The Seneca Income and Growth Investment trust has returned 27 per cent over the past three years, compared to 12 per cent for the average trust in the sector in the same time period.
Elston commented that he tries to allocate to market based on where he thinks the business cycle is. The earlier into a business cycle an economy is, the greater is the potential for further gains, and the more mature the business cycle, the less scope there is for further gains.
Elston tries to understand where the business cycle is by looking at dividend levels. He commented that the average dividend in the US market is currently 2 per cent, compared to 4 per cent for Europe.
Dividend yields can fall for one of two reasons, that earnings have fallen, or the share prices have risen on stagnant earnings as investors find growth harder to find and push the share prices of those companies that are paying dividends higher.
If an economy, and stock market are in the late stages of a cycle, then new companies generating rapidly increased earnings will be harder to find, leading to a lower average dividend. Those are the conditions Elston believes prevail in the US now.
He was keen to assert that because the companies on the stock market continue to generate profits, a steep stock market decline is unlikely to be around the corner.
The veteran market participant added that he has ‘some sympathy’ with the argument that the prevalence of US companies buying back their own shares, rather than engaging in M&A or capital investment may also be a sign that companies are wary of the growth prospects for their own sector.
He added that the business climate and relative stability of the US economy means that investors should always expect to pay a premium for a US company relative to a European company, but that, at present the gap in the valuations is too wide, in his view to make the US market attractive, relative to that of Europe.
The Seneca Income and Growth Trust has a yield of 4.1 per cent.