The Growth Ten: 2000-23

[Luniversal]

The Growth Ten are investment trusts designed to increase capital's purchasing power at moderate speed and risk(1). The G10 has been back-calculated from Nov. 2000 to run alongside the evolution of pyad's 'HYP1' High Yield Portfolio. Not that their aims are similar, but signs of convergence are emerging: HYP1 has often proved better at enlarging realisable worth than at making income flow smoothly, while the Growth Ten has begun to make more of income within its total return.

The Ten were unveiled in a Motley Fool post of August 21, 2012. (2). All have survived save Scottish, which let itself be absorbed by the whizzier JPMorgan Global Growth and income (JGGI) last summer.

Outcomes are calculated to compare with HYP1's £75,000 gross outlay-- £7,500 per trust- after deducting 1% for purchase costs. Statistics are based on aggregated annual financial statements filed between May 2000 and Apr. 2023, the best fit for timeliness. The portfolio began as a way of gauging performance among trusts most likely to be owned by amateur investors trying to build a nest egg slowly but surely; they are mostly old, big and familiar bastions.


CAPITAL
First things first-- profits.

End-Apr. anniversary values in nominal amounts; percentage changes year by year deflated by the Retail Prices Index/performance against the FT All Share Index in percentage points... and the priority, real change in purchasing power taking the launch date as 100:

2001: £72,970, -4.5/1.7 (from Nov. 13, 2000)...95
2002: £68,436, -7.7/6.2...88
2003: £50,231, -29.7/-1.9...62
2004: £61,111, +19.2/3.4...74
2005: £67,123, +6.6/2.7...79
2006: £96,908, +41.6/16.0...111
2007: £106,808, +5.8/1.2...118
2008: £99,717, -10.8/1.0...105
2009: £73,062, -25.5/3.2...78
2010: £95,084, +24.8/-1.6...98
2011: £112,255, +12.9/7.9...110
2012: £107,299, -7.9/1.0...102
2013: £130,593, +18.8/8.1...121
2014: £148,047, +10.9/5.9...134
2015: £164,288, +10.1/7.5...147
2016: £160,879, -3.4/7.2...142
2017: £211,201, +27.8/15.5...182
2018: £236,917, +8.8/8.1...198
2019: £242,205, -0.8/4.1...196
2020: £220,397, -10.5/12.2...176
2021: £355,855, +58.6/36.6...279
2022: £305,697, -25.2/-18.7...208
2023: £279,332, -20.0/-10.9...167

The All-Share rather than a world index is used as a practical benchmark. The G10 is for British investors whose customary resorts are UK equities. If anyone can furnish world equity index values for these dates, I will gladly incorporate them.

The past 22-23 years encompass three bad breaks for listed equities: the dotcom crash at the outset, the Global Financial Crisis (GFC) of 2007-09 and the WuFlu outbreak. There was a lesser hiccup c. 2016. The portfolio lost purchasing power in eleven of 23 years, compounding at 2.5% pa after inflation at 3.5% pa, which includes the alarming takeoff to almost 14% RPI following the Ukraine invasion. Last year's real fall was the G10's fourth worst result, and together with 2021-22's 25% decline constitutes its weakest spell, (Since Apr. it has recovered about 4%.)

Besides a general turn away from developed-world growth stocks, the portfolio bore the very specific and painful revulsion against two future-facing funds managed by Baillie Gifford: Monks (MNKS) and especially Scottish Mortgage (SMT). Both went nap on 'tomorrow's world' businesses, disruptors of traditional economic life; SMT provoked more jitters by lodging around a third of its assets in unquoted companies. These are said to be packed with promise, but are tough to appraise when flotations are out of fashion and private-equity backers are up against rising debt costs.

At Apr. 2021 Monks was 1396p and Scottish Mortgage 1269p (after reaching 1570p in Nov. 2020}. Two years later they were 967p and 616p, shedding £100,000 of paper gains between them. Other less blue-sky trusts resisted the swing to value and high yield more robustly. Last year five trusts rose or were unchanged. The G10 has rarely lagged the All-Share by much or for long. But despite all we hear about British shares being unwanted, this primarily overseas portfolio has, for the first time, severely underperformed the FTAS in two consecutive years.

That is less about the location of its underlying holdings-- London-quoted companies get a good three-quarters of their earnings abroad-- than about their activities and the kinds of customer demand they serve. The Growth Ten's big bets, though not as ambitious as Baillie Gifford's, lean to businesses on high multiples: not suppliers of eternal staples but nursing prospects that have become less clear and immediate in the new landscape of pandemics, Putin and dearer money.

