Recently it struck me that I’ve been writing about dividend investing for more than ten years. (Here’s my first article, if you’re interested – apologies for the sales pitch at the end.)

With the benefit of hindsight, I can’t imagine a better ten year period for covering the topic.

When I started out in 2006, the traditional view of dividend-paying shares – that they are reserved primarily for income-dependent investors – reigned supreme. Shortly after, the dividend world was turned upside down by the financial crisis. Not since the Great Depression had dividend cuts occurred at such frequency or magnitude.

As quickly as dividends fell under the knife, however, they became hugely popular in the post-crisis, low-interest rate environment.

Whether or not you agree this has been an exciting decade for dividends, it’s been an educational one at the very least.

The cycle turns, as ever

In a previous article on Monevator, I noted that a distaste for dividends seems to be taking root once more.

There are multiple explanations as to why this is occurring. At the risk of repeating myself, buybacks have increasingly been seen as an alternative means of returning shareholder cash. Investors might also look at the immense success of younger, non-dividend paying companies like Facebook or a Google, and wonder why they should instead invest in 100-plus-year-old businesses that aren’t changing the world.

To illustrate this trend, I recently spoke with another investor, also in his mid-30s, who told me: “My goal is to invest in high growth businesses until I retire. Then I’ll switch to dividend stocks.”

Logical, yes, but easier said than done. Credit Suisse HOLT’s research, for example, found that:

“…cumulative shareholder returns to stocks with high growth expectations frequently lag shareholder returns to firms with much lower anticipated growth.”

Indeed, Credit Suisse looked at the largest 1,000 U.S. companies, excluding financials and utilities, and broke them into the following four categories:

• Cash Cows: Firms with high CFROI (cash flow return on investment) and low market growth
• Dogs: Low CFROI and low market growth
• Stars: High CFROI and high market growth
• Question Marks: Low CFROI and high market growth

The bank’s researchers then back-tested the performance of these four groups of companies to 1976. The results are quite telling, and perhaps surprising:

Source: Credit Suisse

Why would cash cows and dogs do better than star companies?

The Credit Suisse research is a good reminder that an investment’s performance is ultimately a function of expectations and what actually happens. Too often, investors mistakenly extrapolate recently strong performance from high growth companies, thinking the good times will continue. The problem is, many other investors are likely doing the same.

In some cases, the good times do indeed keep rolling – or even exceed expectations, as has been the case with Facebook and the like. Competitors, however, are attracted to high growth and high profits like flies to honey.

Unless the growth company has a durable competitive advantage (an ‘economic moat’), it’s more likely that their margins will be competed away and fall short of original expectations. There’s also greater risk that management will mis-allocate capital in their effort to keep up with the competition. Ultimately, these sort of shares will be re-rated lower, which reduces returns to investors.

On the other hand, expectations for companies in the lower growth cohorts – the Cows and Dogs – in which we’ll find most dividend payers, are often too pessimistic.

Slow asset growth, for instance, could indicate a consolidating industry where survivors will benefit from improving margins and more rational competition. Low earnings expectations for well-run businesses are eventually corrected and the shares are often re-rated higher.

What does this mean for me?

It’s easy to look at some of the modern growth stock success stories, the massive wealth being created in Silicon Valley and elsewhere, and want a piece of that for yourself. It’s far less satisfying in the short-run to own a basket of slower-growth companies that may not operate in exciting industries.

You won’t exactly endear yourself to dinner party guests with a rousing discussion on the global containerboard market. [Editor’s note: I can confirm Todd speaks from experience. He tried to talk to me about packaging for over an hour on Skype once…]

What matters in the long-run – and isn’t that what we’re after? – is how well your companies perform relative to expectations. And based on evidence found in the Credit Suisse report and elsewhere, if you’re a stock picker then your research time is probably best spent in the slower growth areas of the market.

Remember that it’s in a dividend investor’s best interest to invest when dividend-paying shares are out of favor. I think that we’ll have plenty of chances to do that in the coming years.

