the ultimate investment guide
You can be the most lauded oracle of the stock market with the most impressive of track records, but it will never take away from the fact that picking out individual equities is risky business.
Even if the company in question dazzles onlookers with double digit revenue growth and impressive earnings to boot, this by no means serves as a guarantee for positive share price performance.
To give you an example of this, I highlighted Zoom on November 20th 2020 as an interesting company to possibly add to the watchlist. Fast forward to their most recent set of quarterly numbers and they’ve posted EPS of $1.36 beating analyst expectations by a whole 17% whilst offering up a 54% increase in YoY top-line revenue crossing the $1bn Rubicon. Well, this all sounds delightful right?
Not quite, I’m afraid. Since discussing the merits of Zoom last year and with a supposedly impressive recent quarter under their belt, the shares are down around 37%...
Evidently the market is quite happy to disregard their progress as the idea of lockdown living becomes just a mere speck in the rear-view mirror, or at least that’s what the share price would lead you to believe. Whether or not it plays out like this is yet to be seen.
If nothing else, I hope this drives home the risks of pinning your hard-earned wealth to an individual company.
So, with that in mind, I thought I’d take the time to instead look at some managed Investment Trusts and ETFs. Hopefully reducing the risky element by letting a highly experienced investment manager spread your capital across a group of stocks.
Over the next few paragraphs, I’ll bring to light several ideas which I’ve ranked from mild to spicy. A slightly unique ranking system indeed, but one put to me by a good friend – Dan.
“Tim, I have no idea what I’m doing. I need to put my savings somewhere, can you just give me some ideas as if I’m looking at a menu and put it in order of mild, medium and spicy?”
Of course I can, Dan… So, without further ado;
Mild
Without a shadow of a doubt, the most common question put to me as a stockbroker is, “how do I invest in the S&P 500, Tim”?
The short answer is to look at a passive index fund (or ETF) whose task it is to mirror a benchmark index such as the S&P 500.
As described on the tin, the index fund will give the prospective investor access to a broad range of equities within the benchmark it’s tracking in one simple share. No need to go out and buy 500+ different companies and carefully calculate the specific weighting of each purchase to replicate the S&P 500, just let the index fund manager worry about that.
Do a quick Google search of S&P 500 tracker funds and you’ll be overwhelmed with different ETF (exchange traded fund) providers promising to fulfil your need with minutely varying degrees of accuracy, cost and performance. Providing you’re not electing to go for a leveraged equivalent, the difference between most of them is almost negligible.
But to speed up your process, feel free to ‘pass go’ straight to Vanguard S&P 500 UCITS ETF (£VUSA or $VUSD). With a dividend yield of 1.12%, if you invest the princely sum of £17,857 and you too will collect £200 over the 4 quarterly dividends.
I’ve highlighted this particular ETF for a few simple reasons; it’s available to UK clients, open for retail investing, has a very reasonable expense ratio of 0.07% and can be bought in either GBP or USD. Not to mention Vanguard is one of the largest ETF providers in the world.
The numbers in the above infographic are quite impressive for a passive index ETF, but it’s worth remembering, it hasn’t always been this good with the long-term annualised returns of the S&P 500 averaging 10%.
While we’re on the subject of passively managed index trackers, then you may want to look at other world markets if you wish to broaden your horizon beyond the US economy.
Other notable ETFs you can add to the watchlist include iShares Core MSCI World UCITS ETF USD (ticker: SWDA) and SPDR FTSE UK All Share UCITS ETF (ticker: FTAL).
iShares Core MSCI World ETF looks to provide broad exposure to a wide range of global companies within 23 developed countries. And with SPDR FTSE All Share ETF, their objective is to track the performance of the broad UK equity market across the FTSE 100, FTSE 250 and FTSE small cap index.
Both have an accumulating dividend policy, meaning any cash dividends are reinvested into the ETF reflecting in the share price and both have an expense ratio of 0.2%.
medium
From passive tracking, let’s move on and see who might be best positioned to try and beat the respective benchmark as we enter the realm of active management.
I’ll split this into two areas, first for higher-than-average income yield and a second option seeking to outperform on growth.
According to dividenddata.co.uk the current average yield across the FTSE 100 is 3.4% which will act as the magic number to try and beat. Now admittedly I’m not a huge advocate for FTSE investing as I tend to prefer the growth profiles of big tech in America, but if there’s one thing the UK markets do well, it’s income. The abovementioned 3.4% dividend yield comfortably beats out other developed markets such as the DAX 30 (2.72%), CAC40 (2.28%), S&P 500 (1.28%) and the Nikkei 225 (1.28%).