The portfolio had beaten the All-Share eleven years in a row until 2021-22. It had tripled its purchasing power in the long swing back from the Global Financial Crisis. Such a splendid run cannot be relied on to recur soon, though nerves may steady. Nor is the G10 wholly invested in foreign-quoted concerns; Aberforth Smaller Companies (ASL) and Law Debenture (LWDB) have a British bias.

The switchback ride is part of the deal. In their youth the Ten mislaid one-third of their launch value, and did not surpass it until 2005-06. (At least this sequence-risk effect struck well before a long-term lump-sum saver might want to cash in.) Attaining £100,000 the following year, the G10 then relapsed. It did not revisit six figures until Apr. 2011.

How sharply do capital values in the short run? FE Trustnet's Risk Scores measure price volatility over 36 months, weighted towards the present. The FTSE 100 is the benchmark at 100 where cash is 0. For the Growth Ten the blended score has reduced in a year from 140 to 115, not far above the Footsie. This is so partly because the two Baillie Gifford ITs grew calmer selloffs flattened their fizz. Scottish Mortgage's Risk Score shrank from 231 to 221, Monks's from 156 to 146. Scottish American's was the only score to rise.

Average discount of 8% at present compares with 7.6% over the G10's life. Double-figure discounts were common until after the GFC. The simple average of financial year-end discounts in the last decade is 3.6%, but it eased from under 2% three years ago to 5.4% ( 5.2%) in 2022-23 and has widened further.

Gearing ought not to introduce too much volatility. It averages 6%, with only Witan's in double figures. The G10's net cash has been around 2% of net asset value for the past few years. The trusts did not unload a lot of stocks when a bear market was on the cards in 2021, whereas during the GFC they had been c. 10% liquid. They seem readier to ride out panics than when they were less interested in cultivating rising dividends.

The average Ongoing Charges Ratio has crept up from 0.48% to 0.62% (0.59%) of year-end NAV since 2020-21, but remains below the decade average of 0.70%. War has been waged on performance fees and contracts with managers rejigged so trusts can hold their own against low-cost open-ended tracker funds and ETFs. The expense ratio has more than halved since the trough of the GFC.



INCOME
On the income side, the Growth Ten tells a brighter tale.

The Ten formerly yielded half the All-Share or FTSE 100 indices or lower. Now they pay 2.2%, nearly two-thirds of the market's c. 3.5%. In four years the All-Share's edge has halved, and it is ever less true that G10 dividends are 'incidental sweeteners', as I wrote a year ago. Nobody should pick them chiefly to meet day-to-day expenses, or even in hopes that their dividends will eventually swell to emulate income 'baskets', deposit accounts or fixed interest instruments; but they are catching up.


Actual totals collected in years to Apr., including specials/ growth of real income (2002-03-100)/real percentage changes each year:

2001: £289 (five months' worth)
2002: £1,301/100/+3.2% (underlying rise, adjusted for 'dividend drag')
2003: £1,322/98/-1.6%
2004: £1,378/100/-1.7%
2005: £1,404/99/-1.3%
2006: £1,664/119/+15.9%
2007: £1,594/105/-8.7%
2008: £1,857/118/+12.3%
2009: £2,188/140/+18.0%
2010: £2,312/140/+0.4%
2011: £1,985/113/-19.4%
2012: £2,280/126/+11.4%
2013: £2,545/137/+8.7%
2014: £2,774/146/+6.5%
2015: £2,819/147/+0.7%
2016: £3.188/164/+11.8%
2017: £3,187/158/-3.5%
2018: £3,503/169/+6.5%
2019: £3,820/179/+6.1%
2020: £4,056/187/+4.7%
2021: £4,580/206/+10.0%
2022: £4,449/179/-13.9%
2023: £5,412/196/+10.2%

Total to date £59,903, more than three-quarters of the Nov. 2000 subscription. Last year, unlike capital, income quickly rallied: it recovered 2020-21's purchasing power, almost twice as great as at the outset.

The 23-year harvest represents an annual average yield-- on brought-forward capital at May 1-- of 3.6%. However, payouts have recently soared fast enough, and prices sunk enough, to lift last year's yield to 6.1% (5.4%). Income compounded at 3.2% pa after inflation, faster than the 'growth of income' Basket of Seven managed, although the B7's actual total since 2000 is two-fifths more. G10 receipts' purchasing power fell one-third of the time, taking one year with the next(2), but positives abound when contemplating the near future.

Earnings and dividends per share hit new highs last year. Dividend cover of 1.01 times earnings was back to the decade average after two years of uncovered distributions. Revenue reserves added one month's worth of current payout, reaching 17 months: below the ten-year average of 21 months, but much more comfortable than with the income options reviewed earlier this month in Investment Strategies.

