Growth trumps income

First, the background - the income portfolio's value peaked at £311,000 in February 2014 as it levered up a strong revival in UK equity prices. That meant that, in the 15-and-a-half years since its launch, its value had compounded at over 6 per cent a year, while the FTSE All-Share index managed less than 2.5 per cent. After that, the portfolio's value - entirely separate from the dividends it distributes - fell 12 per cent to the end of June, much further than the nigh-on 4 per cent drop in the All-Share. True, values have rebounded in July as equity markets bet on more quantitative easing from the ever-obliging Bank of England. But one good month doesn't compensate for the preceding 28.

What's odd is that this underperformance has occurred during a period of unprecedentedly low interest rates. Yet the sensible guess would be that good quality high-yield shares of the sort that get into the Bearbull portfolio would be much in demand against this backdrop. Granted, it may be risky to liken dividends received on equity investments with interest paid on savings accounts. But when savings accounts - even long-term ones - pay next to nothing then the search for income drives savers into all sorts of odd - and sometimes unwise - areas. So, if it's acceptable to put low-risk savings into peer-to-peer lending schemes, then it must be acceptable to put them into blue-chip high-yield equities. For such companies, the dividends are as safe as equity distributions can be and the return of capital is assured, even if the amount returned will be subject to the vagaries of equity market gyrations.

Doubly odd is the point - as the table shows - that all high-yield and value stocks, which belong in the same part of the equity-investment spectrum, have been poor performers. So, while interest rates have been driven close to zero and savers have scrambled for alternative sources of income, those equities whose dividends could fulfil that need have been shunned.

Yet MSCI's UK High Dividend Yield index has held up much better than the UK Value index, which requires an explanation. The high-yield index comprises just 17 constituents from a much bigger pool, whose selection is driven by the notion that some shares are not as bad as their dividend yield suggests. Specifically, qualitative factors, such as return on equity and balance-sheet strength, are used to select those whose dividends look more sustainable than their price implies.

But such an index lacks the diversification offered by the MSCI UK Value index, which has 114 constituents and weights those according to archetypal 'value' factors, such as ratios for price to sales and price to book value, and for cash earnings. Superficially, therefore, the value index should sell at a lower rating than the dividend-yield index; indeed, its price-to-book value is currently 1.2 times compared with 1.8 times for the dividend-yield index. That should be in its favour, but for the past couple of years it has been weighed down by oils and financials, sectors that have been deeply unpopular, while the high-yield index has had much less exposure to that shortcoming.

That the Bearbull income portfolio's showing comes in midway between the performance of the value and the high dividend yield indices partly excuses its performance. Meanwhile, the most glaring gap in the table is the 25 percentage point difference between the MSCI UK growth and value indices.

Yet the MSCI UK Growth index is not what its name suggests - it's more about favouring the reliability of sales and their geographical diversity than about their pace of growth. As a result, the index favours consumer staples companies. Its five biggest constituents are British American Tobacco (BATS), Diageo (DGE), Reckitt Benckiser (RB.), Unilever (ULVR) and SABMiller (SAB). These are the archetype of companies that investors love in a world troubled by low growth and excess political uncertainty. The necessity to buy a pack of Lucky Strike, a pint of Guinness and a tub of Blue Band spread means revenues for such companies are assured almost come what may.

Bearbull would dearly love to have such companies in his income portfolio, but it's years since they offered a qualifying level of dividend yield. So I can't do much about that. Meanwhile, the income portfolio has plenty of exposure to overseas revenues, so that's one box ticked.

The solution - such as it is - may be to continue searching for the best quality companies possible with little concern for whether investors favour them or not. So long as companies are trading satisfactorily and their dividends are coming through, then eventually their popularity - and the performance of the income portfolio - should resume.