Vanguard – See how our economic outlook, published in December 2014, has tracked so far in 2015.
The defensive value investing model portfolio and its investment strategy did what they were supposed to do in 2013, by producing a high and growing dividend income with high capital growth and little volatility.
A market beating year (more income, more growth, less risk)
At the end of 2013 the portfolio stands some 25.8% higher than it did at the start of the year. In comparison, the benchmark FTSE All Share tracker trust gained 19.5%. These figures should be compared to the average annual gains that you should expect from the stock market, which is closer to 7 or 8% (or 5% after inflation).
Total gains for the portfolio have been 41% since its inception in March 2011. That’s a 9.6% out-performance of the All-Share tracker trust. In cash terms the portfolio is ahead by £4,764 in less than 3 years, with a starting value of £50,000.
Put another way, the annualised returns have been 12.9% for the model portfolio and 10.1% for the benchmark, which is a 2.8% annualised performance gain, or 28% higher returns in relative terms. You can see the results to date below:
Note that the ‘average’ investor underperforms the market by 3% a year (an estimate from various studies on investor performance) and the ‘bad’ investor underperforms by 6% a year (an estimate from the book ‘Monkey with a pin’). Outperformance relative to the ‘bad’ investor is around £15,000.
Beating the market is one thing, but this is a defensive and income focused strategy, so a high dividend yield and low risk are also required:
- High yield – Throughout the year the portfolio’s yield averaged 4.2% while the All-Share’s averaged 3%. The portfolio’s forward yield (the income produced during the year relative to its capital value at the start of the year) was 4.8%.
- Low risk – The defensive value portfolio has also been less volatile during 2013 than the All-Share tracker trust, with Beta (a measure of volatility) hovering around 0.6, which means the portfolio has been just 60% as volatile as the wider market.
1% more from dividend yield, 1% more from growth and 1% more from effective buying and selling
A 2.8% annualised improvement over passive investing is close to what I’d expect from a good defensive value strategy. I believe it’s possible to get an extra 1% each year from a high dividend yield, 1% from owning fast growing companies, and 1% from repeatedly buying low and selling high.
Of course these are estimates, but I think they are realistic, and a 3% absolute improvement is actually a 60% relative improvement compared to the 5% real return the UK stock market has historically provided.
So what did 2013 actually look like in terms of actively managing a portfolio of shares? How much effort was required, and how much stress did it involve?
The answer is, surprisingly little of either. The portfolio is managed using a steady, plodding approach to buying and selling. Each month just one company is bought or sold, and in 2013 8 companies were bought and 4 were sold.
The first sale came in January with N Brown, the catalogue and multi-channel retailer, leaving the portfolio. The holding period was just 8 months but in that time returns were almost 60%, primarily from a dramatically increasing share price.
This wasn’t anything that I had seen coming; the portfolio was just in the right place at the right time, although it helps to have a robust means of discerning a low price from a high price.
The proceeds were recycled into two companies that offered a better combination of value, quality and defensiveness.
The second sale was Reckitt Benckiser, the monotonously successful consumer goods company, sold in April. RB is exactly the sort of defensive, high quality company that I would expect to see in the model portfolio, but only at the right price.
As with N Brown, gains of more than 50% over a 2 year period meant there was perhaps better value to be found elsewhere, despite the company’s intrinsic qualities. The profits were again recycled back into two more attractively valued companies.
I would not be surprised to find RB back in the portfolio once again, if the shares can be bought at an acceptably low level.
The third company to leave the portfolio was Interserve, sold in July and producing gains of more than 110% over 2 years.
Interserve showed the value of patience; after a virtually flat first year the shares shot up by around 70% in their second year. At that point they began to look expensive relative to the rest of the portfolio and so profits were taken in order to be recycled in to some better value-for-money shares.
The last sale of the year came in October and was of Go-Ahead Group, the leading UK public transport company (over Christmas I travelled on HS1 – which they operate – and very impressive it was too).
Despite being in an apparently ‘dull’ and defensive industry, Go-Ahead’s shares produced total returns of more than 30% in just over a year and a half. Again, a rapidly increasing share price was the main driver, although the starting yield of 6% gave a real boost.
Profits from Go-Ahead have been recycled into yet another two value-for-money, high quality companies.