The revenue account carried one-third of total expenses, against more than half of them six years ago. Quietly but steadily this group is mutating into 'growth and income', and not just because most members now pay quarterly. By Apr. 2023 the portfolio's paper profit was £204,332 for a combined return of £264,235, of which 29% is dividends. At its annual anniversary peak, income was 18% of a combined return of £330,898.


CONSTITUENTS
The average age of trusts is 120. Two are the two oldest pooled investment vehicles on the planet, F&C and Scottish American. Aberforth is an impudent pup of 33. Monks is the only other non-centenarian.

Alliance, F&C, Monks, Scottish Mortgage and Witan are part of the trade body's Global sector. Global Equity & Income houses JGGI, whose payouts are a set percentage of prior NAV. Law Debenture is UK Equity & Income. Aberforth is in UK Smaller Companies and Global Smaller Companies, believe it or not, in Global Smaller Companies.

Aberforth, Alliance, F&C, Law Debenture and Witan are self-managed. Monks, Scottish American and Scottish Mortgage are run by Baillie Gifford, JGGI by JPMorgan, Global Smaller Companies by Columbia Threadneedle.

Stated mandates are long-term, high, superior or maximum total return at Aberforth, GCST, JGGI and SMT respectively; long-term real return at Alliance; long-term capital and income growth at F&C. For Monks 'capital growth' tout court is the aim. Witan desires TR and dividend growth above inflation. Scottish American hunts 'real dividend growth through increasing capital', and is willing to diversify beyond equities. Law Debenture pursues 'long term capital growth in real terms and steadily increasing income' while offering the G10's highest yield, thanks to its flourishing fiduciary services offshoot.

Share price change since launch; number of financial years in the past decade when share price lagged the All-Share index; current and average year-end discount, or (premium), during that decade/latest FE Trustnet Risk Score:

Aberforth Smaller Companies: +351, 4, 13.4, 8.3/144
Alliance: +198, 1 , 5.9, 6.3/106
F&C: +235, 0, 19.0, 5.6/108
Global Smaller Companies: +441, 3, 12.5, 4.0/128
JPM Global Growth & Income: +97*, 2, (2.6), (4.1)/121
Law Debenture: +244, 4, (1.3)**, (6.6)**/121
Monks: +350, 3, 13.1, (3.0)/146
Scottish American Investment: +103, 3, 1.9, 4.0/116
Scottish Mortgage: +577, 3, 17.8, (1.3)/221
Witan: +127, 2, 9.1, (3.6)/115
-------------------------------------------------------------------
G10: +272, 2, 5.4, 3.6/115

* Depressed by prior record of Scottish.
** Distorted by fiduciary businesses.

For total return fans, share price TRs (%) with income reinvested, over ten and five years:

Aberforth Smaller Companies: 35, -8
Alliance: 131, 34
F&C: 131, 20
Global Smaller Companies: 78, 5
JPM Global Growth & Income: 159, 48*
Law Debenture: 111, 30
Monks: 169, 14
Scottish American Investment: 100, 33
Scottish Mortgage: 293, 30
Witan: 81, 3
-------------------------------------------------------------------
G10: 140, 22

* Depressed by prior record of Scottish.
Source: FE Trustnet at Aug. 8, 2023


Difficult now to remember that UK small fry were once a thing, yet for the first 16 years the most valuable constituent at each year's end was Aberforth. Despite the backlash against tech, Monks has caught up with Aberforth, and these two remain in the top five overall. Global Smaller Companies, which notched up one win long ago, has chugged along assuredly and is now the second-best performer. But for six years Scottish Mortgage has been the champ; it was so far out in front two years or ago that disenchantment has not dethroned it.

The bottom five are middle-of-the-road pedestrians, among which JGGI is numbered only because its figures are almost entirely those of its precursor, Scottish IT. JGGI's superior prowess is displayed in the TR table, particularly over five years.

In that quinquennium Law Debenture has matched Scottish Mortgage and Alliance and Scottish American surpassed it-- and after SAIN had been the least valuable constituent in 17 of 23 years. F&C and Witan plodded and the small-cap duo wilted. So there was some rotation, but on the whole half of the G10 anchored the performance while the other half energised or occasionally depressed it.

The blend has given short-distance tranquillity not far below the Footsie, while generating much more profit over time. That vindicates spreading the lump sum across as many as ten positions, over and above standard objections to concentration. For example: had you ignored the fallen high-tech stars, Monks and SMT, settling for a Growth Eight, you would now have a cash-in value of £243,486 instead of the G10's £305, 697-- although income would have totalled £71,106 rather than the G10's £59,903.