Todd Wenning, CFA is an equity analyst based in the United States. Opinions shared here are his own and not those of his employer. A full disclaimer can be found here. For compliance purposes, Todd cannot reply to comments below, though he welcomes any correspondence sent by email. You can read Todd’s expanding collection of dividend articles here on Monevator or check out his book, Keeping Your Dividend Edge.

The simplest way for most people to own shares is via a global equity tracker fund. But what are global equities, never mind a global equity tracker fund?

London calling

Let’s take a step back. You’ll have heard of the City of London and the London Stock Exchange.

The London Stock Exchange is the market where shares listed for trade in the UK are bought and sold. The London Stock Exchange1 has been based in the City of London for hundreds of years. Today it’s all run on computers and in theory those computers could be anywhere. But they mostly remain in London, where hundreds of thousands of traders, accountants, lawyers, and others make their living from financial services.

The companies traded on the London Stock Exchange don’t have to be British, though they usually are. In many cases a lot of their revenues are earned overseas.

Think of a big oil company like BP. It’s a British firm but it makes money selling oil and other products all over the world. It’s the same with many of the other giant companies that trade on the London Stock Exchange – they earn around three-quarters of their income overseas.

Nevertheless, companies listed on the London Stock Exchange are UK-listed shares, by definition, because their shares trade in London.

A world of shares

Of course, the United Kingdom is not the only country with companies that people can invest in.

All developed economies have their own companies operating in various areas of business, from mining to manufacturing to retailing. The variety is endless.

It would be a simpler world if there was just one global stock exchange where shares in all these far-flung companies were traded.

But as things stand, there are distinct stock exchanges in different countries around the world. These exchanges facilitate trading in their own domestic shares, and often shares from smaller neighbouring countries, too.

For instance, another place you’ve probably heard of is Wall Street. (Or the least you’ll have seen the movie…)

Wall Street is home to the New York Stock Exchange – one of the major venues for trading shares in America’s listed companies.

Similarly, Germany has the Frankfurt Stock Exchange. Australia has the Australian Securities Exchange. And so on around the world.2

Deep breath! Stock market capitalisations

So, different countries’ exchanges boast different listed companies. As these companies do business over time they’ll achieve different results, which means different countries’ stock markets have historically delivered different returns.

That’s a lot of differences!

Also, the types of companies we’re talking about are not equally distributed around the world.

The UK, Australian, and Canadian stock markets have a lot of mining and energy companies.

In contrast, the US market is most notable as home to most of the world’s largest technology companies.

Another big difference between the various stock markets is their sizes.

The value of all the companies listed on a single stock exchange added together is called its total market capitalisation.

The UK stock market has a total market capitalisation of around $6 trillion.3 The New York Stock Exchange has a market capitalisation of over $20 trillion. Another big US stock exchange, the technology-focused Nasdaq, is over $10 trillion in size.

Clearly then, the total value of US-listed companies is much larger than the UK equivalent.

But as it happens the UK is still one of the world’s biggest stock markets.

Some exchanges are relative tiddlers. The Italian stock exchange, for instance, has a market capitalisation of less than $500bn.

The global stock market

If you add together the value of every country’s stock market, you get the global market capitalisation.

The global market capitalisation is the total value of all the publicly traded shares listed around the world, translated into a common currency (invariably US dollars).

The following pie chart shows each major country’s share of this global stock market pie:

Source: Credit Suisse Yearbook 2017 / FTSE All Share

You can see from the graphic that the US market makes up by far the largest portion of the global equity market. It’s more than half the total.

Japan is in second place, and the UK is in third.

Note that Britain is punching above its weight here. We’re the third largest piece of the global stock market pie, even though our country’s economic output is smaller than the likes of Germany or China.

This reinforce an important point – a country’s stock market reflects only the value of the companies that are listed on it, not necessarily that nation’s economic output.

Back in the day

When you invest in one the various global tracker funds available, you are putting money to work in each of these different stock markets with just one simple investment.

