Stability of income underpins stable capital values, and this is the absolute difference between investment companies and open-ended funds.
Because investment trusts were created well before computer-generated theories of investment behaviour, managers developed their own style of investing.
Like Bill Gross in his glory days at Pimco, they identified bonds with higher yields but in reality lower risk, and did the same with equities when they became respectable in the early 20th century. Portfolios with above-average and recurring income generate high compounded returns; this is the only sure way to make capital gains.
It is also a way of avoiding market disasters. No method of investing in stock markets can avoid human and market panics, dishonest managers, or physical disasters that destroy assets – whether through wars, volcanoes or floods. This is what ‘risk’ really means. Compare and contrast with the near certainty that the UK or the US will eventually repay their debts, albeit via an inflation-depreciated currency.
But no risk also means no reward, and the object of investment is to balance risk against reward. Investment trusts concentrating on stable and growing income is the most certain way for the private investor to achieve that end, with some of the AIC’s investment heroes achieving more than 20 years of annual increases in their dividend payouts.
Appreciating economic reality
A report from the Cabinet Office, leaked to the press at the end of March, suggested that the economists’ analysis of a no-deal Brexit was all too true – an immediate depreciation of sterling, a 10 per cent increase in food prices, and further slowing of GDP growth compared with our neighbours, in addition to the loss of more than 2 per cent (relative to non-Brexit levels) seen since the June 2016 referendum.
This may have been intended to put pressure on the cabinet to vote for the prime minister’s withdrawal deal, or simply to protect civil servants when Brexit turns out to be closer to the predictions of economists than those of Brexiteer believers.
Because the referendum succeeded on the basis of lies, and the negotiations for exit quickly turned into nationalist, anti-foreigner sentiment, there will be a political reckoning. That remains the case whatever happens: Brexit or no Brexit; an economically successful Brexit, or a return to the economic ignominy of the immediate post-war years – which, of course, was the reason the country joined the EU in 1973.
But some are convinced that leaving the EU means a new economy and prosperity for Britain. Since the future can never be foretold, but only dimly predicted, Brexiteers should back their beliefs by buying investment trusts concentrated on British assets.
A recent AIC release identified 22 trusts on track to achieve dividend hero status – 20 consecutive years of dividend increases. All have between 10 and 20 years of regular dividend rises, and many of them specialise in smaller UK growth companies.
