Here’s one I made earlier. The table below shows the performance of the Bearbull Income Portfolio in a different – and hopefully useful – light. Like me, you can do this for your own portfolio since the data for the comparable indices come free via a download from those nice people at index provider MSCI.
The aim of the table is to address the question: what sort of a portfolio am I running? A question like that often gets ignored because it is so rock-bottom basic. Of course I run an income portfolio – it says so on the label. Therefore it must hold securities with an above-average dividend yield, must rely on income received for a big – and probably rising – part of its total return and most likely will distribute most, if not all, the income it receives. Yes, but if the portfolio does not behave like most income funds and/or performs worse than the average then you have to question its identity.
| Bearbull and comparator indices | |||||
| Year to end June | MSCI UK Growth | MSCI UK Value | MSCI UK High Div Yield | FTSE All-Share | B'bull Income |
| Change on 1 year (%) | 1.1 | 6.2 | -0.6 | 5.0 | -3.0 |
| Change on 3 years (%) | 18.8 | 12.3 | 12.9 | 17.7 | 5.4 |
| Change on 5 years (%) | 23.4 | 4.9 | 8.2 | 19.7 | 10.6 |
| Change 2018 on 2017 (%) | 1.1 | 6.2 | -0.6 | 5.0 | -3.0 |
| Change 2017 on 2016 (%) | 5.2 | 11.8 | 12.6 | 10.7 | 11.7 |
| Change 2016 on 2015 (%) | 7.5 | -5.1 | -1.4 | 0.0 | -0.1 |
| Change 2015 on 2014 (%) | 6.6 | -6.8 | 0.1 | 1.9 | -0.7 |
| Change 2014 on 2013 (%) | 1.2 | 1.7 | -1.1 | 2.2 | 5.6 |
| Source: MSCI Inc; Investors Chronicle | |||||
The context is that the performance of the Bearbull portfolio has been faltering for a while. Sure, it is easy to mask that by focusing on the headline performance of its 20-year history, which still looks great. It has added capital value at almost three times the rate of the FTSE All-Share index and it has distributed almost as much again in dividends.
But over the past two years performance has been poor and the insidious effect is starting to spread outwards, as the table shows. Calculating performance for the year to the end of June, it is now five years since the Bearbull portfolio beat all four of the comparator indices in the table. Worse, in the latest 12 months to this June, it failed to beat any of the four.
True, it would be easy to take refuge in the notion that the latest five years has been a period of sustained global growth, which would favour so-called ‘pro-cyclical’ growth stocks over the type of stocks found in the Bearbull fund, so why wouldn’t the Bearbull portfolio lag? This is borne out by the performance of the MSCI UK Growth index compared with its value and high-yield counterparts (see table).
Yet that logic only goes so far, especially as in the past five years the performance of the Bearbull portfolio correlates as closely with MSCI UK Growth as it does with the UK High Dividend Yield index. Meanwhile, its weakest correlation is with the UK Value index, which is markedly the worst performer over the five years. So a quick trot through these statistics indicates that the Bearbull portfolio is as much a growth fund as it is high yield and least of all is it a value portfolio. True, I could argue with that chiefly because the criteria used by index providers to group stocks into ‘value’, ‘growth’ or whatever often look simplistic.
However, index providers – much like fund managers – also use screening factors to exclude stocks that might endanger the quality of an index. MSCI high-yield indices employ three screening criteria:
■ Dividend sustainability, which excludes stocks whose payout ratio of dividends to earnings is too high;
■ Dividend persistence, which excludes those whose record of dividend payments is patchy;
■ Quality screens, which removes those whose balance sheets are especially weak.
Of these three, the factor to which I have paid least attention is dividend persistence, and there is little doubt that the Bearbull portfolio’s performance has been hit by the poor showing of companies with a patchy dividend history that subsequently cut their payouts.
The clearest examples are at gold miner Pan African Resources (PAF) and satellite communications provider Inmarsat (ISAT). Granted, plenty of thought – and some fair logic – went into the choice of these two, but that did not extend to something as basic as dividend persistence. Pity, because if those two investments had not been made, the income fund would be 6 per cent better off and we might not be having this discussion. Besides, something similar has happened at another holding, speciality chemicals supplier Elementis (ELM). Without its ‘special’ dividends, the stock would not have been high yield and – of course – those special payments have subsequently been hacked back.
So one lesson seems clear: dividend persistence must get more attention. That may change the portfolio’s make-up, swinging the weighting towards bigger companies. That’s fine, so long as performance improves with it. Maybe performance will improve enough to win a Blue Peter badge.
