The Growth Ten: 2006-21

[Luniversal]

The Growth Ten (G10) arose fortuitously. I intended to create only a rough-and-ready yardstick for UK investment trusts which concentrate on capital gain: it would follow the biggest generalists from the turn of the millennium, mostly old stagers.

I was not out to plug them. But it transpired on jobbing back to 2000 that a portfolio invested with equal amounts would have fared rather well. So I began to treat the Ten as a tool for rather cautious wealth-builders, reporting on progress at The Motley Fool.

This will be a summary account of the G10 in calendar 2021 as measured from a launch on Jan. 13, 2006. That puts it on all fours with another newly reappraised portfolio oriented to capital growth, the Conviction Five (C5), which is designed to be more defensive and less risky. Both would bore gunslingers and speculators (1).

The G10 in the pandemic:

viewtopic.php?f=96&t=30086&p=423161#p423161

Review of 2020:

viewtopic.php?f=96&t=27226&p=374593#p374593

Earlier years:

viewtopic.php?f=96&t=21397

Constituents, unchanged since 2000:

Aberforth Smaller Companies (ASL)
Alliance (ATST)
BMO Global Smaller Companies (BGSC)*
F&C (FCIT)+
Law Debenture (LWDB)
Monks (MNKS)
Scottish (SCIN)@
Scottish American (SAIN, prev. SCAM)
Scottish Mortgage (SMT)
Witan (WTAN)

* formerly F&C Global Smaller Companies (FCS)
+ formerly Foreign & Colonial (FRCL)

@ To be absorbed by JPMorgan Global Growth & Income (JGGI) by Q2 2022.

Long-term holders who wish to accumulate without too many sleepless nights can fish among these trusts. Most focus on larger and more developed foreign markets, though not always on the biggest or staidest companies therein; Scottish Mortgage and to a lesser extent Monks relish whizzy 'disruptors'. The G10 houses a British specialist in smaller issues, Aberforth, and an overseas counterpart, BMO Global Smaller Companies. One mainstream trust, Law Debenture, has a trading arm which is doing well and expanding by acquisition. The mix does not always appeal, but LWDB made a strong comeback in 2021.

The broadest based ITs, Alliance, F&C, Scottish and Witan, together hold hundreds of positions. Alliance and Witan are funds of funds, cracking the whip over subcontracted managers. F&C is a do-it-yourselfer, as was Scottish, until persistently feeble results led it to accept a takeover last October after 134 years of independence. Scottish American stresses size of dividend as well as asset growth, more than the rest.

Don't ask how this olla podrida breaks down between countries, sectors or market cap size. N or do I know how it stands up against a world equity index. The older I get, the less 'mine's bigger than yours, anyhow' interests me. Actual values to finance real needs is my thing, and the benchmark is the cost of living.

Doubtless Wall Street, FAANGs, global brands and consumer staples loom large these days. Let the mostly sobersided managers of these portfolios do the business. The 'Doris' principle of picking a roughly differentiated bunch and leaving it be applies here as with income baskets.

No fussy rebalancing after purchase either. Leave well enough alone. So are they well enough?

Results are calculated on the same £75,000 gross outlay as as the C5-- £7,500 per trust in the G10-- on the same start date of Jan. 13, 2006. Tabled below are anniversary values; percentage changes year by year; real changes deflated by the Retail Prices Index/and performance against the FT All Share Index in percentage points, where a minus denotes underperformance.

CAPITAL (at Dec. 31)
2006: £81,604, +8.8, +4.4/-2.5
2007: £85,190, +4.4, +0.4/2.4
2008: £56,446, -33.7, -34.6/-1.0
2009: £72,365, +28.2, +25.8/1.2
2010: £90,109, +24.5, +19.7/11.6
2011: £80,336, -10.5, -15.6/-4.2
2012: £93,149, +15.9, +12.8/7.7
2013: £119,650, +28.4, +25.7/11.8
2014: £123,560, +3.3, +1.7/3.4
2015: £137,020, +5.8, +4.6/8.3
2016: £154,392, +18.1, +15.6/5.7
2017: £187,067, +21.2, +17.1/12.2
2018: £173,543, -7.2, -9.9/5.7
2019: £212,432, +22.4, +20.2/8.2
2020: £260,136, +22.5, +21.3/34.9
2021: £292,627, +12.5, +5.4/-2.1


The G10 had topped £250,000 for the first time in 2020, more than tripling 2006's investment. It approached £300,000, quadruple, in 2021 but sllpped behind the All-Share Index after far outracing it the year before; it has led the index in 12 of 16 years, including eight in a row until 2021.

