buy quality and be patient

Alliance Trust's George Renouf reflects on the shareholder revolution since 1979 and asks if being a shareholder has paid off?

buy quality and be patient


Stockbroking, as it was known at the time, was the preserve of a particular type of chap who worked hard and lunched well, and the culture of public ownership of shares was yet to be defined.

The de-nationalisation of state owned industries started in 1984 with British Telecom, which paved the way for over 40 major businesses employing almost 900,000 people being sold off or privatised, as it became known. It has been suggested that this fundamental change to the structure of the UK economy was largely an accident and that although Sir Keith Joseph, one of Thatcherism’s key architects, was impressed by the telecoms deregulation in the US, the moves here were driven more by the objective of reducing government budget deficits.

However, for whatever reason in early December 1984, 2.1 million members of the UK public grasped the opportunity with both hands to become shareholders, which began a series of changes that would define a generation. By the end of the decade share ownership had jumped from 7% to 25% of the working population.

Despite the calls of “selling the family silver”, one of the most surprising converts to privatisation and this free market based approach, was the Labour party. In 1995 the party voted to amend Clause IV, which had been their mantra for over a century and removed the commitment to “the common ownership of the means of production”; the genie was well and truly out of the bottle and nobody wanted to put it back.

Timing is everything

If you had bought BT shares at launch at 132p and sold in December 1999 at 1060p, you did better than most. However, not all investors were that successful, highlighting that well used investing maxim “timing is everything”! Whether you started investing before 1984 or last week, you should be aware of some longer term numbers which expose the hard facts. Over the past 50 years equity returns annually, in real terms, averaged about 5.5%. Government Gilts have averaged 2.7% and Cash 1.6% on the same basis. This is an average for the UK market as a whole and smoothes out periods of high inflation and extreme volatility.

The first quarter of 2013 has given investors a great start to the year with global equity markets, as measured by the MSCI All World index, returning 14.1% in Sterling terms. The S&P 500 has recently pasted its pervious all time high, set in October 2007 and the FTSE 100 is at levels not seen for 5 years. However, this is still some way below its peak of 6930 reached in December 1999. Financial returns are often referred to in terms of how “the market” has performed and if we look at the period since the market peaked in 1999, returns have been mixed and volatile. Unless your crystal ball primed you to sell ahead of the Tech-bubble burst, then subsequently buy in March 2003, sell in October 2007 and then invest back in March 2009, you might not be as well off as those who invest with 20:20 hindsight.

Since the turn of the century the MSCI All World index would have given investors a total shareholder return of 52% and the FTSE All Share delivery 61%. By comparison the Investment Trust Global Growth sector has returned 95% on the same basis. Active managers, even in a flat market, can produce meaningful investment returns for shareholders. Admittedly much of this return will have come from dividends but that is part of the fundamental reason for investing in quality companies with strong balance sheets, sustainable earnings and earnings growth.

No evidence of great rotation

We need to remind ourselves that earnings and valuations are the biggest determinants of returns for investor’s, not economic growth. The market is a function of what its constituent parts are doing but not all parts contribute equally.

At the beginning of 2013 I felt that many companies offered exceptional long-term opportunities and despite the strong start to the year, I feel this is still the case. We have not solved the global macro-economic ills and European politics will continue to exert influence and volatility on the market but quality companies will still perform throughout the economic cycle and through political adversity.

The Great Rotation out of bonds into equity has also been sighted as the driving force behind the recent market moves, and a rational for the next leg up in the forthcoming bull market. I don’t subscribe to this theory, mainly because there is no evidence to validate it. There continues to be strong flows into bonds as well as into equities, only savings products are seeing inflows dry up. However, I remain convinced there is an opportunity to invest in quality companies at valuation levels consistent with strong positive real returns on a medium to long term basis.

For the fundamental stock picker there remain plenty of opportunities; buying quality well run companies at attractive valuations will produce positive real returns. There has been a lot of discussion about legacies of late and I’m sure that will continue for some time to come. However, for my own legacy I will leave market timing to the preserve of those with a much clearer crystal ball than mine. I think I will stick to my own investment maxim; buy quality and be patient, we know that works.



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