What is the DNA of investment companies that keeps them successful for centuries - when their modern descendants, such as unit trusts, pension fund managers and exchange-traded funds, come and go within decades?
Investment company history (all 150 years of it) suggests the answer is the Victorian and Edwardian insistence on a better-than-average income, combined with the capital security of international diversification. Initially this philosophy was spread throughout the empire; today it is everywhere.
Shareholders demanded simple structures to achieve this: a board of directors responsible to shareholders for meeting their needs, and an investment manager directly responsible to the board for achieving these investment aims.
These investment objectives were met initially through bonds, but as the years went by equity investment first became respectable and then necessary. However, the need for regular annual income never went away, and so while capital growth was appreciated by managers and investors alike, it never became the be-all of investment policy. That remained an annual income – itself a growing income to compensate the risk involved in equity investment.
This strategy has paid off in the number of AIC dividend heroes – investment companies that have increased their dividends every year for more than 20 years consecutively, and some for even longer.
Income and compounding
Recent research, discussed in this column over the past two issues, shows how vital this is.
The number of companies that have been successful in terms of producing above-average capital growth is a very small percentage of the total, so finding them is something of a lottery.
But income from treasury bills is regular, certain and compounds quickly, certainly compared with the irregular dividend income and capital growth from the typical company. This is where the planned and higher annual income of an investment company can pay off for the patient investor.
The anti-Brexit portfolio in Table 1 shows an expected annual income based on forecast dividends that are close to those of the FTSE All-Share index. Although one month is nothing to go on, the overall performance shows a good beginning both in percentage and cash comparisons.
Globalisation and regionalisation have worked well for the world since 1945, and Brexit appears to be a return to a simpler and less profitable world. This portfolio is based on a belief that Brexit is bad for Britain.
These figures will be updated monthly so that this belief can be tested over the coming year.
