Tom Stevenson: the key to a resilient portfolio

During 2011, as I pointed out last week, the difference between investing in the US stock market and its counterpart in India was close to 40pc in dollar terms – the companies you picked within those markets may have been rather less important.

Sectors matter too – 2011 was a good year to be invested in businesses that are less susceptible to the ups and downs of the economy. Companies supplying goods and services that people are obliged to spend money on, like food, heating and phone bills, did better than those in more cyclical sectors.

As well as where they are and what they do, however, companies are also distinguished by how big or small they are and this too was a key factor in stock market performance last year, although one that gets less attention than the other two.

I was reminded of the size effect this week by the publication of the RBS Hoare Govett smaller companies (HGSC) index. It's the 25th edition incidentally, so happy anniversary to the London Business School's Professors Dimson and Marsh who have been gamely crunching the numbers since 1987.

After two years of out-performance, investing in smaller companies hit the buffers last year. The performance of the HGSC index (which includes the bottom tenth of the stock market by value) had a total return including dividends of -8.8pc. That compares with -3.5pc for the FTSE All Share index. By contrast, the total return of the FTSE 100 index of the biggest companies in the market was only 2.2pc down.

Not only was this a break with the performance of the previous two and a half years since the market turned up in March 2009, it was also a reversal of the long-term story. Although the index was first published in the 1980s, the data goes back to 1955 and over the full 57-year history of the series smaller companies have enjoyed a 15.1pc annualised gain, a full 3.2pc better than the All Share index.

That might not sound a great deal, but a 3.2pc difference, year-in year-out for more than half a century, represents a massive difference in total return. Over the long haul, investors have been amply rewarded for investing in riskier smaller companies.

It is never quite as straight-forward as the long-term averages might suggest, however. As the performance of smaller companies since the market low in 2009 has shown, the smaller company premium is heavily influenced by some short periods of explosive growth. At other times larger companies can be in vogue for years on end.

In this regard, the market high of 2000 was a watershed moment. In the 13 years from 1987 to 1999, larger companies did better than smaller companies (another example of a stock-market anomaly being understood and promptly disappearing!). Since the top of the dot.com bubble, however, smaller companies have come back into favour – since 2000, as the chart shows, the FTSE 100 has managed just 1.5pc a year against 5.7pc for the HGSC index and over 7pc for the FTSE250.

And there is one really striking outlier in the figures – the AIM market, which includes mainly smaller companies but which has nonetheless been a terrible performer over the past 12 years, has fallen 7.3pc a year in total return terms. In fact it's been a dog over the whole 25 year period; that may be related to the sector composition of the index or may just be a reflection of the quality of companies in the junior market. Who knows?

The key question is whether there is any practical use for investors in this data. On the face of it, the numbers seem to provide statistical support for the old adage that "elephants don't gallop". This has always been used as a justification for investing in smaller companies, the argument being that it is much harder for BP to double in size than, say, Caffe Nero. While that is true, it may also be the case that the long-term out-performance of smaller companies is simply fair recompense for the fact that they are more volatile, more exposed to the vagaries of their domestic economy and more expensive to deal in.

In the same way that spreading your investments between different countries and sectors makes sense, it is hard to argue against having a balance of big and small in your portfolio.

Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at
@tomstevenson63

View the original article here

Tom Stevenson: Income, not growth, is once again the main driver of returns

I looked for companies, usually small ones, with the potential to increase their earnings quickly and recommended buying them if that growth was not already "in the price".

It was a fairly mechanical process, which involved comparing the valuation of a company's shares with its profits growth to arrive at a measure we called the PEG, standing for Price Earnings Growth. Basically, a low PEG was good, achieved via high growth or a low valuation or a combination of the two.

You don't read much about PEGs these days for the simple reason that while cheap valuations are 10 a penny, high growth is a great deal scarcer.

The growth that we had got used to during the 1980s and 1990s was – to a larger degree than we thought at the time – a product of progressively cheaper money, consequently rising house prices and ever-increasing debt. That world has disappeared and with it, for the time being, the environment in which anyone would think seriously about launching a publication such as Investing for Growth.

The world investors find themselves in today is very different, at least in the developed world. A low-growth environment in which rapidly rising earnings are the exception. It is a world that investors before the 1980s would easily recognise, one in which income, not growth, is the principal driver of returns.

