Ian Cowie reflects on Ukraine and how it could affect your investments.
"No fewer than 24 investment companies survived both World Wars and continue to see their shares traded on stock markets today. One of the ways they were able to achieve this remarkable longevity - despite historical violent conflict even worse than seen in Ukraine so far - is that investment companies diminish risk by diversification."
War destroys human lives and wealth, so it is no surprise to see the Russian invasion of Ukraine shock global stock markets. But there is no need for your pension – or other financial objectives – to become collateral casualties of this tragic clash between dictatorship and democracy.
Investment companies offer several tried and tested ways to minimise the risk of unexpected events. The past is not a guide to the future but some understanding of it might help us to put our present worries into perspective.
Unlike any other form of pooled fund - such as unit trusts or exchange traded funds (ETFs) – no fewer than 24 investment companies survived both World Wars and continue to see their shares traded on stock markets today. One of the ways they were able to achieve this remarkable longevity – despite historical violent conflict even worse than seen in Ukraine so far – is that investment companies diminish risk by diversification.
The principle is the same as the homely advice not to put too many eggs in one basket. Investment companies can spread individual shareholders’ money over many different companies, countries and currencies to reduce our exposure to setbacks or failure at any one of them.
Investment companies also enable individual shareholders to share the cost of professional fund management. This can give us access to specialist sectors we may know little about, plus exposure to economies on the other side of the world and stock markets that trade while we are asleep.
Coming down from the clouds, how does all that work in practice for this long-term equities enthusiast and fan of investment companies? What can it do to preserve our capital and help us to achieve growth and income at a time of great uncertainty?
Worldwide Healthcare (stock market ticker: WWH) and Polar Capital Technology (PCT) are two of my longest-held investment companies and both are among the top ten most valuable holdings in my 50-stock portfolio. Both have done very well over more than a decade for this small shareholder, despite the fact that I know next to nothing about how vaccines are created or how cloud technology can cut businesses’ computing costs.
Ignorant of such matters though I am, I can see that demand for healthcare and digital technologies is likely to grow in future, regardless of what happens in Ukraine. WWH and PCT offer convenient and cost-effective exposure to both long-term trends.
Just outside my top ten by value is another investment company that demonstrates the value of the geographical diversification that can be achieved by investing internationally. Most European share prices fell sharply on the day that Russia invaded Ukraine but Vietnam Enterprise Investments (VEIL) actually went up.
More importantly, VEIL has delivered double-digit total returns over the last difficult year as deteriorating relations between America and China have caused export trade to be displaced from the latter to Vietnam. JPMorgan Indian (JII), where I first invested in 1996 and which became my first ‘ten-bagger’, or share whose price soared tenfold, is also benefiting from an ill wind sweeping across China.
Closer to home, the British Prime Minister, Boris Johnson has said the conflict in Ukraine demonstrates the importance of Europe becoming less dependent on Russian gas and oil. Alongside pre-existing international commitments to reduce carbon emissions, this is likely to stimulate investment in renewable energy.
That’s another area where this arts graduate lacks the scientific knowledge to make informed decisions but I am happy to enjoy exposure to this important economic and ethical trend through several investment companies. Ecofin Global Utilities and Infrastructure (EGL) is my most valuable stake in this theme, with its biggest underlying asset being NextEra Energy - one of the largest renewable energy producers in the world.
My investment in the sterling-denominated shares of the self-descriptive US Solar Fund (USFP) is not far behind. Back in Britain, I also own shares in Gore Street Energy Storage (GSF), which invests in industrial-scale batteries to help cope with inevitable fluctuations in solar and wind power. In plain English, these batteries should help to keep the lights on when the sun don’t shine and the wind won’t blow.
Interestingly for income-seekers, EGL currently delivers a dividend yield of 3.8 per cent; USFP yields 5.8 per cent and GSF yields nearly 6 per cent. It is important to beware that dividends are not guaranteed and can be cut or cancelled without notice.
As has been discussed here before, investment company shareholders benefit from these shares’ ability to smooth out some of the shocks of stock markets, by building reserves in good years to sustain dividends in bad years. If that sounds somewhat theoretical, then bear in mind this unique characteristic of investment companies has enabled 17 of them to raise dividends every year for two decades or more, earning the title of ‘Dividend Heroes’, and seven have achieved this remarkable feat for 50 years or more.
None of the above is intended to diminish the human tragedy unfolding in Ukraine. However, people investing with the aim of paying for house purchase, school fees or retirement in the United Kingdom – among myriad other objectives – do not need to see our dreams dashed by the military ambitions of a foreign dictator. Investment companies can help to deliver income and growth in an uncertain world.
