The ending of compulsory annuities for pensions means that many of us will stay invested in the stock market longer than we previously would have done. That has profound implications that are only gradually becoming apparent. For example,the sheer weight of baby-boomers’ wealth remaining in the equity markets, rather than being annuitised or ‘life-styled’ into gilts, should be a positive factor for share prices.
Another implication, I believe, is that it will encourage people to think about their investments over a longer time horizon. Even if you’re approaching or already in retirement, you could be holding stocks for decades.
On the horizon
There’s an analogy to be drawn with those industries which themselves make investment decisions over decade-long time horizons. Take miners such as BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US). During the over-exuberant, cheap money-fuelled Greenspan Era, management pursued size over profitability.
The current agenda in the sector is to cut back on investment, sell non-core assets, cut operating costs and bump up shareholder returns. That’s especially pertinent for BHP and Rio, both of which are heavily dependent on iron ore. Declining consumption of steel in China means that supply of iron ore will outstrip demand this year. Iron ore prices have gone southward.
Simplification
BHP is executing a ‘simplification’ strategy, with speculation that it might spin-off £12bn-worth of non-core businesses. The company talks of four core ‘pillars’ of iron ore, copper, coal and petroleum, with potash as a potential fifth. Its petroleum interests add a distinctive flavour to BHP’s investment case, whilst potash could become hugely important in a world where crop yields must improve to feed a growing population.
Rio has beaten its own efficiency targets, knocking over $2bn off operating costs and $1bn of exploration spending. Like BHP it’s a diversified miner but it’s even more reliant on iron ore, which contributed nearly 90% of last year’s earnings.
Carry on investing
But amidst all the talk of cuts, it’s important to remember that both companies continue to invest: developing mines is a multi-year, even multi-decade undertaking. Both are large-scale, low-cost producers with mines on the doorstep of the big Asian markets. When volumes do pick up, reduced costs will show through in bumper profits.
It’s the kind of long-term thinking that private investors can emulate – such as by buying the shares of BHP and Rio. They’re relatively cheap now because of the outlook for commodity prices, but if you buy them in the down-cycle you can enjoy the benefit when the cycle eventually turns.
Dividends
There’s another big advantage to holding these stocks over a long period. Right now they’re yielding around 3.8%, a tad over the FTSE 100 average. If you reinvest those dividends over a long period, it can seriously boost your wealth. Over the past 25 years, about 60% of the total return from the FTSE All share Index has come from reinvested dividends.