When investors come to expect double-digit capital gains each year, it is unsurprising that they are uninterested in the extra few percentage points of return chipped in by a company's dividend. It's nice to have, no more. But those kinds of super-charged returns have in recent years been rapidly wiped out by similar-sized falls so that the net gain after a so-called "lost decade" has been negligible.

Over very long periods, almost all the gains from investing in the stock market can be attributed to the reinvestment of dividends. We forgot this in the Investing for Growth years.

Something else we forgot during the low volatility years of what has been called the Great Moderation is that dividend income is a great deal more stable and predictable than economic growth, company profits and so share prices. Company bosses will do almost anything to avoid cutting their dividend because they tend to pay for it with their jobs.

Another thing we are going to have to get used to in our low growth but volatile world is persistently low interest rates. This environment of paltry returns from both cash and government bonds is another reason why investors are going to become increasingly attracted to companies able to offer a high and sustainable income.

For as long as inflation is still a problem, equity income also provides one of the few ways of generating a real return in excess of the cost of living.

The generation of that high and sustainable income is furthermore an indication of a company's quality. It is no coincidence that some of the most attractive dividend yields are currently being paid by the big multinational companies that are also most exposed to the places in the world where there is actually still some decent growth, the emerging markets.

Dividend income, unlike that from fixed interest securities like bonds, tends to grow over time. For the past 50 years or so that has meant investors have been prepared to accept a lower ongoing yield. But today many blue-chip companies are paying a higher yield on their shares than their bonds. High and growing income is a powerful combination.

With the developed world's baby boomers edging towards retirement, the demand for income-generating investments can only increase. If I were looking to relaunch that newsletter today, I can't help thinking it would be called Investing for Income.

Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at
@tomstevenson63

View the original article here

Tom Stevenson: 2012 is going to be dark but sell would be a mistake

Once printing presses are started, because they certainly will be, rising prices are a prediction safer than the end of the world.

If 2011 was the year where the markets the risk of sovereign debt on the periphery of Europe revalued, I fear that 2012 may mount the suite in the main countries which, until now, been seen as a refuge.

The show has begun, with yields on the public debt in countries such as apparently secure as the Belgium, Austria, Netherlands and the France with a port separation company remaining in the storm, Germany.

The good news, as is the case, is that this last phase of the financial crisis has the sensation of a late game. If a market crisis is needed to convince the extremists in Europe to accept that quantitative easing alternatives have been exhausted, this, finally, perhaps.

Two consequences of impacts of the contagion of the base are already underway. In Asia, investors lose faith in Europe and, in particular, in the euro area.

One of the surprising aspects of all disorders market this year has been the relative calm of the currencies of the world market. It is difficult to see the euro continues to hold its own as the crisis deepens. With time, a weakened euro will make European assets attractive to investors outside the region, but it is a way off yet.

Second, the sovereign crisis is starting to spill over into the real economy in the form of a credit crunch renewed. The banks are unwilling to lend to each other, and still less to companies and individuals, in an echo worrisome 2007 entry.

Indeed, the European Central Bank seems to have no problem persuading banks to deposit funds with it; they are the tail to park their surplus cash somewhere they can really trust. We all know what happened to the last time the credit markets closed this way.

The combination of the intransigence of German in the intervention of non-sterilized BCE, the reasonable desire by the banks to recapitalise by less loan rather that to sell shares at lower prices and a dogmatic on the austerity emphasis, austerity, austerity condemned Europe to the recession in the first half of next year.

Identification of the profits of the business and the pressure to lower the lower government bond will create a backdrop for equities test.

Then, how investors should look to survive 2012?

Intuitively, reasonable solution selling and waiting for the horrible things to go, is better in theory than in practice because, as the oscillations in a sense from 1975 to 2009 shown always, it is much easier to get the market to reinstate in time.

Calendar of the market in this way is not a feasible proposal; the market will turn when prospects are dark and psychological barriers to reinvesting more great.

A better way to get through the next 12 months is to position your investments defensively and with an eye on the recovery that will certainly follow.

Fortunately, the two approaches in the end, in some cases, in the same place.For example, the area less affected by the crisis in Europe, Asia, is also best to thrive when it is finally over.

