It was a slight disappointment that the income portfolio's distribution was marginally lower than 2014's (see table below and
). That said, it was still 37 per cent higher than the distribution for 2012, after which it surged to £13,000-plus, a level from which it's unlikely to fall far in 2016 - and hopefully not at all.
| Income Portfolio distributions | |||||
|---|---|---|---|---|---|
| Year ended | Payout (£) | Change | Fund yield (%) | Cumulative payout (£) | |
| 2014 | 1st half | 6,369 | 11% | 4.2 | 124,716 |
| 2nd half | 7,395 | 14% | 5.2 | 132,110 | |
| Total | 13,763 | 13% | 4.7 | ||
| 2015 | 1st half | 6,236 | -2% | 4.4 | 138,346 |
| 2nd half | 7,432 | 1% | 5.1 | 145,778 | |
| Total | 13,668 | -1% | 4.7 | ||
One reason to hope the payout can be boosted this year is that in late December I sold half the portfolio's holding in touch screens maker Zytronic (ZYT). By then, the stock's yield had dropped to 2.8 per cent as the price motored ahead. Locking in guaranteed profits on the fund's investment in Zytronic thus seemed sensible, especially as the share price seems to have outran the company's improved performance (see Bearbull, 31 December 2015). Expect to see the company's market value and its underlying value converge in the months ahead, which is another way of saying that the share price may well be weak.
Still I had good reason to be thankful for the portfolio's holding in Zytronic during 2015; without it, the portfolio would have posted only nominal gains (see table below). As would be expected for a fund that made gains in a falling market, most profits came from one or two stock-specific situations, while the losses stemmed from attrition in prices across the portfolio. After Zytronic, which we can still characterise as a recovery situation, the other big winner was safety equipment maker Latchways (LTC), a takeover situation.
| The performance 'bridge' | |
|---|---|
| How 2015 got to 2016 | £ |
| Fund value 31.12.14 | 278,293 |
| Gains on: | |
| Zytronic | 13,550 |
| Latchways | 9,625 |
| Air Partner | 5,852 |
| Mitie | 3,036 |
| Losses on: | |
| Antofagasta | -4,811 |
| Carr's Milling | -3,086 |
| Vesuvius | -2,721 |
| Record | -2,700 |
| Carillion | -1,887 |
| SSE | -1,692 |
| Net adjustment | -218 |
| Fund value 31.12.15 | 293,241 |
The losses were shared around fairly evenly. Even the biggest loser - copper miner Antofagasta (ANTO) - lost just 1.6 per cent of the portfolio's year-end value, and this holding was axed in August when management announced it would slash the dividend. That made Antofagasta's shares ineligible for the Bearbull portfolio, for which I should probably be thankful as their value has since dropped another 20 per cent.
One aspect of portfolio theory that the income portfolio continues to call into question is that excess returns can only be generated by taking outsize risks; in other words, that rewards are a trade-off for volatility, which carries the possibility that investments will have to be realised at the worst times. For years, the Bearbull fund has generated its market-plus returns while its value bounces around much less than the market's.
Theory says this shouldn't happen, so why does it? My best guess is that it's to do with the wonder of investing in value stocks, which tend to be serially underrated. That makes expectations for their performance low - lower losses in a falling market and lower gains in a rising one. But from time to time - individually and unpredictably - values surge when something happens to highlight underlying merits. That 'something' might be the profits revival at Zytronic these past two years, or the takeover offer for Latchways. Sometimes it's really mundane, such as the realisation that a company has the earnings power to make a high-yielding dividend more reliable than investors had thought. That, for instance, had much to do with the 40 per cent rise in the value of shares in Real Estate Credit Investments (RECI) in the 12 months after I bought them in 2013.
And it may well be that the income portfolio chiefly owes its consistent performance to nothing more than investing in companies that seem to be as high quality as permitted by their status as high-yield shares. As I say, there is nothing very clever in that; nor does it require much work. What it does take - or what I would claim to offer - is a good technical understanding of both company accounts and investment theory. On top of that, there is a good deal of fussiness - I reject far more opportunities than I accept - a lot of patience and a willingness to change my mind.
Even so, whenever I deal, I feel I'm making a glorified guess and relying heavily on good luck. Here's hoping that serendipity will stick with me in 2016.