As investors grew more sanguine about covid, overseas markets, especially North America, began to look pricy against London-listed ones. The G10 specifically was restrained by waning enthusiasm for Scottish Mortgage, its recent, US-oriented star. (Similarly, a loss of confidence in Lindsell Train held the C5 back.)

Market value's increase since inception is 290% against c. 63% inflation*. The C5 is up 282%. The All-Share is up 45%. the FTSE 100 a miserable 11%. Compound annual growth rates, deflated, have been 8.9% for the G10, 8.4% for the C5, 2.4% for the FTAS and 1.0% for the Footsie, with inflation 2.9%.

FE Trustnet Risk Scores measure volatility in 2019-21, weighted towards the present. The FTSE 100 is the benchmark on 100 where cash is 0. For the Ten the blended score is 126 (107 a year ago), skewed by Aberforth's 186 and Scottish Mortgage's 178. For the C5 it is 117, so the intention of distinguishing these portfolios by volatility has held good. The G10 is reasonably stable, although it lost one-third of its worth in the darkest year of the Global Financial Crisis and would be less cushioned by its revenue stream than an income 'basket' in any general slump.

Average discount now is 4.2%, against 6% or so over the G10's life and 2.9% a year back. The C5 normally sells on a premium of around 10%. For those who hesitate to buy over the asset value, that will be a consideration. Only three Growth Ten members are on premia, and those are 3% or less: SAIN, LWDB and SMT. The broadest discounts are for ASL and BGSC: evidently the belief that small companies have more bounceback to come has not made headway.


INCOME
This is a less important affair in the G10 than in my 'baskets'. Dividend growth has been livelier than in British-focused income ITs. It can be treated as a reward en passant for patience.

Law Debenture is the sole member with a yield above the run of UK equities-- 3.6% forecast-- though the incoming JGGI should return about the same. Monks pays almost nothing by design. Scottish Mortgage emits mixed signals: it downplays payout growth in principle, yet it supported the established dividend rate by drawing in a 'relatively immaterial' way on realised capital profits while the revenue account was under strain in 2020.

JPMorgan Global Growth & Income, the rescuer of Scottish IT, has since 2016 forecast a dividend based on paying 4% of its latest net asset value, irrespective of whether that is a natural yield or has to be reinforced from realised gains. Others may copy that practice to rebase yields permanently higher. They possess big distributable reserves, and big firms worldwide are more willing to shell out.

'Global Growth & Income' using natural yield only in the manner of Murray International (MYI) may be the future. G10 constituents such as F&C moved to quarterly payouts, aware that most investors like to be refreshed regularly if modestly as they watch capital values fluctuate. For now, though, the G10 yields less than half the All-Share Index and far less than the Baskets of Seven or Eight.

Actual amounts produced including specials, plus nominal and real percentage changes each year:

2006: £1,377
2007: £1,679, +21.9, +17.9 (incl. 'dividend drag')
2008: £1,850, +10.2, +9.3
2009: £1.948, +5.3, +2.9
2010: £1.849, -5.0, -9.8
2011: £1,994, +7.8, +3.0
2012: £2,210, +10.8, +7.7
2013: £2,362, +6.9, +4.2
2014: £2,464, +4.3, +2.7
2015: £2,591, +5.2, +4.0
2016: £2,684, +3.6, +1.1
2017: £2,829, +5.4, +1.3
2018: £3,249, +14.8, +12.1
2019: £3,416, +5.1, +2.9
2020: £3,885, +13.7, +12.5
2021: £3,707, -4.6, -11.7*


Last year the Ten's dividends lost 11.7%* in purchasing power. This is the first time it has diminished since the GFC, and by more than in 2010. Much of the pandemic-related divi devastation among companies was precautionary and temporary, however-- replenished income is on the cards. Meanwhile the G10's real income after all the machete work remains more than three-quarters higher than in Year One.

