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Hard times

Investing in UK equities increasingly looks like a losers’ game
Hard times
  • UK equity returns have badly lagged inflation
  • Investors must accept lower yield for higher quality

In the end, 2020 looked unexceptional. The FTSE All-Share index, the broad benchmark for UK equities, fell by 12.5 per cent on the year. Nothing especially nasty about that. In the first 20 years of the 21st century, four times the All-Share delivered worse annual returns.

Of course, it was how the market delivered 2020’s return that was exceptional. It managed to cram both this century’s worst month-on-month return (a 15.4 per cent drop in March) and its best (a 12.4 per cent gain in November) at either end of nine remarkable months. Factor in dividends (or the lack of them) and the All-Share’s relative performance becomes a bit worse – just three times since 1999 have there been bigger losses than 2020’s 9.4 per cent negative total return.

That aggregate dividends paid by listed companies fell more than share prices – at least 30 per cent against 13 per cent – says much about the growing willingness of governments and central banks to throw fiat money at would-be horror shows. This helps sustain asset values at the expense of fostering moral hazard; although the resilience of asset values also says something about investors’ expectations that the economy – both domestic and global – will bounce in 2021.

Quite possibly – the comparatives won’t be exactly demanding, although the UK looks among the weakest of the bigger developed nations. Besides, it will take more than a single year’s bright return to dispel the notion that, increasingly, investing in UK equities has become a losers’ game. It is truly depressing to contemplate that, since the turn of the millennium, the All-Share index has risen 13 per cent but UK inflation, as measured by the Retail Price Index, has risen 77 per cent. In other words, every £1 tied up in UK shares 21 years ago now has a year-2000 value of 64p.

True, the new century just happened to coincide with a bruising bear market and focusing on capital values alone ignores the very significant contribution to returns made by dividends. For example, following 2020’s final distribution, for every £1 of capital value the Bearbull Income Fund has added in its 22 years of existence, it has generated – and paid out – £1.56 of dividend income.

The fund’s distribution of £10,513 in 2020 was its lowest since 2012. That, too, will bounce this year, although quite how far will depend partly on what I do with the portfolio. One thing should be clear, the 4.6 per cent yield generated by the fund’s distributions in 2020 is unlikely to be maintained in the long run. Granted, that yield owes something to the drop in the fund’s value. But it also stems from running a portfolio where too many holdings were paying dividends that turned out to be unsustainable.

Bearbull Income Fund distributions
Year ended Pay out (£)Change on yrFund yield (%)Cumulative pay out (£)
20191st half7,88223%5.5199,290
 2nd half8,719-5%5.9208,009
20201st half5,223-34%4.5213,233
 2nd half5,290-39%4.7218,522

True, that was partly a matter of bad luck – even excellent companies can’t pay dividends when government diktat stops them trading. That particularly applied to Hollywood Bowl (BOWL), whose shares went into the income fund just weeks before SARS-CoV-2 began its global march. Hopefully, however, the problem has already been addressed by the disposal in August of five holdings that looked – and still look – unlikely to be paying dividends any time soon. They were replaced by five that are still paying. Indeed, by a stroke of luck, one of them – Stock Spirits (STCK) – will pay a fat special dividend next month, making its total payout for 2019-20 130 per cent higher than the year before.

Meanwhile, the fund is fully invested so there is no pressure to find new holdings. Yet I may tinker with it. Of the most recent additions – made in something of a hurry last August – I am least convinced by house builder Berkeley Group (BKG) and price-comparison web site Moneysupermarket.Com (MONY). Berkeley’s short coming is that its planned dividend payments are so fully discounted that its share price leaves little room for upside. Moneysupermarket’s share price has the potential to re-rate if only the group’s trading could suggest that upside was justified.

Not that too many replacement possibilities are in view. Jersey Electricity (JEL), where there is a 9.7p final dividend in the price until 18 February, looks dull and worthy. Beyond that – and I caricature – one has a choice between overpriced stocks offering security of income or underpriced ones that threaten to justify their low ratings. An invidious choice for hard times.