Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

The Conviction Five: 2006-21

General discussions about growth strategies which focus primarily on investing for capital growth
Luniversal
2 Lemon pips
Posts: 157
Joined: November 4th, 2016, 11:01 am
Has thanked: 14 times
Been thanked: 1163 times

The Conviction Five: 2006-21

#469844

Postby Luniversal » January 3rd, 2022, 9:10 am

In Dec. 2012, at The Motley Fool, I proposed a portfolio called the Conviction Five. It was designed, to quote one of its members' professed aims, to preserve wealth and to grow it 'in that order'. Not losing much even in crashes was paramount.

The C5 is for investors who would rather see their pile capable of buying a constant amount of stuff over time than risk returning to Go in pursuit of gorgeous gains. To quote the introductory post 'Wealth Preservers- Through Thick and Thin':

A tracker only spares you from doing worse than your fellows, on average; a 'conviction' investment trust, as they have come to be known, purposes to limit losses when others are losing. It can also take advantage of occasional bouts of optimism to lift that capital to a new plateau, but safety first: Buffett's Law about not losing money is paramount.


The conviction brigade is distinguished by free an easy means as well as an unwavering end. It is loosely pledged, or not at all, to maintain a conventional long-only equity stance or orthodoxy in asset allocation; it roves from type to type as the spirit moves it. Concerned not about looking like other Growth sector trusts, Conviction follows no benchmark but strives to keep capital safe come what may. That may prompt either full investment in shares, and a passing resemblance to trusts which liquidate their portfolios little and seldom, or a gallimaufry of bonds (conventional or index-linked), cash, gold bullion, derivatives, stakes in trading businesses... whatever serves the cause of Never (well, hardly ever) Losing Money.

To continue the 2012 introduction:

I have confined myself to five freewheelers whose portfolios are not too artery-hardened by large long-term holdings in unquoted companies or dynastic shibboleths. They can turn on a sixpence. That is when they are not sitting tight looking down their noses at the lemmings rushing for the entrance or exit in a craze or panic; 'masterly inactivity' is an important facet of the Conviction style, going against the crowd almost axiomatic in running such a fund. Not by coincidence, those who do run them are middle aged or older and have seen nearly all of it before, more than once...

...The five in the spotlight are Capital Gearing (CGT), Independent (IIT), Lindsell Train (LTI), Personal Assets (PNL) and Ruffer (RICA), which last is not a British authorised trust but a Guernsey 'investment company' listed in London (1). All are midsized, dedicated to not losing money and tended by opinionated maestri relaxed about being out of step with conventional wisdom.



The C5 has been calculated back to Jan. 13, 2006, as with my paper High Yield Portfolio, HYP06 and other investment trust collections: the Growth Ten (G10) and the Baskets of Seven (B7) and Eight (B8). All these assume £75,000 is invested before 1% initial costs, with apportionment equally to their constituents and no ploughing-back of income. Deflated figures use the Retail Prices Index.

Obviously the models' objectives differ starkly. But to see how widely they diverged in combined return, and how it splits between bird-in-hand dividends and capital gains, tells us something about the right horse for one's course, as well as reveaing volatility along the 16-year line of march. The period took in a brief spell of calm, a dire, compacted slump in equities and a very long but slow and fitful recovery, halted temporarily by a weird, sharp but brief panic. Such conditions provided a strenous trial for a wealth conservationist.



CAPITAL

The Conviction Five's Dec. 31 market values; nominal and real percentage changes/performance in percentage points plus or minus versus the FT All-Share Index:

2006: £84,060, +12.1, +7.7/+0.8
2007: £76,957, -8.4, -12.4/-10.5
2008: £70,932, -7.8, -5.7/+25.0
2009: £88,518, +24.8, +22.4/-0.2
2010: £104,493, +18.0, +17.2/+7.1
2011: £104,743, +0.2, -4.6/+6.9
2012: £116,310, +11.0, +7.9/+2.8
2013: £124,875, +7.4, +4.7/-9.3
2014: £131,970, +5.7, +4.1/+7.8
2015: £159,806, +21.1, +19.9/+23.6
2016: £208,661, +30.6, +28.1/+18.1
2017: £219,673, +5.3, +1.2/-3.7
2018: £243,389, +10.8, +8.1/+23.7
2019: £259,609, +6.7, +4.5/-7.5
2020: £294,612, +13.5, +12.6/+25.9
2021: £286.457, -2.8, -9.9/-17.3


The C5 increased its deflated value in twelve out of 16 years-- including all since 2008 except 2021, the second worst annual outcome. The portfolio would have beaten the index in ten of 16 years. Its compound annual growth rate (CAGR) was 9.0% pa, or 6.1% after inflation (2).

