AS ALWAYS, the year-end results for investment specialist Foord Compass make for worthwhile reading.
I was particularly intrigued by a comment that pertains to those of us who covet reliable income flows - in other words, that breed commonly known as the "yield seekers".
Foord Compass chairperson Mark Hodges noted that dividends paid on the JSE All-share Index - which we must remember shifted up 30% in 2009 - declined by a whopping 36% from a year ago.
Hodges reckons this is the biggest single, annual decline in dividends in 50 years as companies felt the real impact of the recession on their earnings and the need to shore up their balance sheets and conserve cash. Anglo American - take a bow.
Coupled to this, Hodges pointed out, was that short-term interest rates declined by more than 40% in the course of 2009.
For the record, Foord Compass - one of my favourite investment vehicles - managed a commendable 12% yield from the income component of its portfolio, which helped restrict the decline in interest distribution in the year to end-December 2009 to 11% at 83.6 cents per debenture.
Now, common sense would suggest that a 36% decline in dividends paid by the JSE's biggest and best companies is unlikely to be repeated in 2010. Touch wood!
So, can we reasonably expect better yields (and, in some cases, a resumption of payouts) by blue chips this year?
Foord Compass, which targets an annual return of inflation plus 10%, seems to think so.
Hodges reckons corporate earnings will improve, which should lead to increased dividend payouts.
Different yardstick
No surprise then that Foord Compass during the second half of 2009 markedly increased its exposure to equities. The fact that Foord Compass was light on equities during the first half of the year probably cost the company a fair bit in capital growth.
But Foord Compass can't be measured over the short term or by the usual market measures. The company essentially juggles the need for risk-averse capital growth with the need for meaningful income flows. This sometimes requires an intricate hedge, encompassing all major asset classes locally and abroad.
Over five years Foord Compass has returned a compound growth of 20%, staying ahead of its benchmark (set at 16.7% over the period).
Leaving the larger equity position aside for a minute, Hodges also believes interest rates are likely to rise. He says the timing of interest rate rises is a key risk for investment markets.
Hodges says given the massive size of the global stimulus packages - which will need to be withdrawn - the risk of a "double dip" recession has not abated. He predicts record budget deficits and government debt levels will be negative for the bond markets in the longer term.
Consequently Foord Compass has retained a fairly large "short" position in government bonds. Corporate debt and cash, of course, still remain a major income source for Foord Compass.
The composition of Foord Compass' portfolio at the end of 2009 was as follows: equities 77% (53% local and 24% offshore), cash 34% (26% local and 8% foreign), corporate debt 24%, listed property 9% and commodities 2%. The "short" position in government bonds represents -46%.
As someone who is approaching the stock market in 2010 with a good deal of circumspection, I really like the positioning of Foord Compass.
Some may argue that there could be a chink if the rand wanes in 2010, but I suspect that a chunk of the locally-held equities hold rand hedge status.
In the bull market(s) of recent years, Foord Compass - which has close links to Foord Asset Management - usually traded at a premium to its net asset value (NAV). No more, though.
At the last traded price of 680c, Foord Compass is discounting its end-December NAV of 713c/debenture (ex the 44c final interest payment) by about 5%.
There's not much of a discount compared to traditional investment trusts (like Remgro, Brimstone or Sabvest), but I think enough incentive for investors who might prefer plotting a careful course in 2010.
And if Foord Compass can match its 2009 interest payout, there is a sweet pre-tax yield of 12%+ to mull.
- Fin24.com