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The Conviction Five: alternatives

General discussions about growth strategies which focus primarily on investing for capital growth
Luniversal
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The Conviction Five: alternatives

#380672

Postby Luniversal » January 25th, 2021, 6:05 pm

My report on fifteen years of the 'Conviction Five' (C5):

viewtopic.php?f=96&t=27375

It found that maverick variants of the growth-minded investment trust would have achieved more capital appreciation with lower volatility than standard growth seekers such as those in the 'Growth Ten' (G10). That was an accidental if not incidental consequence of trying to hang on to the real worth of what one already had, rather than make it bigger.

All the same, the C5's triumph conspicuously arose from one stellar constituent, Lindsell Train Investment Trust (LTI). Latterly it has raced ahead of the field like Scottish Mortgage in the G10.

Back in 2012 my shortlist of 'conviction' ITs on offer in 2006-- the C5's jobbed-backward launch date-- numbered ten: big and old enough to promise the pursuit and achievement of wealth preservation if well blended. Five missed the final cut because they seemed not quite to fit the preservation brief for one reason or another. The other five included two which were more set on growing-- Lindsell and Independent-- against three determined not to mislay much of your original stake, or for long.

Lindsell has recently confounded critics of Long Term Buy and Hold and deep value. But it might not remain so, and in 2006 it might not have been picked at all.

Founded in 2000, its professed intention was "to maximise long-term total returns subject to the avoidance of loss of absolute value and with a minimum objective to maintain the real purchasing power of Sterling capital, as measured by the annual average yield on the 2.5% Consolidated Loan Stock." That answers the C5's ambition, but why as many as four or five cautious critters at all? And how much of Lindsell's success is down not to its portfolio but to the booming eponymous fund management business of its two founders, of which Lindsell owns about a quarter?

For a broader view of the Conviction style, I calculated results for three variations. C5a swaps Lindsell for for RIT Capital Psrtners (RCP); C5b, for Finsbury Growth & Income (FGT). They supply reduced risk and reward.

RCP was floated in 1988 by Jacob Rothschild after a family ruckus. His portion of their fabled wealth, or as some say the iceberg tip of it, went into an investment trust whereby the great unwashed could join the party. RCP was a multiasset operation trying to "deliver long-term capital growth, while preserving shareholders’ capital; to invest without the constraints of a formal benchmark, but to deliver for shareholders increases in capital value in excess of the relevant indices over time." Or so the 2005 annual report proclaimed.

Finsbury reflects the attitude to equities of Lindsell Train, which has run it for two decades: choose sound businesses with defensible brand qualities and stick with them. FGT lacks the 'impurity' of the stake in fund management.

Neither option was interested in distributing income: a further backstop for wealth.

My third alternative is a Conviction Three (C3) which avoids the more aggressive kind of fund altogether. It cleaves to the safety-first outlook embodied by Capital Gearing (CGT), Personal Assets (PNL) and Ruffer Investment (RICA). They too pay meagre dividends.

For comparison, statistics for the Growth Ten are added. Thereby hangs a tale.

During the period Jan. 2006 - Dec. 2020, inflation was 2.9% pa (Retail Prices Index). The FTSE 100 index rose by 13.1% or 6% pa in real terms, and the FT All-Share Index by 26.9%, 1.6% pa real.

Portfolios are calculated back to Jan. 13, 2006. They assume £75,000 was invested before 1% initial costs of 1%, apportioned in equal tranches among their constituents with no ploughback of income.


CAPITAL

Change in market values between launch and end-2020 (£); compound annual growth rates (CAGR), 2006-20 (%):

C5: 219,612/9.9
C5a: 82,666/5.3
C5b: 96,304/5.7
C3: 78,947/5.1
---------------------
G10: 185,136/9.7

CAGR was 0.6% pa for the FTSE 100, 1.6% for the FTAS.

