Cherry picking

Ian Cowie highlights three investment themes to prove profitable in 2021.

Cherry

Political pundits may disagree but green energy, healthcare and international income are three themes this investor expects to prove profitable in 2021. Brexit has dominated headlines since Britain voted to leave the European Union (EU) on June 23, 2016. But, rather like a divorce, now the difficult deed has been done, I expect we will hear rather less about it in future.

By contrast, America, Britain and the EU have all set ambitious targets to reduce dependence on fossil fuels in the years and decades ahead. For example, Joe Biden, president-elect of the world’s biggest economy, has promised to spend $2 trillion stimulating renewable energy. Boris Johnson has enthused about a “green industrial revolution” in which Britain will become “the Saudi Arabia of wind”. Next November, Glasgow will host the United Nations climate change conference on how to implement the Paris Accord on cutting carbon emissions.

Coming down from the clouds, investment companies are the ideal way for individual investors to gain exposure to this global macro-economic theme. Unlike open-ended pooled funds, closed-ended funds - such as investment companies - can hold illiquid assets without needing to worry about having to turn them back into cash in a hurry.

For example, this small shareholder now has professionally-managed exposure to solar energy, wind farms and industrial-scale batteries via three investment companies. They are Ecofin Global Utilities & Infrastructure (stock market ticker: EGL); Gore Street Energy Storage (GSF) and US Solar Fund (USFP); the latter two being additions to my portfolio during 2020. While returns are not guaranteed, going green doesn’t have to mean investors must rely on receiving ‘jam tomorrow’. According to independent statisticians at Morningstar, EGL generated total returns of 25% over the last year, while GSF offers a dividend yield of 6.6%.

Sad to say, one reason governments around the world are now committed to cleaning up and pumping less pollution into the air is a respiratory disease which the World Health Organisation reports has killed 1.8m people. More positively, investors can contribute to the war against the coronavirus by helping to fund research into vaccines and other medical treatments.

Massive sums of money are required. For example, the American pharmaceutical giant Pfizer said it committed $2bn to create the first coronavirus vaccine in co-operation with the German biotechnology company, BioNTech. This small shareholder knows next to nothing about the science involved but is happy to fund better medical outcomes via investments in International Biotechnology Trust (IBT) - another 2020 addition to my ‘forever fund’ - and Worldwide Healthcare (WWH), in which I have invested for more than a decade. Morningstar reports IBT generated total returns of 36% last year, while WWH delivered 20%. Interestingly for investors preparing to pay for retirement, IBT also offers a dividend yield of 3.5%. That is noteworthy while the Bank of England base rate remains frozen at 0.1% and more than half the corporate constituents of the FTSE 100 index of Britain’s biggest shares cut, cancelled or deferred their dividends last year.

Investing internationally is an effective way to diminish the risk of dividend disappointment. Income-seekers enjoy a wide range of investment companies offering attractive yields, regardless of whatever happens to Britain or Brexit. Two I hold include Henderson Far East Income (HFEL), yielding 6.9%, and JPMorgan Japan Small Cap Growth & Income (JSGI), yielding 3.2%.

Because investment companies can smooth out the shocks of the stock market by retaining some returns in good years to top-up payouts in bad years, many of these investment companies have sustained rising dividends for more than a decade. However, it is worth emphasising that dividends are not guaranteed and the price of a high income today can be low or no total returns tomorrow. For example, HFEL has delivered inflation-busting dividends which helped me enjoy tax-efficient income from my ISA over many years but a disappointing total ‘return’ of minus 4% last year. By contrast, JSGI’s more modest yield can be seen in the context of a total return of 43% over the same period.

If the difficult year of 2020 taught investors nothing else, it is that none of us has 20/20 vision about the future. However, Deo volente, this small shareholder expects to continue investing in green energy, healthcare and international income via a portfolio of investment companies for many years ahead.