The big benefit is you’re immediately diversified across the world’s different stock markets.

The amount of money your world tracker fund allocates to each country usually4 reflects that country’s portion of the total global market pie, as indicated by a global stock market index.

The computers that run these market cap weighted funds don’t try to do anything clever. They don’t aim to predict which country’s market will do better next year, or which might be over- or under-valued.

But that’s not the handicap you might think, because most – professionals, amateurs, or computers – who do try to do so will fail.

Cheap and cheerful global trackers

Diversification across the global market via a tracker fund has three major benefits:

• It enables you to capture the average return from the global stock market each year.

• It protects you from suffering potentially very steep losses should your own country’s market do very poorly compared to the rest of the world. (Obviously you also give up the opportunity for big gains if your home country does particularly well).

• It automatically captures the waxing and waning of different stock markets over time.

These points are important because the investment returns from different markets have varied a lot, both in the short-term and the long-term.

By way of illustration, compare the snapshot in the graphic above of the global stock market – accurate as of 2016 – with the one below showing market share by country in 1900:

Source: Credit Suisse Yearbook 2017 / FTSE All Share

Back in 1900, Britain made up the largest share of the global equity market. In contrast, the US, which now comprises more than half the total market, was just 15%.

This picture is always shifting, as economies and markets go through booms and busts, and investors’ appetite for different stock market’s prospects vary.

Another example: As recently as 1990 Japan made up the largest part of the global equity market, with a 45% share. The US was just 30% of the index.

How things change!

Key takeaways

We can now answer our initial question: What is a global equity tracker fund?

• Remember, equity is just a fancier word for a share.

• Global equities are the shares of all the different listed companies around the world.

• A tracker fund is a passive fund that aims to replicate exposure to some particular market.

• Because trackers are run by computers rather than expensive human beings, costs are kept very low compared to expensive active funds.

• This makes a global equity tracker fund (also called a world tracker fund or world index fund) a cheap and efficient way to take a stake in thousands of companies listed around the world.

We’ve other articles that go into deeper detail on global tracker funds, which you can read to learn more.

This article is one of an occasional series on investing for beginners. Subscribe to get our articles emailed to you (we publish three times a week) and you’ll never miss a lesson! And why not tell a friend to help them get started?

1. Which is itself a public company, incidentally. You can buy shares in it! [↩]
2. Fun fact: The company that owns the London Stock Exchange licenses its trading platform to other smaller exchanges around the world. For example the Mongolian Stock Exchange runs on the same core technology as London. [↩]
3. Note: This and the market capitalisation figures that follow are per the latest entries in Wikipedia. They will be broadly inline in relative terms, but their dating is not consistent. See the pie chart below for more. [↩]
4. I am over-simplifying here, and talking about standard or ‘vanilla’ global trackers or ‘market cap-weighted’ funds. Some non-standard funds may for example put a limit to the total percentage share allocated to any one country. [↩]

I have lived happily under Conservative and Labour governments. But I’m glad voters pushed back against the growing appetite in some quarters for an authoritarian one.

Well done Britain.

Dare I hope for more than a recognition that we live in a multi-party democracy?

One Financial Times writer thinks so [Search result]:

The election throws up an even larger prize: a more moderate version of EU exit than the one envisaged by Mrs May.

Before pro-Europeans become delirious, Friday’s result cannot be interpreted as an equal and opposite reaction to the Europe referendum. The two main party manifestos did not differ much on the subject.

But the prime minister called this election to secure a mandate for her hard take on exit and failed to obtain it. Most of her plausible successors – Philip Hammond, the chancellor of the exchequer, and Amber Rudd, the home secretary, who might take on Mr Johnson – are pragmatists.

They will also see where the Tories lost seats: cities, university towns. The bits of Britain that are at ease with the outside world.

We’ll see.

(We all know politics can get tetchy, so please everyone try to keep it civil and constructive if you want to comment. Thanks!)

What caught my eye this week.

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