Page 15 - DIY Investor Magazine - Issue 27
P. 15

      Investment trusts automatically diminish risk by diversification because most hold dozens of different underlying shares within their professionally managed portfolios.
The principle is the same as Granny’s advice not to have all your eggs in one basket; in practice, a diversified portfolio would have aimed to avoid investing too much money in technology shares in 2000 or financial shares in 2008.
Lest all that sounds historic, here and now just five shares - Facebook, Apple, Amazon, Netflix and Google (listed in New York as Alphabet) - comprise a fifth of the value of the Standard & Poor’s 500 index.
So, these technology giants, that form just 1% of the corporate constituents of this broad measure of the American market, comprise 20% of its value.
Today’s worries may seem unprecedented, but several investment trusts have survived events that put them in perspective.
For example, JPMorgan American (stock market ticker: JAM) was founded in 1881 and Mercantile (MRC), in the UK All Companies sector, was founded in 1884; so both survived the Spanish flu of 1918, which is thought to have caused more than 20M deaths, the Great Depression and both World Wars.
No open-ended investment company (OEIC) or unit trust can point to similar longevity. More positively, investors in JPMorgan American have been rewarded for taking a medium to long- term view.
They have received total returns of 12% over the last year; 98% over the last five years; and 291% over the last decade, according to independent statisticians Morningstar via the Association of Investment Companies (AIC).3
Meanwhile, as Brexit continues to create uncertainty about British stock market valuations, Mercantile suffered shrinkage of 9.1% last year but delivered total returns of 32% and 169% over the last five and 10-year periods.
Past Performance is not an indication of future performance
3 Source: Association of Investment Companies,
Mercantile currently yields dividend income of 3.3% which has risen by an annual average of 10% over the last five years.
So, while dividends are not guaranteed and can be cut or cancelled without notice, if Mercantile’s distributions continue to rise at their current rate, shareholders’ annual income would double in just over seven years.
Unfortunately, the coronavirus crisis is forcing many companies to cut, cancel or defer dividend distributions.
For example, more than half the corporate constituents of the FTSE 100 index have disappointed shareholders’ hopes of receiving income during 2020. Fortunately, most investment trusts have sustained shareholders’ income.
The explanation is that investment trusts are allowed to retain up to 15% of their returns in good years, so they can top up or sustain dividend distributions to shareholders in bad years. Some investment trusts have done even better and actually increased shareholders’ income every year over several decades.
For example, JPMorgan Claverhouse (JCH), in the UK Equity Income sector, has raised its dividend every year for an impressive 47 years. JPMorgan Claverhouse currently yields 5.4% and has increased its dividends by an annual average of 7.7% over the last five years. If that rate of rise was sustained, shareholders’ income would double in less than a decade.
However, it is only fair to add that this trust has not been immune to uncertainty about Brexit that has blighted its sector. It shrank by 20% last year but delivered positive returns of 10% and 77% over the last five and 10 years.
     15 DIY Investor Magazine | Mar 2021

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