At once we see what a difference one winner makes. The C5 would have clocked more than twice as much profit as other portfolios, and £35,000 more than the Growth Ten. Both compounded at almost 10% pa, whereas the prudent C3 grew barely half as fast. However, all options are handily ahead of 3% inflation.


INCOME

Total dividends, 2006-20 (£); CAGR, 2006-20 (%):

C5: 36,565/15.3
C5a: 22,697/7.8
C5b: 26,932/6.0
C3: 18,724/4.8
--------------------
G10: 35,647/7.4

Relatively immaterial for the full Five, more significant a contributor to the rest despite the trusts' lack of attention to income streams. Even the C3 got one-fifth of its combined return from dividends. The G10 has a running yield around twice that of the Cs, but its contribution from revenue has been comparable proportionately.


COMBINED RETURN

Unrealised profit plus income, 2006-20 (£); combined return as percentage of original investment; CAGR of combined return, 2006-20 (%):

C5: 256,116/242/10.8
C5a: 105,362/41/6.2
C5b: 123,235/64/6.9
C3: 97,672/30/5.9
---------------------------
G10: 220,783/194/7.5

Adding the capital and revenue streams produced a combined result in which the gap between C5 and G10 was no wider than for capital alone, with more of the G10's return arising from bird-in-hand payouts.

The C3 would have appreciated by only one-third in 15 years, including income; the C5 would have more than tripled in value. That was Lindsell Train's doing. Still, without it the C5b, using LT's alter ego Finsbury, fared appreciably better than C5a did with the magic of the Rothschilds.


VOLATILITY

Looking solely at years where market values shrank, for each candidate and the indices:

Number of falls out of 14 years; average fall (%); worst fall (%):

CGT: 2/9.1/9.3 (2007)
FGT: 4/12.5/31.8 (2008)
IIT: 6/21.3/48.6 (2008)
LTI: 2/8.1/8.7 (2008)
PNL: 4/5.4/7.1 (2008)
RCP: 3/8.1/14.5 (2008)
RICA: 4/6.1/11.3 (2018)
-------------------------------
FTSE: 6/11.9/31.3 (2008)
FTAS: 6/11.6/32.8 (2008)

Given the objective, Conviction investors should care more about mitigating downsides than amassing gains. Not merely during an extended run but over a few years, such a portfolio must not leap around a lot, since capital might be required in an hurry, e.g. if sickness strikes in one's retiral.

The biggest annual falls were concentrated in the Global Financial Crisis (2007-08) when the portfolios would have been new and bedding down: hence 'sequence risk' was less of a headache if the rule of thumb for all IT investors-- hold for at least five years-- were observed. Finsbury and particularly Independent handled the GFC clumsily. Later burps in the market have been less damaging.

Of 98 year-on-year changes among the seven potential constituents, 25, one in four, were losses. Eight were of 10% or worse. Personal Assets and Ruffer stand out for averaging falls less than half as great as the market's, and fewer of them. None of the nastiest reverses hit the C3 except Ruffer's atypical lapse two years ago. Independent is the one trust to behave more erratically than the market, and that was skewed by its GFC antics.

For those who care about relativities:

Cumulative capital-only performance differences versus the FTSE 100 {=100); number of years out of 14 beaten by FTSE; worst annual underperformance of FTSE (percentage points):

C5: 294/4/12.2 (2007)
C5a: 166/5/12.8 (2007)
C5b: 179/3/16.5 (2007)
C3: 125/7/18.6 (2013)
-----------------------------
G10: 207/3/4.2 (2011)

Ironically, the only C portfolio outshone by the market as much as half the time was the C3, albeit ups and downs were small-- except for a 19% undershoot in 2018, when (led by Ruffer) it sat out a sharp equity rally. The Finsbury C5b beat the Footsie 11 years out of 14... but so did the G10.

Of 98 year-on-year changes among the seven potential constituents, 25, one in four, were losses; eight of those were declines of 10% or worse. None of the biggest falls hit the C3 except Ruffer's atypical lapse two years ago.


