My review for 2020-21 (1 May 2020 to 30 April 2021).
As I said last year, the number of income units increased 10.7 per cent between early March and late April 2020. I took advantage of market weakness to add new capital. None has been added since.
However, there have been some trades.
Early in June 2020, I sold Marlborough Multi Cap Income (a unit trust) which was going to pay a much reduced dividend. Due to its open ended structure it had no reserves. The proceeds went into Murray International and Acorn Income Fund (both investment trusts), as well as a new position in BlackRock Smaller Companies investment trust which was then yielding 2.3 per cent and had a very strong dividend growth record. (It then raised its annual dividend 2.5 per cent despite COVID-19.)
CURRENT HOLDINGS (% OF PORTFOLIO)
TOTAL RETURN - INDEX
Absolute performance was strong. The accumulation unit price rose 26.8 per cent year on year, beating the FTSE All Share (25.9 per cent) and FTSE 100 (22.2 per cent) but lagging the FTSE 250 (39.4 per cent) and FTSE All World ($) (46.8 per cent – very strong indeed!). The portfolio had always been ahead of the FTSE indexes and close to, or ahead of, the All World, but it ends its five years behind the All World quite significantly as a result of this year.
Over five years, the portfolio has compounded at 11.6 per cent compared to 14.7 per cent for the All World, but beating the FTSE All Share’s 7 per cent, FTSE 250’s 8.8 per cent and FTSE 100’s 6.3 per cent. Although its constituents have a strong international focus, the holdings are still UK-heavy in terms of their listings.
The portfolio was hurt quite significantly by the strengthening of sterling, which impacted my directly held international holdings as well as the sterling returns of international earners such as Unilever. This probably shows the folly of thinking you can beat the indexes! And I was happy when sterling weakness helped me…
TOTAL RETURN – INDIVIDUAL HOLDINGS
Virtually all holdings had a positive year, excepting AstraZeneca and Reckitt. (As TJH has noted elsewhere, often it seems one year’s best performer is the next year’s worst and this is true: AstraZeneca was my best performer the year before, returning almost 50 per cent.) In aggregate, the new capital which went into MasterCard and PayPal outperformed the overall portfolio return (itself, boosted by their performance) which is pleasing.
CURRENT HOLDINGS FROM PURCHASE TO DATE (30 APRIL 2021):
PayPal has shown a good return for little over one year. It has basically doubled yet the strengthening Dollar reduced the return significantly, as it did for MasterCard. One of my frustrations is that the very strong performance from Spirax Sarco Engineering, Diploma and Renishaw has not had a greater impact on the overall portfolio, because Diploma and Renishaw in particular started out as much smaller holdings. They have grown as a proportion of the portfolio due to their ongoing growth.
How do current holdings look on a historical basis? It seems worth exploring because the portfolio now has five years of unit history:
* Data is only available for the Dollar return on the share price. PayPal pays no dividends so the capital gain is the same as the total return.
** Data is only available for the Dollar return on the share price. MasterCard pays a small current dividend yield which is growing rapidly, however it is unlikely to increase its return above Diploma in second place.
It would be nice if the top performers of my current holdings repeated their performance over the next five years, particularly since they now account for a larger proportion of the portfolio. However, I suspect it more likely that stronger returns will come from the current laggards!
The ordinary dividend income per unit came to 2.90 pence with a 0.03 pence special dividend from Kone, making a ‘yield on cost’ of 2.9 per cent and a ‘current yield’ of 2.15 per cent. This is the third year out of the first five where I have enjoyed a special dividend from one of my holdings. The two prior occasions were Victrex. (Spirax Sarco has form for specials but that was before the portfolio was unitised.)
There are so many complications this year that it is hard to capture the underlying picture. I am pretty pleased with how the dividend stream held up.
The ordinary dividend per unit fell almost 15 per cent. Looking at the absolute figure, total dividends fell over 9 per cent and this highlights the dilution of the dividend per unit by adding substantial new lower yielding investments. Both figures exaggerate the fall to an extent because some dividends move into next year as a result of timing changes, even though they related to this period. Had they been paid on the normal dates, the decline is closer to 5 per cent.
As noted last year, the significant new capital added to the portfolio in March and April 2020 had a dilutive effect on the dividend per unit because it went into MasterCard and PayPal; together, they contributed virtually no yield (the current yield on this new capital was then 0.0037 per cent): ‘even without COVID I would have expected dividends to be slightly down at best in 2020-21’.
If I was running the portfolio solely to try to maintain or grow the ordinary dividend per unit every year, I could have increased it year-on-year by moving lower yielding investments into higher yielding securities, but my focus is more for longer term dividend growth with lower initial dividend yields hopefully growing faster over time. (In fact, doubling the portfolio’s ordinary dividend yield from 2.15 per cent to 4.3 per cent would still have a lower dividend yield than Murray International.)
Leaving aside Marlborough Multi Cap Income, which was sold during the year, the only other dividend cuts came from:
Renishaw (it abolished the dividend for 2020 and has since resumed at its pre-COVID level);
Victrex (it skipped its interim dividend and then paid only a final, reinstated at its prior level); and
Standard Chartered (it was not able to pay its 2019 dividend in May 2020 or an interim for 2020, ordinarily due October 2020; it has now resumed dividends at a low level).
Victrex was somewhat disappointing (it has a history of paying specials!) whereas Renishaw and Standard Chartered could have been predicted more easily. Renishaw slashed its dividend in 2009 and fully restored it in short order.
The actual dividend per share paid was as follows:
The cutters are marked with an asterisk.
Kone’s total includes a special dividend but the ordinary still rose slightly in reporting currency;
AstraZeneca’s dividend was flat in reporting currency;
Rotork increased its dividend slightly (1.6 per cent) but the altered timing of payments mean the payment crosses over into the next year;
Domino’s Pizza’s timing of dividend payments changed.
It is hard to gauge what ‘the Market’ did to get some sort of benchmark. Anecdotally, we’ve seen fund managers claim the ‘income environment’ is the worst for decades and what struck me as unusual was so many dividends being suspended despite the ex-dividend date passing. Taking the income index figures at 30 April 2021 and working out what the historic dividend might have been based on the published market yield at that date (and comparing to same data from the year previous) suggests that aggregate dividends fell as follows:
FTSE All Share minus 31 per cent;
FTSE 250 minus 35 per cent;
FTSE 100 minus 30 per cent;
FTSE All World minus 9.4 per cent.
Against this, my total dividends fell by less than any of these and the ordinary dividend per unit did worse than only the FTSE All World.
I now have no dividends from unit trusts, so the benefit investment trusts have in keeping reserves should help improve the resilience of my portfolio’s income stream when the next crash comes. (Another contribution to the decreased dividend this year was selling Marlborough Multi Cap Income, even though it hopefully improved long term).
The portfolio has returned 16.33 percent of the initial income unit price in dividends (ordinary and special).
To date, about 67 per cent of returns came from capital appreciation and 33 per cent from dividends. That is quite healthy and returns to the immediate pre-COVID situation.
The running costs, based on the portfolio’s capital value at the end of the period, were: annual cost (inc dealing) 0.31% and annual cost (ex dealing) 0.21%. Both are down on the year before which is welcome.
As I said last year: ‘What will the next year bring? Who knows.’ It'll be interesting to see what happens to Renishaw.