An ill wind…

Never before, in more than 30 years investing in the stock market, has the outlook at New Year seemed more uncertain to this small shareholder than it does now in January 2024. At the time of writing, the American navy has sunk three pirate boats south of Suez, as conflict across the Middle East compounds the worries of Europe’s worst war since 1945.

Both outbreaks of violence are not only bad for human life but also threaten the global economy in general and the supply of oil and liquefied natural gas (LNG) in particular. This will focus attention on the fuel we need to keep warm and in work, raising the value of energy independence or self-sufficiency, rather than relying on dictatorships.

Alongside expectations that interest rates will trend downward in 2024, Ecofin Global Utilities and Infrastructure (EGL) should see its 4.7% dividend yield become relatively more attractive and enjoy a better year than last year. Greencoat UK Wind (UKW), another self-descriptive renewable energy specialist in my ‘forever fund’, might also see renewed demand for its 6.7% dividend yield.

Here and now, there are some certainties that can comfort medium to long-term shareholders in investment companies. First, these pooled funds automatically provide diversification to diminish the risk inherent in stock markets by spreading our money over dozens of different companies and – in the case of international funds – countries and currencies. Second, investment companies enable individual investors to share the cost of dedicated, specialist fund management to gain exposure to wealth creation in commercial sectors and/or countries which might otherwise remain closed to us.

For example, artificial intelligence (AI) and weight-loss drugs generated a great deal of excitement last year, causing several companies’ share prices to rise strongly. Both trends are likely to accelerate in 2024 as the AIC’s Technology & Technology Innovation and Biotechnology & Healthcare sectors give us access to a wide range of businesses turning science fiction into commercial fact.
 

Allianz Technology Trust (ATT) currently leads the first of those two sectors over the last five and ten-year periods, according to independent statisticians Morningstar, although Polar Capital Technology (PCT) is in pole position over the last year. Both investment companies include among their top ten underlying holdings the global leaders in AI and augmented reality.

But lesser-known businesses within these and other investment companies’ portfolios could prove even more important in terms of capital growth and income, depending on unpredictable future events. That’s where diversification and professional fund management can boost returns as well as reduce risks.

Similarly, RTW Biotech Opportunities (RTW) leads its sector over the last year, while Polar Capital Global Healthcare (PCGH) leads over five years and International Biotechnology Trust (IBT) did best over the last decade. While PCGH has several big businesses among its top holdings, as does Worldwide Healthcare (WWH), where I have been a shareholder for more than a decade, few – if any – of the assets held by RTW or IBT could be described as household names. But that didn’t prevent them producing healthy returns for these investment companies’ shareholders.

The same could be said about India Capital Growth Fund (IGC), which focuses on medium-sized and smaller companies on the subcontinent. Few of its underlying holdings are familiar to me but investment companies bring the world within reach. IGC leads its AIC sector over the last year and decade with the potential for more to come as major manufacturers move production away from China, the world’s biggest dictatorship, toward India, the world’s biggest democracy.

While some trends are likely to continue in 2024 – because the price discovery mechanism of stock markets doesn’t know or care what year it is – investment companies’ diversified portfolios can help shareholders cope with unexpected events. It’s an ill wind that blows no good and even bad news can create some winners, as well as losers.

For example, to return to where we began, conflict in the Red Sea and approaches to the Suez Canal might remind investors that 90% of the world’s international trade is transported by ship. Freight rates had been falling sharply before container vessels and other craft were forced to reroute round the Cape of Good Hope, which should help to support valuations at investment companies in the AIC’s Leasing sector, such as Taylor Maritime Investments (TMI) and Tufton Oceanic Assets (SHIP).

Certainly, shareholders who held on to some aircraft leasing investment companies through the dismal days of the Covid crisis have been amply rewarded since lockdowns ended and international travel resumed. For example, DP Aircraft 1 (DPA) delivered total returns of 39% over the last year. But capital growth is not the only form of return, with SHIP and TMI delivering dividend incomes of 8.6% and 9.4% respectively.

Dividends are not guaranteed and can be cut or cancelled without notice. Perhaps that caveat scarcely needs stating, with so many reasons to be fearful hitting the headlines. But a decent income can pay investors to be patient and a diversified portfolio should minimise risks and maximise returns whatever happens in 2024.

Ian Cowie is a shareholder in Ecofin Global Utilities and Infrastructure (EGL), Greencoat UK Wind (UKW), India Capital Growth Fund (IGC), International Biotechnology Trust (IBT), Polar Capital Technology (PCT), Tufton Oceanic Assets (SHIP) and Worldwide Healthcare (WWH) as part of a globally diversified portfolio of investment companies and other shares.