Similar stats for the Conviction Five: an erosion of just 0.1% after inflation in last year's payout thanks to Lindsell Train's fund management profits, after only one other major decline, 17% in 2011, albeit there were three others of 3% or smaller. The C5, stuffed with bonds, bullion and alternative investments, is neither expected to cultivate payouts nor to keep them rising; but it has finished its 16th year with a payout more than five times the size of Year One's in real terms.

This has become a tale of two baggers. Although the C5 started more slowly, the Growth Ten to date has yielded £40,095 from £75,000, compared with £43,731 from the C5. It overtook the G10 because Lindsell Train strews earnings while Scottish Mortgage minimises them. Not that either growth portfolio comes close to my income machines: £58,410 from the 'growth-of-income' B7, £62,804 from the 'juicy but slower growth' Basket of Eight.

It is imaginable that Lindsell Train's distributions will loom less dominant and the C5's revenue will relapse, while the growthers go on swinging towards 'juiciness'. If so, the G10 may retake the lead in total return. Worse, a drier stream from Lindsell Train might knock a hole in the C5's market value.


CONSTITUENTS
Briefly, individual contributions: share price change in 2021 and since launch/Risk Score now and a year ago:

ASL: +17.1, +120.6/186 (194)
ATST: +13.9, +197.0, 2, 9.9/110 (105)
BGSC: +20.6, +350.1/130 (135)
FCIT: +17.4, +254.3/117 (111)
LWDB: +15.1, +166.8/132 (135)
MNKS: +1.2, +393.3/123 (107)
SAIN: +16.3, +137.2, 3/95 (88)
SCIN: +20.1, +93.3/113 (103)
SMT: +10.4, +987.4/178 (130)
WTAN: +9.6, +201.7/115 (118)
----------------------------------------------
G10: +12,5, +290.2/126 (107)


Performance rotated more among the best constituents than the worst. BMO Global Smaller Companies notched up six wins on the trot, while for the past five, as three times in the early days, Scottish Mortgage has swept all others aside. F&C and Law Debenture clocked up one win apiece.

The bottom marker for the first 13 years was always Scottish American, partly because its leanings towards running yield and progressive divis discouraged profit-taking. In Year 1 Witan had claimed the wooden spoon. In Years 15 and 16 it went to Scottish IT, whose imminent extinction could be ascribed to pyad's gospel of leaving the market to do your pruning and weeding. Given time it will fix duds.

Balance matters a lot to some, but I see no more call for tweaking and shuffling than in income baskets. My rule of thumb is that a trust could be deemed overweight if it became twice its equalised weight in the beginning, i.e. if it was worth one-fifth of a ten-share job. SMT exceeded that norm at end-2020 and 2021, accounting for 28% and then 31% of the G10's value. But only twice before, and once at BGSC, had any trust been worth as much as 15%, and SMT has stopped imitating a V2, as Bouleversee noticed today.

To sum the Growth Ten up: realisable value compounding at 6% pa after inflation, a useful and robustly expanding dividend add-on, tolerable volatility, little skewing within the selection, well regulated and mainly venerable British companies, easy to trade. No decisions required since 2006. Outlook improving.
----------------------------------------------------------------------------------------------------------
* Nov.'s 7.1% pa inflation (RPI) is used pending Dec.'s announcement.

(1) The full survey of the G10, measured from 'HYP1 Day' in Nov. 2000, takes in financial accounts for the year to Apr. It should appear in six months or so.

[Peter1B1]

l'Uni, thank you for the reminder to set the long-term direction on sound principles and not to tinker. Your approach enabled this beginner-investor to start young family SIPPs in an era of non-defined benefit pensions; which are now showing sufficient returns to perhaps breach government constrained allowances. And all on the minimum annual contribution of £3500 gross.

I did a little desk research last year looking at CAGR and yield for 'my' IT selections and very informative it was. There is one core choice, growth or yield.

If you want the former then you must accept volatility and never be in a forced sale situation, if you can avoid that. Depending on your selection, growth can be unconstrained.

If you want yield then you sacrifice the prospect of higher growth, though inflation protection remains a reasonable expectation.

ITs blending growth and income are plentiful but the search for (any) yield compromises the opportunity for unconstrained growth. Zen-like, growth is associated with new industries, yield with maturity.

It is so important to decide on your investment objective, recognising that it is straightforward in highly-liquid IT markets to move from one to the other, when the need arises.

I hope you continue to enjoy the fruits of your investing endeavours.