For this week, however, let's keep it simple and focus on the patience premium as the reward for buying a portfolio of shares in good-quality companies at what look like decent prices and being patient - letting the merits of the companies and their ability to churn out growing profits and dividends do the rest.
The Bearbull Income Portfolio is now sufficiently mature to illustrate this phenomenon nicely. Arguably it takes any investment fund with a long-term aim at least 10 years to get into its stride. In its present guise, the Bearbull income fund has been around for almost 16 years and is starting to show a remorselessness in its ability to generate income.
Okay, I know the previous sentence is a hostage to fortune and in the real world of chaotic dynamics, tipping points and feedback, bad things happen more often than our instinct or conventional finance theory predict. Even so, the way in which its distributed income has grown means that some really nasty things must happen to return the income fund to square one or thereabouts.
The table shows the details of the fund's pay-out for the first half of this year compared with 2012 and 2013. The 11 per cent increase in the distribution on last year's first half is the cumulative result of switching out of shares in iShares Markit iBoxx £ Corporate Bond fund (SLXX) and into shares in touch sensors maker Zytronic (ZYT), of the extra interest derived from the cash received from Vodafone (VOD) following the sale of its US interests and of rising dividends from the rest.
| Income Portfolio distributions | |||||
| Year ended | Pay out (£) | Change | Fund yield (%) | Cumulative pay-out (£) | |
| 2012 | 1st half | 4,741 | -16% | 4.1 | 100,889 |
| 2nd half | 5,224 | 5% | 4.4 | 106,113 | |
| Total | 9,965 | -6% | 4.3 | ||
| 2013 | 1st half | 5,758 | 21% | 4.4 | 111,871 |
| 2nd half | 6,476 | 24% | 4.5 | 118,347 | |
| Total | 12,234 | 23% | 4.4 | ||
| 2014 | 1st half | 6,369 | 11% | 4.2 | 124,716 |
The drop in income compared with last year's second half is largely due to the timing of pay-outs from the fund’s newish holding in property-related debt investor Real Estate Credit Investments (RECI), which made three of its four distributions in the second half of 2013. The final one of those was on New Year’s Eve and depending on whether or not this year’s equivalent falls into 2014 will have a big impact on whether the Bearbull fund’s pay-out for 2014 tops £13,000 a year for the first time. For that to happen, horrors elsewhere must be absent, too - the most likely being a cut in the dividend from struggling bookmaker Ladbrokes (LAD).
Assuming the £13,000 target is achieved - nice, though hardly crucial - then the distribution would be over 50 per cent higher than five years ago and approaching 120 per cent more than 10 years ago. That a starting pool of capital of £100,000 could now be generating this much income while adding to its real value - the fund’s value now tops £300,000 - is really what powers the notion that the income-generating capacity can now drive on remorselessly.
True, for this to happen, I must continue to find shares in good companies at decent prices. The need is not pressing. The fund is fully invested and, with one exception, no holding is close to its stop-loss level. That exception is Ladbrokes, where - at 152p - the price is well below the stop-loss trigger. That I have done nothing about it is partly due to the absence of credible alternatives.
If you want proof - well, a prima facie indication - that the London equity market is fully valued then the shortage of shares on acceptable ratings provides it. Maybe the market's rating - at 21 times latest normalised earnings - is not hugely expensive compared with its average since 2001 of almost 20 times. Even so, it would take a marvellously persuasive argument to convince me to buy anything on that level.
Equally telling is the dearth of high-yield candidates. Run a screen for London-quoted companies whose shares yield at least 4 per cent on a dividend covered at least twice by earnings and not a lot appears. Exclude the investment trusts (I don’t need to hire a fund manager) and the venture capital trusts (I don’t understand them) and we are left with a clutch of property companies, non-life insurers plus the ‘usual’ candidates - the likes of J Sainsbury (SBRY), United Utilities (UU.) and Intercontinental Hotels (IHG).
True, there is one newcomer, sweeteners processor Tate & Lyle (TATE), whose shares – coincidentally – we are tipping as a buy this week. In fact, I have always been a bit sceptical about Tate's transformation from a commodity sweeteners producer into an added-value food ingredients provider. Still, its presence as a high-yield candidate brings an attraction that its shares have not offered for quite a while. Maybe it's time to see what range of figures the Bearbull valuation spreadsheets put on the shares.
