Merchants Share Discussion Threads

[zac0_4] 02/5/2020 16:37

If you look at the performance of the Fundsmith equity fund, which was launched towards the end of 2010, and use a very similar analogy to the one you've suggested the performance is nothing short of staggering!
Invest £10,000 in January 2011 and at the end of each calendar year take out £500. At the end on 2019 you would have withdrawn £4,500 but your capital is now worth £33,800. These are not made up numbers which is why I believe using funds (OEICS) has an important part to play in any investment portfolio, irrespective of whether you're investing for income, capital growth or a combination of the 2. This is one of my best performing investments.

[zac0_4] 02/5/2020 13:16

Maybe of interest. From Terry Smith, CEO, Fundsmith Equity Fund.

Financial Times
Investors: never let a crisis go to waste
Terry Smith
30th April 2020

We now have a fully-fledged economic crisis caused by the reaction to the Covid-19 pandemic. What should you do about it in terms of investment?
I would strongly advise avoiding the approach of many investment advisers or analysts. They spend their time speculating about what will happen. When will the lockdowns end? What will happen in the travel and hospitality industry? When will there be a vaccine (I suspect that question should be “Will there ever be an effective vaccine?”). Who will be the winners — makers of disinfectant and masks? Drug companies? E-commerce plays? Home food delivery?
In my view, all of this speculation is useless. No one knows. It is about as useful as all those “risk registers” which companies are required to produce, demonstrating that they have assessed the main risks to their business. How many of them do you suppose had “pandemic̶1; listed prior to these events? Equally, how many will omit it in future? It is not only generals who are prone to fighting the last war.
My award for the silliest question asked by an analyst so far goes to the questioner who asked a US company presenting its quarterly results: “What would cause your device sales to be down in the second quarter?” (I’m not making this up.)
But as an old saying goes, “Never let a crisis go to waste.” You should always think about a crisis as an opportunity. This was expressed in the notorious remarks of a spin-doctor working for Stephen Byers, the former transport secretary, who wrote of 9/11, “It’s now a very good day to get out anything we want to bury.”
We can already see this advice being followed. The Investment Association has suspended its equity income requirements for 12 months. This is bad news for equity income investors. It’s not as if these requirements were exactly stringent to begin with.
To qualify for inclusion in the IA UK Equity Income sector, all a fund had to do was exceed 90 per cent of the yield on the FTSE All-Share Index each year (not a mistype — yes, a fund yielding nearly 10 per cent less than the index qualified as an income fund) and exceed the index yield on a three-year rolling basis.
In a ridiculous piece of deception, which I suspect would not be permitted in any other product, a fund can lose its Investment Association status and still carry the word “income” in its title. To paraphrase a common saying, “It doesn’t do what it says on the tin.”
To some extent the Investment Association is just acknowledging reality. By mid-April a quarter of the stocks in the Stoxx Europe 600 Index had suspended their dividends.
However, I suspect that the really bad news for equity income investors is yet to surface. As at mid-April, the dividend cover on the top 20 highest dividend yield stocks in the FTSE 100 was just 1.3 times. For the top 20 largest absolute dividend paying stocks in the UK it was 1.1 times — net profits are just 10 per cent more than the dividend.
One of the more ridiculous questions which investors and others have been asking in this crisis is, “When do you think things will get back to normal?” This ignores the fact that what came before the crisis may not have been normal.
Over time, dividend cover for most businesses cannot be sustained at 1.1-1.3 times, as most of them need retained earnings in order to grow. An average cover of two times is more normal. I would suspect that the boards of companies which have passed the dividend will indeed not be allowing a good crisis to go to waste and will return with a much smaller and more sustainable dividend which will mean much lower yields for equity income investors.
I have long said that no one should invest in equities for income. If you had invested in the IA UK Equity Income sector over the past five years, you would on average have lost nearly 1.3 per cent a year. The best way to approach this is to invest for the highest total return you can achieve and sell whatever shares or units you need to provide cash. However, I realise that for many investors, the idea of realising part of their capital to provide income is anathema. So what to do?
If you insist on investing for dividend income, consider investing alongside a family which founded and has control of a public company. Out of the 47 stocks in the Stoxx Europe 600 that are “family influenced”, only three have cancelled or postponed dividends. Very often these extended families, descended from the business founder, rely on the dividend income from the family business.
The chief executive of one of the family controlled companies we invest in at Fundsmith says his first piece of advice from the patriarch of the family was to never cut the dividend. Investing alongside them can help to preserve your income too, and in this market environment you may get some attractive opportunities to do so.
Terry Smith is the chief executive of Fundsmith LLP.

[superiorshares] 02/5/2020 11:19

Chart trader 2000
Are you sure about a Trust will never go bust claim ?

[tim 3] 02/5/2020 09:24

"My main priority is to move away from individual shares when the time is right."

