Investment is best kept simple to succeed. Complexity adds cost, risks confusion and usually hinders performance. This philosophy runs through all my portfolios. Such an approach involves staying invested for the long term, for the evidence confirms the extent performance can suffer if one tries to time the market.
Time in the market
Research from Fidelity a few years ago suggested that the gains achieved by the FTSE All-Share over a 10 year period from October 2000 would have nearly halved had the best 10 trading days been missed. If the next best 10 trading were also missed, then the gain would have been reduced by nearly two-thirds. Studies involving longer timescales confirm the figures.
It could be argued that an investor would have to be extremely unlucky to miss so many good days. But markets often make big moves when sentiment is poor and markets have fallen. The single best day over the last decade or two was on 24 November 2008 when the FTSE All-Share rose 9.2 per cent - during a ballooning credit crisis and when sentiment was at rock bottom.
And evidence suggests some investors do have a tendency to buy when the market has risen, to sell when markets have fallen, and then sit on cash for a while after a market low. Subsequent research into bear markets in the UK since 1972 by Blue Sky Asset Management found that returns over the following four years would have been reduced by up to 75 per cent if an investor had hoarded cash for one year after a market low.
The case for long term investing is reinforced by further research from Ibbotson Associates a few years ago. Having analysed the S&P 500 since 1926, it found that the index would have lost money just 14 per cent of the time - based on five-year periods with dividends reinvested. There would have been no losses at all over 15-year periods.
The other reason investors should stick with the market is that it allows the full harvesting of dividends, which over time make up the lion’s share of total returns – as highlighted in last month’s column (‘Ensuring dividend diversification’, 5 June 2015). Ducking in and out of the market disrupts dividend flow.
So the message is clear: despite recent market turbulence and poor sentiment, long term investors should ignore the noise and chatter. Do not get distracted. Do not complicate your investment approach. Time in the market is more important than market timing. Stay loyal and the market will reward; stray and it will punish. Simple really!
But staying invested is no excuse for investors not to continue their ‘due diligence’ on both existing and potential holdings. The relentless assessment of the balance between sentiment and fundamentals must continue – staying invested is not an easy option. This is particularly the case if these holdings’ underlying market is going through turbulent times.
European Assets Trust
With this in mind, and with the Greek tragedy continuing to unfold, now is a good time to revisit European Assets Trust (EAT) given its prominence in both the Growth and Income portfolios, and the volatility of European markets.
Regular readers will know that I have become more positive on the outlook for European equities and have added to portfolios accordingly (‘Adding to Europe’, 10 April 2015). The EU remains fixed in the global economic ‘slow lane’, with unemployment rates to match – youth unemployment of 50 per cent and more being a particular crime.
However, economic indicators are slowly turning positive – albeit from a low base. Meanwhile, the European Central Bank will print money for as long as it will take to safeguard the euro and keep ever-closer political union on track.
I suggest market sentiment continues to trail the fundamentals. Although valuations are middle ground, the recovery is in its early days – profits being 30 per cent below peak levels when compared to the US. Meanwhile, an equity yield which is nearly twice that of the US, and a price-to-book discount of around 40 per cent, again suggests good value.
Furthermore, within Europe, the valuation gap between the small and large companies has narrowed somewhat, suggesting smaller companies are relatively attractive. This is particularly the case given that many under-researched smaller companies are promising 25-30 per cent earnings growth, compared to around 10 per cent for the larger company universe.
The challenge is to capture this smaller company potential. This is where EAT comes in. Focusing on small and mid-cap companies, the performance has been impressive – handsomely beating both the benchmarks and its peers over one, three and five years. It also offers an attractive dividend, expressed in euros, which is calculated as 6 per cent of the NAV of the portfolio at each year-end – equating today to a yield of around 5.3 per cent.
Speaking recently with Sam Cosh, EAT’s manager at F&C, the broad approach is to buy good quality businesses at an attractive price – perhaps depressed by short-term difficulties – and then holding for the long term. A low portfolio turnover is one consequence. It seeks businesses that have a good record at creating value.
Around 35 per cent of the portfolio is focused on the consumer sectors given the belief that the economic recovery and lower energy prices will help confidence and encourage spending – the economic figures beginning to substantiate this view.
The energy and financial sectors are also considered attractive given their rating, the quality of the companies and the scope to improve margins - the ECB’s money-printing particularly helping the financials. Meanwhile, EAT’s largest exposure is to Germany on account that it’s many exporters will benefit from the weakening euro.
When first introduced to both portfolios in December 2012, EAT was standing on a 10 per cent discount and offered a historic yield of 6.4 per cent based on a year-end dividend of 44p. Healthy dividend increases since, with around 58p being announced for the 2014 year-end, have helped to eliminate this discount.
Despite this, I believe EAT should be retained. A fund manager at the top of his game, a continental recovery in its early stages, smaller company valuations looking relatively attractive, and a handsome yield, all suggest investors should ensure they are up to weight.
Otherwise, there were no changes to either portfolio during June.
Paul Locke
Paul Locke, the well-respected investment trust analyst at Investec, has very sadly and unexpectedly passed away. Although I came to know Paul only fairly recently, he was a kind man who was always very generous with his ideas and time. He was also a champion of investment trusts. He will be missed by those who knew him. My thoughts are with his family.
ABOUT THE AUTHOR:
John Baron waives his fee for this column in lieu of donations by Investors Chronicle to charities of his choice. As these are live portfolios, he has interests in all of the investments mentioned. For more portfolios and commentary please visit John's website at: johnbaronportfolios.co.ukRead more articles by John Baron