The likely speed of recovery and the probability of which pass to the first point of Asia to a higher weighting in the region as most investors have today.

Closer to home, he there has never been better time to focus on quality - companies with the power, the strong balance sheets with little or no debt, exposure to these assessments made Beaver the rapid growth of emerging markets and are the place safe.

Yields above into the actions of many blue-chip companies will examine also particularly compelling if markets all weaken further. Their obligations look much safer than many Governments from now too.

Beyond the crisis of the next year, I expect that a significant risk of tail will be the bogeyman of the Germany, inflation. The difference between the yields of bonds linked to inflation and nominal, said deflation is the real concern, and in the short term, it may be. But once the printing presses are started, because they certainly can be, the price increases are a prediction safer than the end of the world.

Tom Stevenson is a Director of investment at Fidelity Investments in the world. The views expressed are his own. He tweets at @ tomstevenson63

View the original article here

Tom Stevenson: Four average investors can protect themselves against the loss of company reputation

"A significant risk for investors, is that companies like BSkyB are not always in control of their own risk" Photo: Reuters

With the news of the world complete editorial staff, investors in the satellite television channel has become innocent victims of a spectacular piece of the mismanagement of crisis - by another company.

They should not have taken to the free, however. Sometimes events come out of the blue but not these. It is act decisively, accept responsibility or in fact one of the things that someone with a life in the newspapers would have understood a minimum five years since the telephone hacking scandal response outbreak, five years during which News International has failed to take control of the story.

As Warren Buffett, it can take to build a reputation for 20 years and only five minutes to ruin it. Reputation risk is one of the greatest threats a company faces and, therefore, one of the most important things for an investor to assess. The problem, however, is that, while it is easy with hindsight to see what damage was done to a reputation, it is much more difficult to measure the extent to which a company is or is not in control of his public image.

There are at least three risks that should take account of the investor. Firstly is the measurement in which customers vote with their feet at the first breath of irregularity. Finally, Rupert Murdoch acted because it has the (correct) judgment that revenues would evaporate - because readers boycott paper and advertisers do not want to be associated with such a tarnished mark.

Arthur Andersen was found to its cost, for a professional, business services, the perception of integrity is the greatest asset of the firm. The accounting firm has grown from four great to annihilation in a blink of eye in 2002 because customers walked. Unfortunately, it is not a mere correlation. At the same time Enron was leaving Andersen history, Shell was shaken by the revelation that it had overestimated its reserves of oil. Today, few would associate Shell with this episode.

Another key for investors risk is that the companies (such as BSkyB) are not always in control of their own risk. Last year, BP has found that when oil ran aground on the beaches, indifferent America if the fault lay with the British company or Transocean, its subcontractor of drilling. BP has paid the price. In the same way Walmart may not have used illegal immigrants as cleaners, or even known about it, but that did not prevent further the Distributor for the forfeiture of its supplier by the Government.

A third risk is political. The Gulf of the Mexico a lot of water and he has recovered from the Deepwater spill with surprising ease. But the political capital to win a reflex ban offshore drilling in America was too tempting for politicians. This meant that the rest of the industry investors spilled BP disaster. This type of collateral damage is common. A striking example of the recent has been the stagnation in all areas of the price of the shares of Chinese companies listed on the U.S. list after a handful of allegations of fraud for large projects such as those launched against Sino Forest, a Chinese lumber company. After all, it is never a rotten Apple is?

Only can do you to protect yourself from this kind of impact reputation? Four things. Firstly and obviously, ensure that you are diverse. A fall 50pc price is a disaster if it is the only one you own. But if the stock is one of the 50 in a portfolio, the damage could hardly be noticed. Second, make sure that you invest in companies which have set the roof while the Sun was shining again. Ten years ago, Coca Cola face banned across Europe after an outbreak of poisoning cases. Less than a year, it is the largest beverage sales in the area again with good will and trust, that he had accumulated over the years. Thirdly, talk to suppliers and customers of the company. The rumours that I wrote about last week can provide an alert vital reputation risks to come.

Finally, walk towards the blow-ups as soon as it is deemed that it is safe to do so. BP has been a great investment for anyone brave enough to look through the crisis.

tomrstevenson@fil.com

Tom Stevenson is a Director of Fidelity International investment. The views expressed are his own.

Twitter: @ tomstevenson63

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.