Experience counts

Ian Cowie on lessons he's learned during the coronavirus crisis. 

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Two years since the coronavirus crisis began, a period of extraordinary uncertainty for the global economy that continues with war in Europe today, what has this long-term shareholder in investment companies learned?

First, while none of us knows what the future holds, we can all keep a clear idea of what our investment objectives or priorities are. That is not a counsel of despair - quite the opposite - because it reminds us that short-term stock market shocks might not matter as much as media coverage suggests.

For example, many commentators and speculators reacted to news of the coronavirus by selling their shares, which caused global markets to fall sharply in the spring of 2020. By contrast, I was one of the few to point out back then that the only certainty provided by selling after prices had fallen was to turn paper losses into real ones.

That would be pointless and unnecessary for many people like me whose main investment aim was - and is - to pay for an enjoyable retirement. As I told a senior editorial colleague, who queried why I remained relatively calm during a similar market crash in the global financial crisis more than a decade ago, I didn’t know what share prices would do next month or next year but that didn’t matter much to me because my investment objective was further away than that.

Since then, most market indices have more than doubled, while many have risen by 50 per cent or more from their low point two years ago. Meanwhile, this long-term investor still hasn’t reached the time when I need to turn shares into cash to pay for retirement. So I am jolly glad I avoided short-term panic and, instead, held onto the shares I owned while buying some more with reinvested dividend income.

That raises the second lesson I have learned during the last two years. Investors should never forget the importance of income. Until recently, financial fashion focused on growth stocks - often paying low or no income - before inflation and interest rates began to rise. Now many investors are rediscovering the reality check that can be provided by a real cheque in the post - or any other income payment - depending on whether it is delivered or disappoints.

Put another way, dreams of capital growth may disappear in a puff of smoke - or some unexpected bad news about a virus or a war - but the discipline of dividends keeps valuations rooted in reality. Shareholders’ income payments either turn up on time and to the expected value or they do not.

Sad to say, most of Britain’s biggest businesses or FTSE 100 companies cut or cancelled their dividends during the pandemic panic of 2020 but only a small minority of investment companies did so. The explanation is that investment companies can retain up to 15 per cent of their income during good years in order to sustain or top up shareholders’ income during bad years.

That enables them to smooth out some of the shocks of stock markets and help investors cope with an uncertain future. Never mind the theory, in practice no fewer than 17 investment companies have raised their dividends every year for more than two decades and a ‘magnificent seven’ have succeeded in rewarding shareholders with a pay rise every year for half a century or more.

The third lesson of these crisis years is that they demonstrate the importance of diversification. All investment companies automatically provide this by spreading individual investors’ money over dozens of different underlying assets, so we don’t have too much money in too few businesses - or, as the old adage puts it, all our eggs in one basket.

Without in any way wishing to underestimate the tragic effects of the coronavirus and war in Ukraine, both shocks affected different companies, countries and currencies differently. Investment companies enable investors to minimise our exposure to negative impacts while maximising our participation in any positive consequences.

For example, the search for a vaccine underlined the massive sums of capital required for medical research which shareholders in Worldwide Healthcare (stock market ticker: WWH), among other investment companies, help to fund. The unexpected - and probably to some degree permanent - phenomenon of working from home demonstrated the importance of digital communications and rebooted another of my top ten holdings by value, Polar Capital Technology (PCT).

Meanwhile, war in Europe illustrates the value of investing internationally. On the day Russia invaded Ukraine, my shares in Vietnam Enterprise Investments (VEIL) actually went up and are now knocking on the door of my top ten.

Similarly, the urgent search for new sources of energy has helped holdings in Ecofin Global Utilities and Infrastructure (EGL), Gore Street Energy Storage (GSF), Gulf Investment Fund (GIF) and US Solar Fund (USF). All four yield decent dividends, paying shareholders to be patient while we wait to see what happens with renewable energy.

It’s an ill wind that blows no good. Many investment companies have delivered resilient returns in the form of income and growth during the last two difficult years, giving this investor grounds for hope we can cope with an uncertain future.