Testing.. testing.. testing

There will be dividend cuts; the UK and European banks have been told to withhold their dividends until the end of this year (along with not paying any cash bonuses).

Essentially the issue that the PRA has is that it does not want to see banks making profits on the back of the taxpayer money being injected to keep the loan cogs turning. It would seem that the banks need to be told, not asked, and they should be collectively embarrassed.

We have spent the last four days unpicking the trusts we use to run the arithmetic across the existing revenue streams and portfolios. I am pleased to say the trusts all pass their MOTs, with some comfortably stronger than expected, with balance sheets sufficiently resilient to ride out this global catastrophe. We will show you the figures in this update, you don’t need more description, reasoning, explaining of the how and why of income investing.

Possibility v Probability

Investors are supposed to feel anxious with the current position – it is the enhanced lack of financial certainty that floods groups of people with anxieties, it is because there is no visible bottom underfoot with which our brains can judge, measure, assimilate. We can see no reference points to enable us to quantify our investment surroundings, and so, as Hammer Horror trained us, we assume the worst.

Here begins the scale of our problem in understanding: in this age of modern media we are bombarded with information, some fake, some expert, but in the main it is information that is simply padding. Any journalist you know will tell you of the difficulties in filling column inches in the broadsheets – now, two of the largest companies on the planet – Facebook and Alphabet – manufacture billions of advertising revenue dollars by keeping your eyeballs on the page.

‘Plane lands safely at Heathrow’ was never going to be a great headline other than after 9/11, and being human we do indeed stop to read about the gore and misery of human calamities. However, the over burdening of the media-waves with many channels competing for your clicks, means that our brains get smothered in myriad possible outcomes, and we start to confuse probabilities with possibilities.

The fact that humans live on earth in 2020, with a sanitised food chain, antiseptics and antibiotics, surely proves with probable accuracy that pandemic illnesses are cyclical – if not we’d have been wiped out as a race 3,000 years ago. We should also not forget our medical advances in keeping elderly and infirm people alive much longer (and I say hello to all reading this who have had to deal with the last days of aged parents), and we should also remember that penicillin was not put to use till 1940.

We need to start to frame this pandemic in our own brains to prevent excess anxiety and panic: in 1900 (our grandparents’ era) 30% of all children born in the US died before their 5th birthday. In 1999 it was still 7.1 children per 1,000. They died in the beginning of last century from three diseases – influenza, tuberculosis and diarrhoea. In 2019 we still have 800,000 children worldwide dying from diarrhoea – it kills more than malaria. But we don’t get malaria in the UK, so that’s not newsworthy, however in 2018 there were 56,000 child emergency admissions for pneumonia. In England. As I write this Johns Hopkins website tells us that tragically 68,000 people worldwide have died with covid-19. Every death is one too many if it could have been prevented, but it is important not to lose sight of the fact that it is not possible for no one to die, and that the natural world is cyclical, thanks to our relationship with the sun.

In 1994, 800,000 people were killed in Rwanda in just three months – that’s almost twelve times as many current Covid-19 deaths in the last five months. As a race, we are not strangers to death en masse, unfortunately this time it’s in our own communities, and we can’t yet stop it.

It is wrong to fixate on the ‘possible’ – that simply gives up on reference points and point blank rejects all we, as a race, have learned. Every adult reading this note has lived through 74, 87, 00, 08 and 11, and knows by experience that markets fall as well as rise. If we knew the ‘what, why, when and how much’ we’d all own all the wealth on the planet, but you might note than when the clever tried it (LTCM’s two Nobel prize winners), they imploded, and not even Goldman Sachs has discovered how to own all the market.

The market works because of the uncertainty - expecting otherwise is irrational and not very smart – it is self denial, because we know the ‘what’ (it will recover), we just don’t know the ‘when’. If any investor truly believes with no doubt that the possible end-game will occur, then they should have all their wealth in their pockets to buy bags of corn seed and a lifetime’s supply of tinned foods. Such people don’t actually do that, because we do have that inherent subconscious faith that the cycle will turn.

Looking after the money

Our reference points are past market downturns; it is interesting to see that back in 2000 and 2008 the key trusts main holdings were still Shell, BP, HSBC, Glaxo, AstraZeneca, BT et al. Plus ça change... In 2008 the banks stopped all their dividends – they didn’t have to be asked, they simply ran out of money. Here we go again, and will it be different? After 9/11 every airline was shutdown. Will it be different?

I have included for you a summary of the top ten holdings across nine of our main trusts, and you should be reassured that this covers fifty three different companies – the trusts are very well spread, and are clearly not following the herd. It is this spread that has kept their income flows, and their reserves that have enabled the reliability of the trusts’ own dividends to be paid.

The average number of years that the trusts reserves can fund the shortfall from our expected cuts is 3.53 (the median is 3.12). We trust three years support will be plenty.

Doug Brodie
Director