Ian Cowie explores overlooked investment company sectors.
What a difference a year makes. Last summer American technology shares led global stock markets in recovery from the coronavirus crisis, largely because they offered great hopes of capital growth. Few folk worried about those that paid low or no dividends when both inflation and interest rates seemed set to remain subdued.
Since then, both inflation and interest rates have risen around the world, partly because of quantitative easing (QE) and other measures intended to prevent Covid causing an economic slump. But a bad situation has been made much worse by Russia’s invasion of Ukraine, with renewed lockdowns in China adding to uncertainty. Now global stock markets have fallen out of love with ‘jam tomorrow’ stocks.
Financial fashions can change faster than trends in clothes and music. China was one of the fastest growing economies in the world before it was first to identify Covid. New York’s technology index, Nasdaq, led valuations skyward last summer when just five tech shares comprised nearly a fifth of the value of the Standard & Poor's 500 Index (S&P 500), a broad measure of the biggest economy in the world.
Then ‘Awful April’ this year wiped 13 per cent off the value of the Nasdaq, its worst performance since the global financial crisis in 2008, with this index ending last month 21 per cent lower than it began 2022. That all added up to a painful experience for followers of financial fashion but not all investors or markets suffered the same fate.
For example, the FTSE 100 index of Britain’s biggest shares ended ‘Awful April’ marginally higher than it began the month and this year. Dividend income often supplemented shareholders’ returns.
Despite extremely difficult economic conditions, the AIC's UK Equity Income sector ended April with positive average total returns of 3.7 per cent over the previous year and 27 per cent over the last five years, according to independent statisticians Morningstar. That followed a period of relative underperformance, when some international investors shunned the UK after the Brexit referendum in June 2016.
This raises the important point that unloved and overlooked investment sectors can provide good opportunities for long-term investors seeking growth and income. It also demonstrates the importance of diversification to diminish our exposure to unexpected events.
For example, I have been a shareholder in Polar Capital Technology (PCT) for more than the last decade, during which time it delivered total returns of 421.8 per cent. Despite such strong performance, PCT currently trades at a discount to net asset value of just over 14 per cent.
Meanwhile this £3.13 billion investment company provides professionally managed exposure to a portfolio that is led by Microsoft (MSFT), Apple (AAPL) and Alphabet (GOOGL). Despite short-term stock market fluctuations, I expect many of us will continue to need the goods and services sold by these businesses – such as the MacBook Air I am writing this on now – and I intend to continue buying PCT.
Geographic diversification is added to my ‘forever fund’ by investment companies including JPMorgan Indian (JII) and Vietnam Enterprise Investments (VEIL). Both have gained to some extent from export trade being displaced away from China, as a result of its Covid problems and trade war with America.
VEIL achieved total returns of 120.4 per cent over the last five years and 18 per cent over the last year, according to Morningstar. No wonder they say it’s an ill wind that blows no good. Even so, VEIL shares remain priced 20 per cent below their NAV.
Sad to say, JII delivered returns of just 10.5 per cent and 11.9 per cent over the last five and one-year periods but will always have a place near this investor’s wallet because it was my first ten-bagger. I paid 63p in June 1996 for shares that surged through £6 years ago and currently trade around £7.70 at a 20 per cent discount to NAV.
Elsewhere in Asia, the Japanese smaller companies specialist Baillie Gifford Shin Nippon (BGS) has suffered even more over the last year, with returns of minus 38.5 per cent. Like JII and VEIL, BGS pays no dividends.
As mentioned earlier, higher inflation and interest rates mean many shares that yield low or no income have become relatively unpopular. Oil and gas trading at or near record peaks add to India and Japan’s current woes because they have little of their own.
All these factors have caused formerly high-flying shares to fall from favour over the last year. But nobody knows what will happen next year or further ahead than that and this long-term investor is more interested in the future than the past.
"A global portfolio of investment companies – diversified over many companies, countries and currencies – should minimise risk and maximise returns. In a very uncertain world, that should help me protect my ‘forever fund’ – whatever happens next."
