Are the 'great' good?

The test of the proposition should be: what returns do you get if you keep a portfolio of shares in great companies for many years? Yet this is hard to assess. Greatness emerges with achievement, so companies only become great with hindsight and their reputation only endures if they continue to excel. They may be allowed the occasional blip, but a top company can't louse up regularly. But that means investors assess greatness by looking backwards, never forwards; and that's at odds with the investment process, which necessarily peers into the future.

However, one benefit of having been around for as long as Bearbull is that I can look back to the distant past. Also, this notion of buying shares only in great companies occupied my thoughts in the 1990s more than today (though that may be telling me something). Back then I had a firm notion of what constituted corporate greatness. It had much to do with generating a consistently high return on capital, of having a strong business franchise and was often associated with companies where the boss really did think like an owner (rather than claiming to). If the company had a low profile and grew without recourse to acquisitions (especially those that diluted shareholders' interests), better still.

Thoughts such as those took me to the 12 companies shown in the table. To be clear, if someone had asked me back in September 1998, when I took over the Bearbull column, to name, say, 20 companies that I thought were 'great', then - after protesting that 20 was far too many - I would have included those 12; no doubt about it.

And they've done all right. As the table shows, if - big if - someone had bought an equally-weighted portfolio of the 12 back in September 1998, then its value would have quadrupled. Over the same period, the value of the FTSE All-Share index has risen less than a half.

Still, there are caveats; chiefly that this is a back-testing exercise and jobbing backwards is the easiest thing, which always seems to get the result you want. However, apply a notion in real time with real money and the returns tend to be more modest. And, true enough, back in 1998 if I had been compelled to find 20 'greats' there would have been some that did not remain great. One such might have been GlaxoWellcome (as it then was), whose shares still sit in the Bearbull Income Portfolio. Others would have been housebuilder Prowting and industrial gases supplier BOC, which were taken over; or building products supplier Wolseley (WOS), which turned out to be an acquisition junkie riding a property boom. Worst, I might well have included Independent Insurance, which was revealed to be more cult than company with a scam at its heart for which its boss, Michael Bright, got seven years at Her Majesty's pleasure.

So the 20 'greats' I would have chosen would collectively have performed less well than the 12 in the table. How much less, is impossible to say, though I suspect their performance would have been much like that of the Bearbull Income Portfolio. That's not to be scoffed at since the income fund's value has risen 193 per cent since September 1998. But it undermines the idea that buy-and-hold is best. The income fund is not hyperactive, but, on average, it does about seven trades a year.

The other intriguing thought is, what about those 12 now; can they produce another market-busting performance in the next 15 years? It's a tempting thought since, with the exception of Chemring (CHG), they still look great. In which case, buying the 12 for an average forecast earnings multiple of under 17 times is - well - daunting, but not horrific. And there is something else that's good about buying, holding and forgetting about a portfolio of great companies - it frees up so much time to do more interesting things.