Nominal-value CAGRs per trust were: CGT, 5.3%; IIT, 5.0%; LTI, 16.5%; PNL, 3.8%; RICA, 4.7%. All beat inflation.

Resilience was shown in the early days. The global financial crisis poleaxed share prices from 2007. The portfolio would have fallen by about 8% then and again in 2008, but regained one-quarter in 2009: in real terms, recapturing all lost ground since the end of 2006. There was a further advance of 18% in 2010.

Afterwards, until spring 2020, the C5 would have ridden the gentler upswing which became the Quantitative Easing silver age for asset prices, their longest modern bull run. The portfolio was higher in nominal worth at ten New Year's Eves from 2011 to 2020, and by at least 5% nine times in a row until the latest setback.

Not that the quintet always matched the All-Share Index: it lagged in 2013, 2017 and 2019, and last year it was 18 points behind the benchmark, its worst yet. That is relative: as a partly growth-focused enterprise, the C5 is more aptly stood against the Growth Ten, whose worldwide coverage ought to reflect the capitalist world's vivacity more than British-based businesses alone.

Since inception, though as likely to grow in value each twelvemonth, the G10's actual value had exceeded the convicts only in 2007, finishing £8,000 ahead. After the V-shaped crash and rapid rally, at end-2009 the C5 was £16,000 ahead. It held the lead until 2020, but last year it finished £7,000 behind.

It topped £100K at end-2010, whereas the G10 did not hit six figures until end-2013. At that point the C5 was only £5,000 in front-- such is the penalty of prudence when prices rediscover exuberance. By end-2015, after bullishness had cooled, the C5 led the G10 by £23,000. So it has been fairly nip and tuck, though volatility must also be weighed; see below.


CONTRIBUTORS

The C5 has evolved as a kind of barbell strategy. At one end, Lindsell Train and Independent have been highly volatile, though tending to grow fastest; at the other, Ruffer, Capital Gearing and especially Personal Assets have been safety-first stabilisers at the expense of growth.

Let us consider the year-end percentage weights at six moments of the portfolio's life: 2007, when the market was beginning to crumble; 2009, after the QE medicine; 2013, following a lesser fit of nerves; 2016, when the charge into Lindsell Train began; 2020 and 2021, apres covid fright and relief, and after LTI blew off somewhat:

CGT: 19.1/21.4/18.4/13.0/11.5/13.0
IIT: 17.8/12.6/13.5/11.6/11.1/12.1
LTI: 24.3/23.2/32.7/50.7/57.6/52.2
PNL: 19.7/18.8/15.3/11.2/9.2/10.4
RICA: 19.1/24.0/20.2/13.5/10.6/12.2


Constituents have not altered their mandates or methods since a year ago. Two bulletins have tracked them through the turbulence since the Year 14 report for 2019:

2020 report:
viewtopic.php?f=96&t=27375

Alternatives to conviction trusts:
viewtopic.php?f=96&t=27501&p=380672#p380672

Lindsell Train has dominated the collection for the past third of its history. Lately a widespread impression has arisen that those wonder boys of Deep Value have lost their grip on megatrends: not enough Baillie Gifford-type tech whizzery, too fond of Japan rather than China, too obsessed with venerable 'moat' businesses and luxury brands as a defence against recrudescent inflation. LTI's share price, £1.28 at launch, sank from £14.63 to £12.90 in 2021. But its adherents are staunch; there has been no fugue of the footloose such as Invesco suffered when it lost its way. And now inflation is baring its fangs once more, making that bugbear of LTI's (and RICA's and CGT's) relevant anew.


METRICS

The aggregate of financial results for the composite year to Jun., which best fits different accounting dates, discloses these measures of the C5's robustness: percentage change in deflated net asset value per share; year-end (discount) or premium/expenses as percentage of year-end net asset value:

2006: 8.2, 4.9/1.01
2007: 7.9, 0.8/0.95
2008: -5.3, 2.7/1.01
2009: -9.1, (0.5)/1.11
2010: 23.5, 7.0/1.05
2011: 4.2, 2.4/1.03
2012: 3.8, 3.9/0.95
2013: 9.7, 3.7/1.06
2014: -0.6, 4.2/0.97
2015: 13.3, 3.1/1.03
2016: 6.0, 15.6/0.92
2017: 18.2, 22.2/1.02
2018: 11.1, 24.4/0.94
2019: 11.4, 43.2/0.89
2020: 4.2, 7.7/0.71
2021: 17.1,13.9/0.72