With that in mind, and having scoured various investment trusts I keep coming back to the same two names. Those being Merchant Trust PLC (MRCH) and Henderson High Income Trust PLC (HHI).
Merchant Trust, established in 1889, is now on a 39-year streak of increasing their dividend pay-out and approaches the task with a simple yet effective memorandum – look only for quality companies with solid prospects, on reasonable valuations.
Thus far, this simple yet disciplined approach seems to have merit with the share price outperforming (cumulatively) their FTSE All-Share benchmark over 1, 3 and 5 years.
Share price performance to one side, we came here to hear about the dividends. And again, they’re able to beat the benchmark with a very healthy 5.1% yield.
Scanning through their top-ten holdings, it’s filled with large-cap household names such as GlaxoSmithKline, National Grid and Royal Dutch Shell.
It also includes some companies which I’ve previously raised an eyebrow at, having concerns surrounding their ability to keep up on their dividend pay-out promise such as Imperial Brands and Vodafone (Big Dividends).
But therein lies the beauty of handing the reins over to an investment manager who can do the worrying for me and continually monitor any changes in ongoing dividend policies. It would be very tricky not to differ on opinion on every single holding within a diversified investment trust, but with their long track record of increasing dividends and outperforming the benchmark, it certainly won’t keep me up at night.
Before we get to the hot and spicy section of the menu, I’d like to quickly shine a light on the Henderson High Income Trust. I won’t go into as much depth as it shares many common traits with Merchant Trust.
Like MRCH, Henderson High Income Trust is focused on returning an above average income stream while maintaining the prospect of capital growth. But from there they start to differ in their approach on how best to achieve this goal.
HHI is slightly less UK centric with 85.76% of their holdings sitting in the UK (MRCH is 95.6% UK) and will utilise slightly more gearing to enhance the returns of the fixed income portion of the trust.
Apart from that, the similarities then continue with HHI also outperforming (cumulatively) their respective benchmark over the past one, three and five years. Look through their top ten holdings and again it’s filled with familiar FTSE 100 staples such as Unilever, RELX and Rio Tinto.
Now for the important part, the dividend yield! Well, I’m pleased to report a sizeable 5.6% which is split into quarterly payments of 4.75p per share. All-in all, a very worthwhile alternative (or addition) to Merchant Trust.
To finish off the medium portion of today’s menu, I promised to highlight something more focused on growth than Income.
A few came to mind for consideration including the very popular Scottish Mortgage Investment Trust (SMT), but it was another Ballie Gifford investment trust that stood out for me – Monks Investment Trust PLC (MNKS). Monks got the nod in large part because SMT’s 18% exposure to China whose market I find erratic at the best of times.
Considered to be a less aggressive version of SMT, Monks is managed by Spencer Adair (as of 2015) and had this to say when asked about how the trust is organised in the recent video interview; ‘Monks is and remains a trust that’s laser focused on long-term capital appreciation. We scour all four corners of the world looking for businesses whose growth prospects are underappreciated. Monks is global and Monks is underappreciated growth’.
The objective of the trust is to return long-term capital growth which takes priority over income.
With a dividend yield of just 0.14% it certainly ticks the latter of the two boxes – so I’m keen to unpack some of their top holdings and share price performance to see if they live up their earlier promise of growth.
Their biggest geographical weighting is in the United States (50.48%) and their top ten holdings include US growth stocks such as Alphabet (Google), Shopify and Amazon which fits in nicely with the capital growth objective.
Interestingly, their largest holding (3.8%) is another Ballie Gifford housed fund – The Schiehallion Fund, which invests in a mix of listed high growth stocks and later stage private businesses who they believe are on the cusp of a full stock exchange listing.
This all stacks up rather well for a growth focused investment trust and historically performance is also consistent with this profile having gained 31% over 1 year, 70% over 3 years and 178% over 5 years.
For more in-depth information on the Monks Investment Trust then I’d recommend watching the very insightful video interview for yourself;
HOT HOT HOt
“You can almost view Chrysalis as a Dragon’s Den style investment vehicle but on steroids. “
I couldn’t think of a more appropriate time to drive home some of those risk warnings typically attached to any financial website or piece of stock market related literature. Share prices do go DOWN as well as up, capital is at RISK and if you dance with the devil, you are at risk of getting burned.
