Investment companies versus single stocks – Ian Cowie gives his verdict.
Why bother with investment companies when you could just buy shares in individual businesses directly? That question is topical at a time when many newcomers to the stock market are trying to run before they can walk, with day trading all the rage online.
Sad to say, more than a decade since share prices began to trend upward after the global financial crisis, some folk may be over-estimating the rewards and under-estimating the risks of investment. Robinhood, an online American broker, is planning its own initial public offering (IPO) or flotation, despite rising concerns about the “gamification” of investment. The Financial Industry Regulatory Authority recently imposed a record $70m fine on Robinhood for causing “widespread and significant harm” to its clients.
On a brighter note, it’s a quarter of a century since I began to buy shares in investment companies - one of which went on to become my first ‘ten-bagger’ or share whose price soared 10 times or more. So I know from personal experience how investment companies can deliver substantial returns.
However, the flip side of return is risk - or the danger that prices may fall and we might get back less than we put into the stock market. This is an area where investment companies offer important advantages over shares in individual businesses. Investment companies diminish risk by diversification or spreading our money over dozens of different assets to reduce our exposure to setbacks or failure at any one of them.
The principle is the same as not having too many eggs in one basket. If that sounds obvious, then consider how often otherwise successful folk featured in The Sunday Times ‘Fame and Fortune’ interview admit to investing too much in too few individual businesses before they suffered substantial losses and resolved to avoid shares altogether.
More positively, investment companies also enable individual investors to gain access to assets trading in markets that may be far away. For example, that ‘ten-bagger’ I mentioned earlier was called Fleming Indian Investment Trust when I invested at 63p per share in June, 1996.
I freely confess that I knew next to nothing about individual Indian businesses back then and know precious little now. But this small DIY investor was optimistic about the opportunity to participate in the economic development of the world’s largest democracy.
Despite all the recent dismal news about the coronavirus and other difficulties, I remain optimistic - not least because the investment company now known as JPMorgan Indian (stock market ticker: JII) is currently trading at 752p. Similarly, other long-term holdings in Baillie Gifford Shin Nippon (BGS), the Japanese smaller companies specialist; BlackRock Latin American (BRLA); and Jupiter Emerging & Frontiers Income (JEFI) - to name three other investment companies in which I am a happy shareholder - provide professionally-managed exposure to markets which trade while I am asleep.
Closer to home, investment companies can also give individual investors a way into specialist sectors which we expect to generate income and/or growth but where it is impractical to select specific shares or businesses. For example, shopping online is rapidly replacing bricks and mortar retail but all those goods bought on the internet need to be stored somewhere before they are delivered to our doors.
Only the largest investor can obtain direct ownership of a warehouse but Aberdeen Standard European Logistics Income (ASLI) is just one of several investment companies that manage a portfolio of such properties. Since I invested at the initial public offering (IPO) less than four years ago, the shares have delivered double-digit capital gains and currently yield dividend income of 4.2 per cent.
Meanwhile, Polar Capital Technology (PCT) and Worldwide Healthcare Trust (WWH) are both among my top 10 holdings by value after I invested more than a decade ago. Despite my cerebral software dating back to the 1950s and lacking any medical qualifications, both these investment companies enable me to benefit from professional stock selection of technology turning science fiction into fact plus life-changing healthcare innovations, such as the coronavirus vaccines.
What all that has boiled down to over the last decade is total returns of 567 per cent from PCT and 475 per cent from WWH, according to independent statisticians at Morningstar. While the latter’s share price is only marginally lower than its net asset value (NAV), the former’s shares are trading 7.8 per cent below their NAV.
Discounts can widen as well as narrow, so there is no guarantee they offer good value, but such apparent potential bargains are another aspect of investment companies that I find attractive. While I have gone on to invest directly in individual businesses’ shares over the years, I continue to value characteristics only investment companies can provide.
I don’t regard these two routes into the stock market as being competitive, so much as complementary. That’s why both comprise my ‘forever fund’ or life savings and allow me to balance the risks and rewards of investment.