Same metrics by trust, average 2006-21:

CGT: 3.8, 4.7/1.09
IIT: 7.7, (7.8)/0.34
LTI: 13.4, 16.4/1.89
PNL: 2.2, 1.0/0.90
RICA: 3.3, 1.3/1.29
------------------------
C5: 7.7, 9.9/0.96


Real NAV per share has risen by 7.7% pa and in thirteen of 16 years. The only serious setbacks for share prices were 2009, when they fell by 12.0%, and last year, down 22.1%. Mr Market exacted a purchase premium continually except in 2009, when optimism temporarily left safety shots in the locker; but discount control contained that premium until Lindsell Trainmania set in four years ago. Independent alone has generally traded at a discount.

Expenses average 0.96% of NAV; they too peaked in 2009, but have tended to be pruned, although the elephantiasis at LTI cut the average OCR to ~0.7% in the past two years. For the time being at least, the C5's running costs are in the same area as the Growth Ten's.

Some people shrink from paying more than asset value for trusts. The C5 has sold for about a tenth more during its life. In 2020 LTI's blowoff reduced that bagger from a barmy 43% premium to under 8%. A more practical complaint is that the quotes of LTI, PNL and CGT are very heavy, rendering small orders awkward. Growth trusts have been doing share splits and going over to quarterly divis.



VOLATILITY

The portfolio's market value compounded at about 6% real across the last ten financial years. Standard deviations of price changes across these years averaged 14. The FE Trustnet Risk Score (measuring volatility in prices over the last three years but weighted towards the present), was 119 at Dec. 31 where cash is 0 and the FTSE 100 index 100. A year ago it was 115.

For constituents, CAGRs of share prices (% pa), standard deviations and Risk Scores at Jan. 9 are:

CGT: 4.2/44/38
IIT: 9.5/203/156
LTI: 20.6/138/159
PNL: 4.0/36/48
RICA: 3.5/66/67
---------------------
C5: 13.0/14/119


Inverse relationships between Risk Score or SDs and growth rates in value are manifest, except that Independent's performance is subpar against its price gyrations: LTI has grown more than twice as fast and with fewer upsets. The other three members are of a piece. They have accomplished minimal real growth, 1-3% pa. But grow they did, with volatility half or less that of the Footsie.



INCOME

Dividends are even less of a consideration than in the Growth Ten, best regarded as a sweetener.

The historic yield averaged c. 1.5%, against c. 2% for the G10, 3.5% for the All-Share Index and 4% for the universe of 24 income trusts whence my 'baskets' were drawn. No C5 trust pursued a path of ever-rising income. Nor have they promised to resist passes, cuts or freezes. Such policies would compromise the overriding necessity to skirt loss of value: it would imply asking managers to forage among higher-yielding shares, which might well incur markdowns.

However trusts legally have to shell out 85% of their revenue. Outcomes tell a rather different tale from theory. Here are nominal and real percentage changes between calendar years and purchasing power/indexed to 2006:

2006: £921/100
2007: £1,113, +20.9, +16.9/117
2008: £1,232, +10.7, +9.8/128
2009: £1,564, +26.9, +24.5/160
2010: £1,726,+10.3, +5.5/169
2011: £1,516, -12.2, -17.0/140
2012: £1,517, +0.1, -3.0/136
2013: £1,966, +29.6, +26.9/172
2014: £1,973, +0.4, -1.2/170
2015: £2,115, +7.2, +6.0/180
2016: £2,687, +27.0, +24.5/225
2017: £2,785, +3.6, -0.5/224
2018: £3,750, +34.7, +32.0/295
2019: £4,885, +30.3, +28.1/378
2020: £6,756, +38.3, +37.4/519
2021: £7,226, +7.0, -0.1/518


Total £43,731 v. £40,095 for the G10. The Conviction Five's receipts grew at 14.2% pa: considerably brisker than its 8.4% for capital and more than twice as fast as the G10 income's CAGR of 5.8%.

Revenue has grown more lustily than receipts from the baskets or my HYP-othetical. Real falls occurred in four of 15 years, but purchasing power was always at least one-third higher than in Year 1.

Income per trust: total, percentage share of total, CAGRs (%):

CGT: £2,642, 6.0, 8.4
IIT: £7,104, 16.2, 4.2
LTI: £24,467, 55.9, 27.1
PNL: £5,046, 11.5, 1.8
RICA: £4,473, 10.2, 0.0 (sic)
------------------------------------------------
C5 total/average: £43,731, 100.0, 14.2


More than half of dividends have been provided by Lindsell Train, and more than half the capital value is Michael's and Nick's doing. The surge since 2017 comes from the quarter-share of its fund management business's earnings, running open-ended funds that dwarf LTI.

