Given the same mandate, same manager and same period of investment, trusts outperform all competitors; this outperformance margin is tiny, but it is all that is needed where compounded returns and the world of stockmarkets are concerned.
Smart beta and the efficient market hypothesis do not concern their managers. They are instead focused on ensuring the companies they hold have the management, products and services needed to see off all competition.
British investment trusts can hold back profits ingood years, as capital and revenue reserves, and pay them out as dividends in bad years. Every trust in Table 1 has increased its annual dividend for at least the past 30 years.
Assuming £10,000 had been invested on 31 December 1996, shareholders would by now have received the bulk of their capital back as dividends – as shown in the penultimate column of the table. Dividend yields for many of the trusts remain low in absolute terms, but this statistic shows the power of consistent growth over the years.
Better yet, these improved dividends have increased the attractiveness of the shares. The majority have increased by more than three or four times, with some rising even further. So investors have not only had much of their original capital repaid by dividends, but have also seen that capital multiplied in value several times over.
Of course, these results do not translate into instant riches, but only fools expect that from stockmarket investment. What it does do is cement long-term savings into real wealth for retirement, and it does so through the only practical strategy of investment – investing for regular, and preferably growing, income. Other methods have been tried – and most have failed, for even successful traders within bank-dealing rooms often lose out.
Income or capital – the choice
The table reiterates another lesson. Investors can have income, or capital growth. They cannot usually have both. This is shown by the results of the two Baillie Gifford trusts. Scottish American is an equity income fund and, as Table 1 shows, has done significantly better than most others in dividend income. However, the shares have not appreciated in value nearly so well. Scottish Mortgage, on the other hand, has not only been an early advocate of technology, but has held onto its shares when conventional wisdom would have sold them. Its lower dividend yield is in part a reflection of the capital growth it has enjoyed. The lesson: if you want it now, you cannot have as much in the future.
Most companies are under threat from artificial intelligence, and commentators such as McKinsey believe that nearly half of existing jobs will have gone in the next 20 years or so. The investment environment has already changed, but it is now changing more and faster, and in ways that are hard to imagine. Managers must have the freedom and flexibility to make difficult or contrarian decisions that will stand them well over the long term.