This. Realised it a few years ago Depending on the trust/fund obviously but you are basically moving your risk factor down by spreading it over more shares.You could argue you are reducing your potential gains too if (and its a very big if) you were to pick the right individual shares and also your costs would be lower but I accept this trade off and it works for me.

[zac0_4] 01/5/2020 23:20

Hi Chart trader 2000
I must admit my example I provided a couple of days ago was not a true reflection. If I had taken the 5% dividend earned each year from Mrch and simply reinvested it in Mrch, as will have happened with the accumulation fund example I used, there’s very little in it over the last 5 years. For me, even after 20 plus years of investing, I think a mix of funds and investment trusts is probably best. My main priority is to move away from individual shares when the time is right.

[poikka] 30/4/2020 10:42

Whoops, Merchant's biggest holding just cut the div by 2/3rds.

Too aggressive Superior called that right.

[zac0_4] 28/4/2020 22:32

I take your point with regards to your example. However, total return from MRCH over the last 5 years is about 3.1% - this is made up of a capital loss of 23.7% with income returns over the period of 26.8%. Not brilliant. The international tracker fund I used as an example has a total return over the same period of 51.5%.

I'm probably a bit like you in the opposite camp - I'm still to be convinced that investment trusts are a better investment than using funds and drawing down an income as and when required. Having said that I own HHI, HFEL, SSON (although no dividend) and MRCH so they do have an appeal.

Good Luck!

[zac0_4] 26/4/2020 23:31

Hi Tim3
I agree the exposure to the US market over recent years has been beneficial. The international fund I alluded to in my post was the Legal&General International Index trust/fund. It’s delivered good results for me over a number of years. The only downside for me is I have to physically sell units to provide income unlike shares and investment trusts which automatically pay a dividend. I think I have a psychological barrier to selling! I get around this with my investment in Fundsmith where I invest directly with them and you can set up regular payments which as they are done automatically I seem to be able to cope with better!!! That’s another fund that’s delivered excellent results over many years.

[zac0_4] 26/4/2020 23:30

Hi Tim3
I agree the exposure to the US market over recent years has been beneficial. The international fund I alluded to in my post was the Legal&General International Index trust/fund. It’s delivered good results for me over a number of years. The only downside for me is I have to physically sell units to provide income unlike shares and investment trusts which automatically pay a dividend. I think I have a psychological barrier to selling! I get around this with my investment in Fundsmith where I invest directly with them and you can set up regular payments which as they are done automatically I seem to be able to cope with better!!! That’s another fund that’s delivered excellent results over many years.

[tim 3] 26/4/2020 22:52

Hi zac

You make a very good point one I have observed myself.

I think one of the reasons the international index funds have beaten is because they have a stronger exposure to the US market than many investment trusts.

I have done a fair bit of research on US index funds/ETF's and compared their performance to investment trusts over various time periods (trust net have some good charts for this)not just the recent boom years and they have outperformed in terms of total performance even with dividends reinvested compared to most investment trusts over a wide range of time periods.

I have used the recent falls to adjust my portfolio to add some exposure to S&P trackers.I think if it crashes its highly likely it will bring most other markets down with it but when it outperforms it seems to leave the others behind.

Maybe I have missed something or got my figures wrong would be interested in others views.

[zac0_4] 26/4/2020 22:07

I hold a number of Investment Trusts, Individual dividend paying shares and a number of funds (OEICS). I'm drawn to the trusts and individual shares because of the dividend payments but can't help but think I'd be better off simply investing in funds and drawing down on a quarterly basis an amount equivalent to an average dividend payment. Total returns look far better from a simple international index fund than from all my investment trusts (HFEL, EDIN, HHI, Merchants). Merchants is a recent acquisition. I'd welcome any constructive comments.

[superiorshares] 26/4/2020 10:59

Hello goldpig. I have made big gains and losses. my biggest gain ever was in Henderson far east income. I got into that about a year after the Asian currency crisis. Biggest losses 9/11 it all went pretty much. The financial situation was a non-issue as far as that event goes.
I like investment trusts but at the end of the day all you are buying is a basket of shares. No different to a share in a downturn.
Where my opinion differs to a few on here. There isn't going to be a return to growth and nor will the dividend be there. I seriously think we are going into a 5 year depression.
The debt levels coupled with the debt of the 2008 financial crisis is going to be just too much.
I will be watching property very closely. The collateralized debt obligations the bulk of which were linked to mortgages triggered the 2008 financial crisis. Complicated debt obfuscation will trigger the coming crisis too.
I still am totally absorbed by the markets a lifelong addiction for me.
I am out for the next 10 months at least.
Those that have the nous to trade debt contracts, they will make good money. The rest will be lucky to keep their head above water.
If I am correct ???? :-). I will be looking closely at MRCH, HHI, HDIV, HFE, BP, NWF, RFX . but a lot cheaper than they are today.
Regards All