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Beyond our ken

True, there was a scare during December as the All-Share powered ahead. That’s because December is always a demanding month for the income portfolio’s value as dividends accrued over the previous six months are distributed. Combine that with a stock-specific horror and the portfolio might have ended up underperforming the All-Share. As it was, no horror materialised, the All-Share did not have quite enough puff and the income portfolio finished almost three percentage points ahead of the All-Share with a total return of 21 per cent for the year, its first 20 per cent-plus return since 2013. So God’s in his heaven and all’s right with the world.

Well, let’s not overdo it. When assessing a portfolio’s returns – just as when assessing so much in life – it’s right to remember the effects of random distribution. Sure, we don’t like the notion that chance, luck, happenstance – call it what you will – plays a major part in shaping our ends. Fund managers and those who make a living picking stocks like it least of all, especially when they seem to be doing well. Acknowledge the power of chance and suddenly you acknowledge the limitations of the arguments that went into a stock selection; arguments that seemed so neat and persuasive were really just so much confirmatory bias. What’s so clever about that?

So 2019 was a good year for the income portfolio, but the good one might just as well have been 2018 or 2020 and Bearbull would have been just as smart or as thick, depending on your point of view. Arguably greater significance lies in the fact that the income distributed by the portfolio continues on its consistent upwards trajectory (see Table 1). True, the distribution for the second half was 5 per cent lower than 2018’s second half. But that was a matter of timing of dividends received and was the obverse of the 23 per cent rise in 2019’s first-half payout.


Table 1: Bearbull Income Portfolio distributions  
Year ended Pay out (£)ChangeFund Yield (%)Cumulative payout (£)
20151st half6,236-2%4.4138,346
 2nd half7,4321%5.1145,778
20161st half6,7989%4.8152,576
 2nd half7,8926%5.4160,468
20171st half7,0083%4.4167,476
 2nd half8,3526%5.2175,828
20181st half6,396-9%4.1182,223
 2nd half9,18610%6.3191,409
20191st half7,88223%5.5199,290
 2nd half8,719-5%5.9208,009


Since 1999, the first full year of the income portfolio, its payout has grown at the rate of 7.6 per cent a year. That’s way ahead of UK inflation, which has risen at an annual rate of 2.9 per cent as measured by the retail price index (RPI), which produces the highest rate of the various national measures of inflation. This also means, first, that the portfolio’s cumulative payouts are now clear of £200,000, twice the original capital subscribed, and, second, that the return from income is narrowly more than the portfolio’s cumulative capital gains, which currently stand at £205,000.

Obviously, capital gains will be much more volatile than income received. But the point of that comparison is to underline the importance of dividends to investment returns over the long haul as they rise almost remorselessly (assuming, that is, a balanced portfolio of holdings in dividend-paying companies).

It would be unrealistic to expect the Bearbull portfolio’s distributions to maintain their historical growth rate, especially as UK plc is distributing such a high proportion of its post-tax profits. At the latest count the aggregate payout of the All-Share’s component companies was covered just less than 1.4 times by their net profits; almost certainly, therefore, cash flow cover is a little less. Despite this, I would still expect the distributions to rise in line with inflation in the coming years, with most variation around the average coming from changes in the timing of dividends received as the portfolio’s holdings are shuffled.

Even if income received is as important as capital gained, it’s the gains (and losses) that grab the most attention. In 2019, the income portfolio generated almost £41,000 of gains from opening capital of £265,000. Instantly, we can see that luck played its part here since takeovers produced almost 40 per cent of those gains. Most of that came from the takeover of pubs operator Greene King, which was bought by a Hong Kong-based property investor. If the bid for Greene King was generous, the other one that benefited the income portfolio – for telecoms operator Manx Telecom – was stingy. Even so, it went through.

These two were chance in action. Assume – as would have been perfectly possible – that neither of these offers fell into 2019 and that shares in those two companies produced returns in line with the All-Share. If so, the income portfolio would have underperformed the All-Share and I might be agonising deeply. As it was, happenstance turned up and, having waited since 2015 for a bid to boost the portfolio’s performance, two came along almost together. Now who’s to say that the portfolio won’t have to wait another four years before another takeover bid hoves into view?

The other notable gains during the year – about £5,500 in each case – came from pharma giant GlaxoSmithKline (GSK) and construction group Henry Boot (BOOT). That Glaxo should make a useful contribution to the portfolio’s performance is almost a first. Regular readers will know that for some years I have been sceptical that the company could maintain its dividend let alone look like a group with purpose. I would be telling a fib if I said I had looked hard at the forthcoming split of Glaxo into its consumer healthcare and pharmaceuticals component parts. Such very expensive exercises are often more about generating the appearance of doing something rather than doing something useful. Yet clearly I need to get a handle on Glaxo’s plan. Meanwhile, shares in Sheffield-based Henry Boot surged chiefly, as far as I can tell, on the ‘northern powerhouse’ notion, that the new government will spend shed-loads of capital upgrading infrastructure in north England.

If one year’s performance means little, aggregated performance has more significance. Hence Table 2, which takes the first 20 years of the century and splits them into four five-year blocks, as well as showing the whole period. Given the scale of outperformance in the five years 2000-04, it is small wonder that the fund remains well clear of the market over the whole 20 years. Since 2004, performance has been acceptable rather than outstanding – in one five-year period the portfolio beat the market, in another it tied and in the remaining period, which happened to be the most recent, it trailed.


Table 2: Bearbull Income Portfolio v All-Share index
  Bearbull Income Portfolio  FTSE All-Share 
 Capital (% ch)Yield (%)*Total return (%)Capital (% ch)Yield (%)*Total return (%)
Past five years     
Five-year blocks (ave % pa)    
Full 20 years (ave % pa)     
* Income fund yield calculated on year's average value; All-Share yield calculated on year-end value


Is that significant or is it just random? Search me. When all is said and done, I just keep trying to find shares in decent-to-good companies at acceptable prices. The rest is beyond my control.