Bill Jamieson: ‘Safe’ dividends | Fund managers

Switzerland has some great scenery but some negative bank interest returns . Picture: Getty
Switzerland has some great scenery but some negative bank interest returns . Picture: Getty
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Could shares paying “safe” dividends double in price? Such was the assertion of investment giant Merrill last week.

A fanciful notion, you may think. There is no such thing as a “safe” dividend – as calamitous examples from RBS to Tesco remind us. And “dividend” shares tend not to be high flyers. If it’s capital growth we’re after, conventional wisdom is that growth stocks tend to sacrifice income in order to build the business.

But today we are in a different era. Across Western economies, interest rates are at ultra-low levels. Deflation is the big concern of central banks.

Last week the European Central Bank finally joined the party. As I wrote here last week, European stock markets were set to enjoy a big uplift. And so it proved: the larger-than-expected quantitative easing programme sent the FTSE Eurofirst 300 Index 5.1 per cent higher last week, the biggest weekly rise since December 2011. The FTSE 100 Index enjoyed a gain of 4.3 per cent, its best week for three years.

Meanwhile, both “core” and “peripheral” eurozone government bond yields fell to record lows. The ten-year German government bond yield sank to just 0.36 per cent, while the US Treasury bond yield dropped to 1.81 per cent.

Such is the expectation that inflation will stay low that there is little likelihood that interest rates in America and Europe will be raised any time soon. This means that cash kept on deposit and fixed interest savings generally are set to offer little by way of investment return. Indeed in some markets such as Switzerland, yields have gone negative. And it is this backcloth that makes equities attractive. The dividend yield on the FTSE 100 today is 3.41 per cent – far above anything that a bank deposit account or bond fund might offer.

And that is before we start looking at the traditional big dividend payers and income-orientated investment trusts such as British Assets Trust on 4.8 per cent and City Merchants High Yield on 5.34 per cent.

The argument for dividends looks compelling. Most income-orientated trusts and funds tend to have portfolios dominated by large companies with attractive yields and a solid record of dividend payment. It is not hard to envisage a stampede of yield-starved investors piling into these companies and driving their shares to record levels. Equity dividend yield in a low-inflation environment looks seductive. And the Merrill argument has logic.

But equities are not government bonds. The fortunes of companies and the dividends they pay can change dramatically. And today’s “safe bet” yield can come to look vulnerable. Keep an eye on risk.

What fund managers are for

How do we rate investment managers? Easy enough – click onto the performance tables and see how they score. Top quartile over six months? Promising, if you’re a momentum investor. Fourth quartile over five years? Bottom of the class!

Even the best can trip up. Look at Warren Buffet, the “Sage of Omaha”, followed by millions, who piled heavily into Tesco – the supermarket giant whose shares have collapsed.

All managers are fallible and capable of getting it wrong. So once we make allowance for that, what is the value of the investment manager?

I am grateful to Victor Wood, the sage of East Lothian investment managers McInroy & Wood, for one of the most prescient and thoughtful observations on this age-old problem. It’s easy to rank an investment manager’s performance on numerical measures over any given time period. And indeed, that is how thousands are ranked.

But there is a broader, latent function that many investors value above arithmetic performance. “The term ‘investment manager’,” Wood writes, “has come to embrace a wide spectrum of activities, ranging from that of an individual appointed to manage a specialised collective fund with narrowly defined objectives to that of a firm which holds responsibility for looking after all of a client’s financial resources.”

In recent years many managers have effectively given up on chasing performance and opted instead for passive index-tracking. But this, he writes, “is like a bidder at an auction who guarantees to match the winning price for every lot, without bothering to check whether he’s buying treasure or trash”.

Personalisation of performance around a “star” fund manager also gets short shrift. For the vast majority of private clients, “protection of their financial resources’ real value is the first concern … that cannot be done by straining after an irrelevant or unattainable objective”.

Wood continues: “Rather, it involves single-minded pursuit of ends that truly matter to a client. Attention to detail, efficient administration and a considered investment narrative are all crucial ingredients in adding value for the client.

“Ultimately, success for a personal investment manager consists simply of a client’s resulting peace of mind. In the end, satisfaction for the client (and success for the manager) consists of a mental state. That is not a condition measurable by financial analysis or performance tables.”

Great wisdom – and so eloquently put – from this estimable firm.