Slow and steady wins the race
All in all it has been a steady year, with this slow, methodical, plodding approach to buying and selling proving itself worthwhile. I think it’s a good pace to work at, which allows the portfolio to be improved and profits to be taken, but without having to rush around keeping an eye on the market at all hours of the day.
For 2014 I expect to sell 5 or 6 companies, and to maintain the number of holdings at around 30 with the addition of 5 or 6 new holdings.
I also expect the combination of high quality, relatively defensive companies – mixed with high yield shares and prudent profit taking – to continue to provide above average income and growth, at below average risk.
It was an upbeat week for the economy and an eventful one for the financial markets. 2013 ended with major stock indexes at or near record highs, and 2014 opened with positive reports on manufacturing and construction spending.
Costs matter when it comes to investing success and the reason is simple: The less you pay for your mutual funds, the more you have available to invest and the more returns you get to keep. Vanguard investment analyst Yan Zilbering talks about what you’re paying for when you invest in mutual funds, and why.
Whether you’re preparing for the holidays or preparing to file your tax returns, the end of the year can be a stressful time. But don’t fret. These tips can help you end 2013 on the right note, and the tools and resources on vanguard.com can make things even easier.
After months of speculation about the timing, the U.S. Federal Reserve this week announced a plan to slow its monthly purchases of mortgage and Treasury bonds from $85 billion to $75 billion, starting in January. The Fed also committed to keeping short-term interest rates near zero.
Vanguard Global Minimum Volatility Fund is now available in low-cost Investor Shares and even lower-cost Admiral Shares. This new actively managed fund seeks to provide investors with long-term capital appreciation while having less volatility than that of the overall global equity market.
How to Make a Million – Slowly, is a book about the lessons learned and experiences gained by a private investor over a 50 or 60 year investment lifetime. The book is written by John Lee (Lord Lee of Trafford) who for many years wrote a column in the FT, and excerpts from that column feature heavily in the book.
John’s own portfolio became even more famous when he mentioned in 2003 that his ISA account was valued at more than £1 million (hence the name of the book). So how did he do it?
The answer is through the patient application of what he calls a DVD investment strategy. DVD stands for Defensive Value plus Dividends, which explains itself quite nicely. I only wish I’d thought of it first, because it neatly captures my own approach to investing as well.
The book is full of ideas on how to find good companies and how to value them. There is some very small amount of theory, but the bulk of the book is from John’s actual experience, with many detailed accounts of how he found, analysed, visited, bought, held and occasionally sold many companies over many decades.
The book is full of many insightful comments, and here are a few of my favourites:
He looks for companies with strong finances, committed managers, and improving outlooks – and buys their shares when they are at attractive prices. Then he waits, for years if necessary. This is essentially the same approach followed by legendary value investors such as Warren Buffett and Benjamin Graham. It worked in the US back in the 1930s, and it works now in the UK. With patience, method and discipline, anyone can do it.
I have called the book How to Make a Million – Slowly because it sums up my approach to stock market success – building up a portfolio brick by brick, share by share over many years.
There are those who treat the stock market like a casino – constantly dealing in and out – not knowing or caring what activities the companies they buy and sell are engaged in. Good luck to them – that is their choice – but it is not my way.
12 guiding principles:
1. Endeavour to buy shares on modest valuations
2. Ignore the overall level of the stock market
3. Be prepared to hold for a minimum of 5 years
4. Have a broad understanding of the PLC’s main business activity
5. Ignore minor share price movements
6. Seek established companies with a record of profitability and dividend payments
7. Look for moderately optimistic recent comments
8. Focus on preferably conservative, cash-rich companies or those with low levels of debt
9. Ensure the directors have meaningful shareholdings themselves and ‘clean’ reputations
10, Look for a stable board
11. Face up to poor decisions
12. Let profitable holdings run
I have always believed that most investors and analysts over-complicate matters. I try to focus on just two yardsticks when investing in a trading company… dividend yields and PERs, and two for an investment or property company… net asset values (NAVs) and gearing.
I like to buy shares on a modest valuation – ideally say a dividend yield of 5-6% – and on a single-figure PER.
