexo in the fund for 20 out of the last 25 years and it is an investment that we continue to view favourably. The contract catering and facilities management industries have grown strongly for a number of years, driven by the increased penetration of outsourced solutions. Put simply, a company such as Sodexo is a far more efficient supplier of services than a government department, a school or a company focused on other core activities; this provides a key raison d’etre for the business.
“For this reason, Sodexo (and its peers Compass and Elior amongst others) have been steadily gaining market share and benefitting from the structural growth that this provides. When we look forward and try to ascertain the prospects for the business over the medium term, we see very little reason to believe that their competitive advantage will be eroded; the company is also investing heavily in technology and other efficiency measures in order to solidify their market position.
"We have held Sodexo in the fund for 20 out of the last 25 years and it is an investment that we continue to view favourably"
Tim Stevenson, Henderson EuroTrust
“There have been periods when the business model has come under a bit of pressure and times when the company have looked to invest in the future health of the business at the expense of short-term profits. We tend to look through these short-term issues and focus on the long-term attractions of the industry and the business model. This demonstrates one of the key advantages of the closed-end investment trust structure; a stable pool of capital allows you to stay invested for the long term in your high conviction ideas rather than be forced sellers or buyers as money flows in and out as would be the situation with an open-ended product. A long-term fixed pool of capital is perfect for long-term investors.”