Given the scale of the business, if its house style remains popular enough those earnings may be more repeatable than dividends from the portfolio. Maybe punters will take against Lindsell and Train as they did against Barnett and Woodford, or the founders or their heirs may change LT's ways drastically and detrimentally. Hard to see such a metamorphosis, however. Train recently toyed with retiral-- in 2050.



COVID AND AFTER

Homing in on the period of 22 months since Feb. 20: a brief fright about the Chinese flu gave way after only two months to stoicism. Apocalypse When? Not yet, apparently.

The All-Share sank by a quarter to 3000 in the two nervous months; finished Oct. 2020 at 3150 after a lot of risk on/off uncertainty in spring and summer; then hallelujah, it bounced from Nov. 2020 when vaccines were hailed as the Great Escape. Some mini-panics and recoveries have followed when 'variants' were announced, but optimism mainly prevailed in 2021, if only as a reaction from crisis fatigue. All the same, the FTAS close of 4208 had been exceeded at the end of 2019 and 2017.

Overall, since Feb. 2020 the C5 has risen by one-fifth, but the Growth Ten advanced twice as quickly while the All-Share managed under 8%. Wealth preservation has been achieved when needed most, fulfilling the C5's mandate before it began to be growthier than the growers; I recounted in my last annual audit how it kept a stiff upper lip during the initial scare, losing less than half as much value as the All-Share and less sharply when it was falling.

Well and good, but one cannot ignore the relative feistiness of the G10. By no means a safety-first project, it has fared as well as the C5 in that respect over 16 years, and in most discrete periods within the term. Nor has it depended as much on one star turn. I would have been content if the purchasing power of a £75,000 pot in Jan. 2006 had increased by 140% like the C5, but might the Growth Ten have more tiger in its tank as the comparison onrolls? My forthcoming 2021 sitrep on the G10 will ponder the choice further.
--------------------------------------------------------------------------------------------------------------------------------
(1) The pool from which these were fished included AVI Global Trust (AGT), formerly British Empire (BTEM); Caledonia Investments (CLDN); Hansa Investment (HAN), formerly Hansa Trust; Manchester & London (MNL); and RIT Capital Partners (RCP), which was a tossup with Independent for C5 membership.

A £15,000 position in RIT would have become worth £32,727 by Fri., having paid £5,416 of income after a rebase towards more liberal distributions in 2012. In short, a decent also-ran far behind Lindsell Train, and another calm constituent. Its present Risk Score is 139.

(2) Compound growth ratee in income exclude Jan.-Dec. 2006, when different dates for payouts ('dividend drag'} render comparison impossible.

Mulberry
Posts: 12
Joined: November 4th, 2016, 9:35 am
Has thanked: 40 times
Been thanked: 5 times

Re: The Conviction Five: 2006-21

#470024

Postby Mulberry » January 3rd, 2022, 7:54 pm

I always appreciate your very detailed updates Luni. Many thanks for an interesting read.

Mulberry

monabri
Lemon Half
Posts: 8396
Joined: January 7th, 2017, 9:56 am
Has thanked: 1539 times
Been thanked: 3428 times

Re: The Conviction Five: 2006-21

#470025

Postby monabri » January 3rd, 2022, 8:07 pm

"LTI's share price, £1.28 at launch, sank from £14.63 to £12.90 in 2021. "

I'd like those LTI shareprices!......a few decimal places missing.

Lootman
The full Lemon
Posts: 18681
Joined: November 4th, 2016, 3:58 pm
Has thanked: 628 times
Been thanked: 6564 times

Re: The Conviction Five: 2006-21

#470026

Postby Lootman » January 3rd, 2022, 8:17 pm

monabri wrote:"LTI's share price, £1.28 at launch, sank from £14.63 to £12.90 in 2021. "

I'd like those LTI shareprices!......a few decimal places missing.

CGT and RIT also have unusually high nominal share prices and so care is needed when trading them. I have in the past bought ten times as much as I had intended with both CGT and RIT. Both mistakes were remedied at a relatively low cost, and in the case of CGT a profit. Be more careful than I was!

I think this exercise is great but would be more useful if RIT were used in place of IIT, since RIT is clearly much more widely held here by those investing in this space, whilst IIT is a quirky and tiny fund that is rarely discussed here.


Return to “Growth Strategies”

Who is online

Users browsing this forum: No registered users and 4 guests