If you had restricted yourself to five ITs-- and by some malign fate picked what transpired to be the bottom half of the table-- you would have bought Alliance, F&C, LawDeb, Scottish and Witan. Those five conservative generalists produced £191,657 of realisable value (only £11,000 more than the Basket of Seven) and £53,507 of dividends. On the other hand, a clairvoyant who selected the racier and stronger half of the Ten would have netted £369,507 and income of £65,999.

The question that remains is whether a couple of global trackers might have sufficed, assuming they existed in late 2000. A compound growth rate of 2.5% pa real over almost a quarter-century, with modest volatility and hands off, sounds adequate to Doris and me: but how easy is it for a lazy and inexpert accumulator to do better, now that so many cheap means of wrapping up world equities are on sale than in 2000?
----------------------------------------------------------------------------------------------------------------------------------
(1) Review of year to Apr. 2022:

viewtopic.php?f=96&t=35352&p=517930#p517930

Review of year to Dec. 2021:

viewtopic.php?f=96&t=32783&p=470592#p470592

The G10 in the pandemic (year to Apr. 2021):

viewtopic.php?f=96&t=30086&p=423161#p423161

Review of year to Dec. 2020:

viewtopic.php?f=96&t=27226&p=374593#p374593

Review of year to Dec. 2019:

viewtopic.php?f=96&t=21397&p=278607#p278607

(2) For what very little it is worth, the G10's receipts could have been 'derisked' to give a spendable sum, plus protection against inflation, averaging a yield of 2.3% over 23 years. At present the income reserve would cover a year's worth of payouts, against an average of 13 months since 2000. Secure but meagre; over the same timespan the Basket of Seven could have yielded 4.0%+RPI spendable and HYP1 4.6%. Each of these options entailed reserving just under one-tenth of income.

[richardsun]

Thanks Luniversal for your informative and entertaining posts.

As a fan of ITs and holder of some of the trusts in the G10, I was curious to know what your criteria for the original selection of these particular 10 trusts were? Was it purely gut feeling, or the reputation of the trusts? I suppose what I'm asking is, if one was to start from scratch today with the intention of setting up a similar portfolio, would different choices be made?

Cheers

Richard

[Itsallaguess]

As a fan of ITs and holder of some of the trusts in the G10, I was curious to know what [Luniversal's] criteria for the original selection of these particular 10 trusts were?

Was it purely gut feeling, or the reputation of the trusts?

I suppose what I'm asking is, if one was to start from scratch today with the intention of setting up a similar portfolio, would different choices be made?

I think it's important to clearly recognise these two key pieces of information in the initial review -

• The [Growth Ten] has been back-calculated from Nov. 2000 to run alongside the evolution of pyad's 'HYP1' High Yield Portfolio.

• The [Growth Ten] were unveiled in a Motley Fool post of August 21, 2012.

If we assume that in 2012, an initial IT filtering process took place to capture ten Investment Trusts with a good record from the previous 12 years, those beneficial legacy results have since been 'incorporated' into the 'historical' record of this basket.

A view can be taken on the validity of such a process, but I think first and foremost it's very important to at least recognise this, as it leaves an investor looking to replicate such a process with a dilemma, because whilst such 'back-tested' numbers can of course be 'incorporated' into a 'review' such as this, an investor starting today will only ever see any results going forward, from the point of selection, rather than having a set of pre-filtered, back-tested beneficial figures 'baked-in'...

Cheers,

Itsallaguess

[richardsun]

Thanks itsallaguess, that makes sense. I guess this acknowledges that most of us are inclined to pick 'previous winners', despite knowing that this offers absolutely no guarantee for the future.

I like to hold 4 or 5 global/general ITs alongside some trackers. It's interesting to read Luniversal's comments on the number of holdings in the G10, and how a more concentrated portfolio would have missed out on some of the gains. Makes me wonder if I should diversify further.

[Itsallaguess]

I guess this acknowledges that most of us are inclined to pick 'previous winners', despite knowing that this offers absolutely no guarantee for the future.

Whilst I agree with that point though, I think what we're looking at here is a little more subtle and needs specifically recognising.

Imagine a 23-year car race over very risky terrain...

Now imagine a co-driver, that hadn't picked his team yet, waiting until the race had been run for 12 years, and then choosing and jumping into the lead car...

Cheers,

Itsallaguess

[HillManMill]

Now imagine a co-driver, that hadn't picked his team yet, waiting until the race had been run for 12 years, and then choosing and jumping into the lead car....

Or maybe imagine the team of [ten] co drivers at year 23 seeing that some of the ten originally selected race cars had suffered mechanical problems after year 13 and other non selected cars in the race were now in better positions. Should some co drivers then change cars to improve the overall team performance?