COPING WITH COVID

During the market crash, 14 weeks between Jan. 3 and Apr. 3 last year:

Numbers of weekly falls in value out of 13; average weekly fall (%); largest weekly fall (%); outperformance of the FTAS in percentage points during the quarter:

C5: 6/1.0/3.3/16.5
C5a: 6/1.1/9.9/14.2
C5b: 6/1.1/7.1/15.2
C3: 7/0.3/3.8/25.4
-------------------------
FTSE: 9/2.3/17.0
FTAS: 10/2.4/16.8

When punters were 'bugged' by health scares, each C version would have been rising at least half the time. During the rest of it, they would be down by an average ~1% or less on the week. In no week did any of the four models drop by more than 10%. For 'mine's bigger than yours' braggarts, they would have outpaced equities at large by between 14 and 25 points. Sturdiness, absolute and relative, abounded.


CONCLUSION

My food for thought harvested from this survey is not so much the Lindsell Train effect: i.e., questions it raises about how big a conviction collection should be, and how to select it. No, my concern is the trade-off between any such portfolio and the more conventional Growth Ten.

The C3 carries an FE Trustnet Risk Score of under 50, meaning that it is less than half as volatile as UK shares. Very soothing, only growth since 2006-- though possibly adequate for the diehard conservationist at 2% pa after inflation-- seems modest indeed stood against the Growth Ten's near-7%.

The G10 has lifted its capital value yearly since 2011. Its Risk Score is 104-- thus no more volatile than British shares as a class-- versus 112 for the 'classic' C5 and c. 50 for the C3. Was minimising volatility worth missing far fatter paybacks?

The choice rests on individual circumstances and temperaments; but the extended durations we are working on allow plenty of time for a more (but not very) risky bunch of growth funds to recoup setbacks. Therefore the G10 feels at least as sound a method for the ardent disciple of Don't Lose Money.

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Re: The Conviction Five: alternatives

#380684

Postby HillManMill » January 25th, 2021, 6:37 pm

Fantastic post many thanks Luniversal. I had been contemplating building a hybrid C/G basket. I have held RCP for some long while, a small amount of SMT for a shorter time and have more recently bought FGT and LWDB and am currently looking at CGT as a means of limiting volatility. So you thoughts were particularly welcome.

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Re: The Conviction Five: alternatives

#380697

Postby monabri » January 25th, 2021, 7:12 pm

I wonder if the gloss will fade when/if Lindsell and Train hang up their spurs?

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Re: The Conviction Five: alternatives

#380714

Postby monabri » January 25th, 2021, 8:06 pm

Looking at the G10 review viewtopic.php?p=278607#p278607

A significant contributor to performance was SMT, where L'Uni mentioned

"The FE Trustnet Risk Score for the Ten is 110 (skewed by SMT's 185)"

So, one conclusion might be that a portfolio needs one or two spicey choices...no risk, no reward?

Chosing the winners is the tricky bit but a G10 approach gives the retail punter 10 chances to pick a winner ( and 10 chances to pick some pedestrians). Maybe a post Covid G10 "Spanish Stew" (that L'Uni fellow must have European roots ;) ) should be more "pot noodle" with a tilt towards Eastern promise?


G10 (reminder of constituents:)

Aberforth Smaller Companies (ASL)
Alliance (ATST)
BMO Global Smaller Companies (BGSC)
F&C (FCIT)
Law Debenture (LWDB)
Monks (MNKS)
Scottish (SCIN)
Scottish American (SAIN)
Scottish Mortgage (SMT)
Witan (WTAN)

I wonder if there is mileage in replacing some of the US/UK focused funds ( high US & UK % content such as SCIN , LWDB, ASL) with the likes of funds strong in China ( eg JP Morgan China Growth & Income PLC : JCGI)? I guess I'm writing off further medium term US growth with a reference to stretched valuations of FAANG-Tesla?


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