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We meet our clients at regular intervals to discuss the suitability of their portfolios, performance and the market and economic outlook. The range of topics covered over the last few years have certainly been diverse: political turmoil in Greece, economic slowdown in China, mounting US debt levels, commodity boom and bust, and this year Brexit and the prospect of a Trump Presidency.

The ensuing uncertainty has led to volatility and low interest rates. Our clients are affected by both. A popular slide in our latest presentation pack starkly illustrates the knock-on impact of the collapse in yields: 20 years ago you could generate £10,000 of annual income from £135,000 of 10-year gilts. To generate the same £10,000 today you would need an astonishing £1,900,000.

“even when bought at 1972's peak valuations, a portfolio of nifty fifty produced annualised returns of 12.7% through 1996” 

Low interest rates don’t just affect your fixed-income returns – they have driven up prices across all asset classes. When investors cannot find decent returns in ‘safer’ bonds, they look for other assets that deliver attractive and sustainable income. This could be in property, or in equity sectors such as consumer staples, telecommunications and utilities, where consistent cash flows lead to steadily growing dividend payments.

The consequence of this hunt for yield has been that the valuations of these high-quality cash compounding equities have risen sharply. This has led to comparisons with the 1970s when investors paid high prices for a concentrated group of American companies known as the ‘nifty fifty’ – US stocks which were perceived to be dominant and able to grow.

Investors were at times willing to pay as much as 80 to 100 times earnings per share, according to a study by Professor Siegel of the Wharton School. However, even when bought at 1972’s peak valuations, a portfolio of the nifty fifty stocks produced annualised returns of 12.7% through 1996.

Of course, there have been casualties in that basket, but that is what portfolio diversification is all about. The ability to hold the stocks for several years, to ride out the inevitable periods of volatility, is also a crucial factor.

The question for investors today is whether it is once again astute to pay a premium for quality cash compounders when secure income is so elusive – and this surely depends on having the ability to invest for the long term.

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IMPORTANT INFORMATION

Issued by Adam & Company Investment Management Limited (Adam), which is authorised and regulated by the Financial Conduct Authority. Adam is registered in Scotland number SC102144. Financial Services Firm Reference Number 141831. Registered Office: 25 St Andrew Square, Edinburgh EH2 1AF.

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

The information on this webpage is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information is believed to be correct but cannot be guaranteed.

Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Nothing in this material constitutes investment, legal, credit, accounting or tax advice, or a representation that any investment or strategy is suitable for or appropriate to your individual circumstances. The analysis contained within this webpage has been procured, and may have been acted upon, by Adam and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Adam nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.