You get the idea.
For this last section, I was keen to cover the Cathie Wood actively managed ARK Innovation ETF but sadly it’s not available to retail clients in the UK. But hopefully I can try and capture some of her gumption with an equally as bold investment trust.
And if we’re sticking to the theme of investing in next generation disruptive technologies, then you might want to pay attention to Chrysalis Investments (CHRY). This is an especially unique proposition as it gives shareholders exposure to unquoted private companies the likes of you and I would never normally have access to.
“Chrysalis Investments is looking to identify businesses that are disrupting huge addressable markets by harnessing the benefits of technology. These are typically later stage assets, with proven business models that are generating strong rates of growth with superior economics.” – Chrysalis website
You can almost view Chrysalis as a Dragon’s Den style investment vehicle but on steroids. Before you hear about the likes of Cathie Wood snapping up listed shares of next generation technology companies such as Palantir, Coinbase and Zoom, there would have been a yesteryear before even appearing on her radar. A time when ‘cross-over capital’ investment will have been needed in order to grow into the status of being a publicly listed company.
Step in Chrysalis, whose job it is to hunt out the next multi-bag success story. To understand Chrysalis, it would be best to look at a couple of their recent successes.
Klarna, which makes up 28% of Chrysalis’ portfolio is a Swedish fintech buy-now-pay-later app who recently completed a $1bn funding round that values Klarna at a staggering $31bn. The reason this number is so significant is because it’s nearly 3X higher from the year prior when it was valued at $10.7bn and 5.6X higher than their $5.5bn 2019 valuation. With that kind of explosive growth, you can start to understand why the Chrysalis Investment has such a high conviction position in the Swedish un-listed company.
Another large holding within the Chrysalis portfolio is Wise (formally TransferWise). A company I’ve heard much about of late, simply because there’s been a surge in client requests asking to fund their Mitto Markets trading account from their Wise payment app (which they can do so).
Years before I experienced an influx of Wise payment enquiries, CHRY investment manager Richard Watts had met with Wise (late 2017) to begin the process of adding them to the portfolio. Proving to be another huge success, Wise is now listed on the London Stock Exchange as a publicly traded company commanding a £10bn market capitalisation.
Other notable names making up the Chrysalis portfolio include challenger lender Starling Bank, members-only travel company Secret Escapes and recently listed The Hut Group (THG).
These wonderful milestones are very much reflected in the share price performance up 164% since they listed in November 2018.
As exciting as this all sounds, I opened this section with a dire risk warning and I’ll leave you with an important reminder of when investing in unquoted companies goes wrong.
Former superstar fund manager Neil Woodford saw his Woodford Equity Income fund implode after an investigation found an over-reliance on illiquid unlisted companies, some of which had questionable prospects. In turn, a mass exodus of investor cash ensued and the fund later became suspended, causing significant losses for any remaining bag holders. This of course is an incredibly rare incident but one not to be ignored.
With that in mind, I have deliberately only mentioned ‘closed-ended’ funds and ETFs instead of ‘open-ended’ funds like Neil Woodford’s Equity Income. The key difference is an open-ended fund is forced to deal in the underlying investments which make up the fund on a daily basis to allow an open number of investors to buy or sell. I.e. if there are large outflows on bad news, the fund will have to sell the underlying shares in order to return cash back to the investor.
In the case of Neil Woodford, this added further pain as it acted as a signal to the market that the underlying shares which make up the fund will come under huge selling pressure in the coming weeks. More selling than buying is not what you want to hear. This isn’t the case with a close-ended fund as there are a finite number of shares which are traded on the secondary market and won’t encroach on their underlying investments. The fund, in this case, can trade at a discount to the NAV but doesn’t mean the underlying securities will be flogged at a less-favourable price.
And with that, go away and do your own homework. These are merely ideas for you, the reader, to ponder and should not be taken as investment advice. Any past performance quoted above should never be taken as an indication of future results but rather a nice point of reference.
If you’ve enjoyed this article and want to start your investing journey, feel free to reach out to me personally on t.sunderland@mittomarkets.com or call 0208 159 8985
Important Notice: When investing in shares, your capital is at risk. The value of the investment and any income from it can fall as well as rise, so you may get back less than your original investment.