In its small way, the Bearbull Income Portfolio does much the same. As it approaches another dividend distribution and its 20th anniversary, the portfolio demonstrates how money saved conscientiously over a decent period of time remorselessly rolls into something much bigger.
In 1999, the first full year of its operation, the income portfolio distributed all of £3,860. This year, the distribution should top 2017’s by a small amount and tot up to about £15,500. At a compound rate of return, that means its distributions have grown at 7.2 per cent a year during a period when the loss of purchasing power, as measured by the Retail Price Index, has run at 2.8 per cent.
Of course, the income distributes all of the income it receives. Had it behaved more like a serious private investor saving for retirement and therefore kept all the dividends it got, its capital value would now top £0.5m and – based on its current yield – it would be able to distribute almost £23,000 a year with the expectation that such an annuity would rise each year by a little more than inflation without the capital being touched. However, should our theoretical investor want to consume the capital, too, then, using a sum-of-the-years amortisation method and assuming 20 years’ worth of drawdown, the annual take from the fund would rise clear of £25,000 – all this from an initial capital outlay of £100,000 and an investment period of only half a typical working lifetime.
I make these points, hardly for the first time, not to market the unique benefits of following the Bearbull portfolio but, if anything, to do the opposite – to illustrate the gains that are likely to be available for anyone with a modicum of intelligence, diligence and patience who is fortunate enough to be able to invest money in the capital markets of the developed world.
If that was the good news, there is a bit of the bad to slip in – the income portfolio's distribution for the first half of 2018 will be lower than the last year's first half’s at £6,390 against £7,008. Chiefly this is because of dividend cuts at speciality chemicals supplier Elementis (ELM) and students’ accommodation provider Empiric Student Property (ESP). These were sufficient to outweigh the gains on other holdings, especially at touch-screens maker Zytronic (ZYT), where management has markedly shifted up the payout ratio of dividends to earnings.
There is also an element of timing, which means that dividends received will edge towards the second half and 2018’s total payout should still be marginally ahead of last year’s £15,359. And if I do something useful with the £18,000 of spare cash sitting in the income fund, then the full-year payout should be comfortably above 2017’s.
The caveat to throw in is that the previous paragraph assumes the portfolio won’t be visited by some form of pestilence in the second half. Happily, the mini crisis that threatened to flatten one holding, air-travel broker Air Partner (AIR), has now passed. Or at least this week Air Partner’s bosses did what they promised in mid-April and declared a 3.8p final dividend for the year to the end of January. Recall that they twice deferred releasing 2017-18’s results as they came to terms with a systematic overstatement of amounts owing that stretched back to 2010 but was only spotted last October when new financial systems were installed. The best guess of the total damage adds up to £4.4m, an amount that has now been written off net assets, which stood at £11.5m after the adjustment.
As to the cause, the board’s review leans towards incompetence rather than venality. There was fraud, according to investigating accountants PricewaterhouseCoopers – “supporting accounting records were inappropriately and repeatedly created and manipulated in order to minimise the chances of detection of these accounting issues” – but it displayed “no conceivable pattern or logic” and there was “no clear motivation or evidence of personal gain”. The cost of sorting out this little mess – in addition to some loss of credibility – is £1.3m in cash. As to how much it will cost shareholders, we will see when share trading, which was suspended at 100p, resumes. My guess is that the price will rise, but it won’t threaten its all-time high of 153p, which was reached in March.
Meanwhile, GlaxoSmithKline (GSK), the income portfolio's longest-standing holding, is going through a phase of popularity with City analysts as they regurgitate management’s logic for raising the group’s exposure to consumer healthcare, where the major brands are, say, Sensodyne, Panadol and Nicorette. Regular readers will know I’m doubtful that Glaxo can arrest the long-term decline that will result in either a cut in its dividend or a merger of some sorts (see Bearbull, 26 Jan 2018). But I’d be happy to be proved wrong. It would save me the bother of having to find a new home for the capital tied up in Glaxo; much better – if at all possible – to leave capital where it is and let compounding produce its long-term effects. Einstein would surely agree with that.
