Take the positives

However, there is another important aspect of the job where the investment manager can borrow from the coach – in judging performance realistically yet looking to take the positives from any situation. And it is in that spirit that I come to assess the performance of the Bearbull Income Portfolio for 2016.

Granted, the final tally is not yet in. It is 20 December as I write and seven trading days are left in the year. They are unlikely to be active, but prices have a record of moving in those Yuletide days of thin trading and fuzzy heads.

However, one matter that is clear is the level of dividend that the Bearbull Income Portfolio will distribute on the 31st (see table). A timing difference means that the portfolio’s distribution for the second half of 2016 won’t top £8,000, as I had hoped. That’s because the second-quarter dividend for 2016-17 from Real Estate Credit Investments (RECI) will be distributed 11 days later than 2015, thus slipping into 2017. Despite that, the distribution for the year – at £14,511 – is 6 per cent higher than 2015’s and comfortably better than the previous annual high of £13,763 in 2014.

So let’s put the latest distribution into context and let’s remind readers that the Bearbull income portfolio has a very simple distribution policy – any income that comes in, whether via dividends or savings interest, is distributed onwards.

More of that in a moment, but it meant that £3,860 was distributed in 1999, the portfolio’s first full year in operation, and, over its 18 years, the payout has risen by 8.9 per cent a year on average. Over the same period, inflation in the UK, as measured by the Retail Prices Index (RPI), has averaged 2.8 per cent a year. The choice of RPI, as opposed to the Consumer Prices Index (CPI), is deliberate. RPI better known and the mechanics behind it mean that it produces a higher level of inflation than the CPI and so is a more demanding benchmark. Even so, the ‘real’ increase in the portfolio’s distribution – ie, the increase in excess of inflation – has averaged 6.1 percentage points a year.

That’s great, though almost certainly it won’t persist. But the hope must be that over, say, the next 18 years the real growth in the payout will average about 3 percentage points. Make that assumption and we get an idea of the possible purchasing power of the portfolio’s distribution after 36 years of investing, a period that might be considered the natural span of a savings project that covers a working lifetime.

In today’s money values, the distribution would have grown from this year’s £14,511 to £24,704. If – by some great good fortune – the real increase averaged 4 points, then the payout would be the equivalent of £29,400. And if the outcome was a disappointing 2 points of average growth, then the sum would be £20,725. Yet the basic point is that the central figure – almost £25,000 – is a useful chunk of annual income anyway and a mighty return from an original lump sum of £100,000, whose real value would also – hopefully – be rising.

It’s also interesting to note the volatility in the growth of the income portfolio’s payouts. From the 1999 base year, the distribution fell in six of the subsequent 17 years and that average growth of 8.9 per cent came with a standard deviation of 13.7 per cent.

This might be a consequence of paying out too much income too soon (recall that the portfolio simply redistributes all the income it receives). If so, then formative income portfolios may do better to reinvest the income they receive in their early years. If the Bearbull portfolio had followed that line for its first 10 years, it would have added £66,000 to its capital base. Making similar assumptions about growth to those just used, that would generate another £8,400 of annual income in today’s money values in 18 years time. That brings the projection to about £33,000 a year, which is starting to approach a liveable sum.

There is an underlying point here – these projections aren’t pie in the sky. Rather, based on an unexceptional period for UK equity returns, they show what’s likely to result from a sensible investment plan to buy shares in good companies at reasonable prices and being patient. That’s pretty well all that the Bearbull Income Portfolio seeks to do. Nothing especially clever; certainly nothing magical – and let’s hope for more of the same in 2017.

Income portfolio distributions