How our Dividend Letter works
An excerpt from a bigger HindeSight Dividend supplement written by Mark Mahaffey, Aalok Sathe and Ben Davies – the full PDF is available by signing up to our Dividend Letter.
While not deluging us in typical rain showers, the month of April was colder than we might have hoped for, but the financial markets have potentially made up for all of that. We shouldn’t be surprised at this because, on a 15-year-average, April has the highest average return for UK equities and also the joint highest positive/negative observation skew.
Sectors that were heavily beaten up in the last 12 months, such as banking and mining, have rallied impressively but all general developed market equity indices, including corporate bonds, made stellar advances.
As part of our general rotational strategy, we lightened up the portfolio considerably with 8 stocks sold this month to take advantage of these gains. We were happy to follow the standard yearly methodology of selling in May and going away, especially when you bear in mind the size of the gains made, compared with the lows in February.
This month’s ‘Panama papers’ revelations have given the socialists a field day in divulging how much tax has been legally avoided or illegally evaded on investment companies set up in tax havens. We are unlikely to hear as much about investment income and the tax on it in future, as it is not likely there will be any – just losses as both zero interest rates and sky high asset valuations threaten the global investment world.
Low interest rates and high valuations bring low annuity rates and low bank net interest margins with them, as well as pension shortfalls and capital drawdowns, especially for the ageing populace. We should be trading at low valuations to discount future concerns, but unfortunately that is not the case. This picture is where I believe we are now in valuations!!
Monthly returns FTSE 100, 2001-2016
As long-term readers will know, the HindeSight Dividend Value Strategy is a rotational strategy focused on the cyclical nature of the stock market, both from a large market capitalisation individual stock basis and a seasonal perspective. We hope to compound our gains throughout the year by holding the cheapest value stocks that will pay sizeable dividends, while also mitigating our losses with strict stop losses and the total size of holding adjustments.
Our strategy is often considered rather short term for many investors, who seem to believe that the best success lies in passive investing over the long term. However, we believe it is a reasonable strategy at these levels of valuations, along with full index hedges.
In 2011, we wrote a report entitled, ‘Gold Portfolio Management’ (which can be found in the reports section at www.hindecapital.com ). This was about savings, pensions and compounding returns with respect to the permanent portfolio. The ‘Permanent Portfolio’ is often referred to as the ‘All weather portfolio’ or even the ‘Cockroach portfolio’, which the late Harry Browne wrote about many moons ago. It basically divides your investment wealth into four equal parts (25%) of stocks, bonds, cash and gold. For most of the last 40 years it has produced not only 8-10% positive annual returns, but also relatively low risk. Although property is not included, the wealth held in property is so large (especially in the UK) any investment portfolio discussion needs to include it.
The price that you pay for property, both on an absolute and relative basis, is by far the largest determinant of a potentially profitable investment. While the business cycle, growth potential and cash flow generation are important, the likelihood of loss increases if you pay too much for anything.
We are extremely worried about valuations with respect to history over any time series you would like to discuss; hence, at these purchase prices, the likelihood of loss is more extreme than ever.