The payment of a dividend acts as a significant discipline on the Board of a PLC in that it has to find the cash, each year, to pay those dividends.
What we want is a company that increases profits (and hopefully dividends) each year and where the rating (PE ratio) that the stock market/investors place on the company’s shares increases significantly. This is the ‘double whammy’ any investor should be seeking.
Today  we are in an extraordinary period when not only do large-caps yield 5-6% and ‘proper’ small-caps twice that, but returns on cash deposits are minuscule.
Stock market movements are often exaggerated both ways – sometimes too bullish, sometimes too bearish.
The key to building an appreciating portfolio is to avoid the losses – don’t take unnecessary risks or buy at inflated levels.
I like the alignment of board and shareholder interests, the focus on conservative growth and “stewarding” a business through generations, their generally low borrowings and usually progressive dividend policy.
My core investment philosophy is that ‘value’, i.e. real worth, always comes through in the end, but you must be patient.
Smaller caps, established, profitable, conservative dividend-paying companies, cash positive, or with low levels of debt are for me, preferably having a recognised ‘brand’ or unique selling point (USP) and preferably also trading internationally.
Nothing is certain in stock market investing – equity investing always involves a degree of risk.
I have been a happy holder for 36 years – today it is one of my largest holdings, with an annual dividend return of approximately 38% on original cost. This is what long-term investment is all about.
To be a successful investors requires commitment and time, and you’re only going to put in the required effort if you find the stock market enjoyable and absorbing.
Apart from the financial columns I regularly subscribe to the weekly Investors Chronicle, having done so for many years, and find it an invaluable source of comment and ideas.
I would not invest in a PLC unless the directors themselves held serious personal shareholdings in it.
Investing by watching screens is all very well, but you can’t beat human contact. So get out there.
Visiting a PLC such as Cropper’s is for me part of the interest and enjoyment of serious investing – an opportunity to embrace our industrial heritage and to appreciate the role that founding families and their businesses have played in the life of their communities.
Major institutions rarely attend AGMs (having their own private briefings) so the meetings are the private investors’ theatre. But be strong-willed. Do not waste time in which you could be gathering crucial information by going back for a second helping at the buffet. Circulate – and make sure you stay sober.
Few investors apply much consistency or logic to the creation of their personal investment portfolios. Your average investor will usually hold a range of stocks, with substantially differing values, delivering wildly varying yields, with no obvious theme or structure.
In my current portfolios, putting together my ISA and non-ISA holdings, I hold around 35 different stocks.
One of my cardinal principles has been to focus on avoiding losses rather than chasing profits.
As the legendary Warren Buffett famously said: “Lethargy bordering on sloth remains the cornerstone of our investment style.”. Definitely an attitude to be encouraged.
My late father jokingly used to say that money was not for spending but for buying shares.
For me, equity investment is about long-term growth in both capital and income. I have never worried too much about annual performance comparisons.
I ask 10 questions, applying a score from 1 to 10 for each. The subject areas cover trade/activity, profits record, dividend yield and cover, asset backing, cash/borrowing, board shareholdings, institutional holdings, the price/earnings ratio, professional advisers/non-executive directors, and company optimism/brokers’ forecasts.
A number of groupings of private investors have been formed in recent years. For example, ShareSoc, with 3,000 members, takes up investors’ grievances, and Mello Meeting, with over 800 members, arranges regular company presentations.
Overall it was an enjoyable and interesting read, and certainly gave me a look inside the activities of an investor who likes to visit the companies that he invests in. It’s also good to see that Lee also covers his mistakes, which is very helpful for other investors, and should help to ease the fear that investors feel when an investment performs badly. Mistakes are inevitable, and you just have to accept that.
I’ll end with one final quote that sums up this whole Defensive Value plus Dividends (DVD) approach in a nutshell:
A substantial portfolio can be built, brick by brick, by applying common sense and basic investment principles. But it does take time!
U.S. consumers may be more cautious about spending during the holiday season, as their confidence plummeted in November for the second straight month. Yet there were encouraging signs in leading economic indicators and the housing market.
It’s been a very good year for stocks, but some analysts are warning about a possible correction. Whatever the future holds in store for Wall Street, this is a good opportunity to assess how the market rally has affected your asset allocation and decide whether to take action.