This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
By Rob Davies (TMFEssex)
Three-quarters of the way through the year and things are not looking good for the Qualiport. For the year to date it is down 13%, which is a bit painful. Even after the erratic market of the last few weeks, the FTSE 100 is still up 2.3% since the start of January and the FT All Share is up even more, at 5.5%. However, even these numbers look pretty subdued against the nominal 12% the market has returned annually since 1918, or 8% in real terms. These figures have been the subject of considerable discussion on our boards after an article by David Schwartz in last weekend's Financial Times. TMF Tiger weighed in too with forensic comments in his Fool's Eye View this week.
One of the issues revolved around the composition of the total return. Schwartz made much of the fact that capital growth only made up 3% of the return in those 80 years. It was a cheap, attention-grabbing headline, but it worked. The other 5% came from reinvested dividends, in other words money being ploughed back into the business. This was great when the stock market used to yield something like 5% in the seventies and eighties, but now that the yield has dropped to 2.42% it shows that the market will have to work harder to match those gains.
In times past, well up to the fifties anyway, equities used to yield more than gilts, so high yields were common throughout the market. The reason for this was that equities were seriously mispriced. Everyone thought they were riskier than gilts and investors demanded a premium to hold them.
Two things happened to change that. Firstly, Mr Ross Goobey, an eminent actuary and pension fund administrator, started advocating the merits of equities as investments for pension funds. He argued that investing in blue-chip British industrial companies was the best way to create wealth for the burgeoning number of employees who were rushing to join the new pension funds. Until then the funds had virtually all been in gilts.
The second thing that happened was that it slowly dawned on people that gilts themselves were mispriced. Getting interest of 4% on a gilt when inflation was 5%, and rising, was not a good deal. The only way to compensate for that was for the price of gilts to fall, which they did. Good old 3.5% War Loan went from its nominal issue price of £100 down to a low of just £17. That was when inflation was running at 20%+, so even when gilts were yielding 17% you were still losing money.
Since those dark days of course the economy has been transformed and inflation is no longer a big problem. The price of War Loan has recovered to £70; it doubled in 1988 alone. A wild ride over 30 years for something supposedly as safe as houses.
However, the net effect of all these gyrations is that while interest rates on bonds have fallen back to levels last seen in the fifties and sixties, the yields on equities have fallen even more. The "reverse yield gap", to which the market became accustomed in the seventies, eighties and nineties to compensate for inflation is still there. But inflation isn't.
So now we have a situation where much more of the total return will have to come from capital growth than from dividends. This is where the Qualiport ought to do quite well. The yields on the shares in its portfolio are now significant, with a couple of exceptions like Dell (NASDAQ: DELL), Misys (LSE: MSY) and PizzaExpress (LSE: PIZ). Dell we can excuse because it is American and they have a different culture, and tax system, that works against dividends.
Stock Yield EMA 3.6% ULVR 2.1% MSY 0.5% RTO 1.8% PIZ 0.55% LLOY 3.1% IIG 1.6% Average Yield 1.9%
Some shares, like PizzaExpress and Misys, have particularly low yields, but the rest all have substantial pay-outs. As a technology company we might expect Misys to have a low yield, although I was surprised by how low the yield on PizzaExpress is. However, this is explicable by its continuing expansion programme, which is consuming cash internally.
Nevertheless the average yield on the UK shares in the portfolio of 1.9% is reasonable, especially when we consider that many have exposure to high growth markets. Lloyds TSB (LSE: LLOY), through Scottish Widows, is in a strong position to benefit from the sale of low cost stakeholder pensions and a general move by the population to make provisions for retirement. EMAP (LSE: EMA), despite its wobble this week, still looks like a very cheap way into the Internet business to me. And we all believe in that, don't we?
Unilever (LSE: ULVR) has a fearsome competitor in Procter and Gamble (NYSE: PG) but both companies have enormous potential to sell household goods and fast food to the majority of the world's population that have yet to experience it. This week P&G unveiled its Internet strategy and it can't be long before Unilever does the same. P&G are setting up a separate brand to sell over the net, presumably so as not to cannibalise existing sales. The fledgling operation has an initial sales target of only $50m, so it's pretty small at the moment.
Nevertheless, as the Gardner brothers have said, today every company must have an Internet strategy. Apart from mining and oil companies I can't think of any company that can't use the Internet to deliver its products more efficiently to the market place. If you Fools can think of other companies that don't need the Internet please tell us on the Qualiport message board.
The key to successful long-term investing is growth. The trick is finding the companies that can do it.
Company Change Bid DELL(US)-0.30 42.00 EMA +0.56 8.94 IIG +0.05 2.78 MSY -0.35 5.59 PIZ -0.05 8.05 RTO 0.00 2.14 ULVR -0.09 5.61 LLOY +0.06 7.59 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 2.78 7.8% 04/11/98 245 Pizza Exp 7.93 8.05 1.6% 29/09/99 356 Lloyds TSB 7.56 7.59 0.5% 22/04/99 347 Misys 5.76 5.59 (3.0%) 27/01/99 74 Dell (US) 44.63 42.00 (5.9%) 19/12/97 783 Rentokil 2.55 2.14 (16.1%) 17/04/98 169 EMAP 11.34 8.84 (22.1%) 17/07/98 266 Unilever 7.53 5.61 (25.5%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2098.90 126.26 04/11/98 245 Pizza Exp 1966.34 1972.25 5.92 29/09/99 356 Lloyds TSB 2723.20 2702.04 (21.16) 22/04/99 347 Misys 2028.71 1939.73 (88.98) 27/01/99 74 Dell (US) 2007.42 1883.64 (123.78) 19/12/97 783 Rentokil 2046.53 1675.62 (370.91) 17/04/98 169 EMAP 2341.32 1785.68 (555.64) 17/07/98 266 Unilever 2052.00 1492.26 (559.74) Cash: £2,710.26 Current Total : £18,260.38 Total Invested: £18,184.62 Profit/(Loss) : (£ 1,924.24) Value Per Share Day Month Year Qualiport 0.01% 0.01% -13.54% FTSE 100 -0.98% -0.98% 1.50% FTSE All Share -0.84% -0.84% 4.80%