When the going gets tough, it is important to hang on to past investment gains. Over the past quarter Killik & Co’s hypothetical £100,000 growth portfolio has lost less ground than the market. Mick Gilligan, head of research, explains
his tactics to Helen Pridham.

The direction of investment markets was mainly downwards over the past quarter. Worries about Greece, the instability of the euro and a potential double dip in the world economy undermined investor confidence. In the UK the stock market started a brief recovery, following the general election, but then the FTSE All-Share index started falling again, ending the quarter nearly 12 per cent down.

Against this gloomy background, it was difficult for any investments to thrive. However, the Killik portfolio held its ground better than most, slipping back only 4 per cent over the quarter. This was less than half the fall in the FTSE APCIMS (Association of Private Client Investment Managers and Stockbrokers) Growth index, which reflects the progress of a typical discretionary managed private client portfolio. Killik is also ahead of that index for the period since the portfolio’s inception.

Yet only one of the holdings managed to defy gravity and move up instead of down over the period. Not surprisingly, in the circumstances, it was BlackRock Gold & General, which rose by more than 9 per cent. But since the fund makes up less than 5 per cent of the portfolio, its impact on the overall return was limited.

Mick Gilligan explains its progress. ‘With worries about currencies – the euro in particular – coming to the fore recently, gold shares did well, benefiting from the metal’s safe haven status.’ But he does not regret only having a modest exposure to gold, pointing out that its volatility means the price can come down as quickly as it goes up.

The second best-performing holding in the portfolio over the quarter was hedge fund BH Macro. Its price declined by just 0.4 per cent despite moving from a 4 per cent premium to a 1 per cent discount over the period, thanks to the positive performance of its assets. Gilligan points out that the sell off in the company’s shares was partly due to the fact that, as a constituent of the FTSE 250 index, it is affected by the buying and selling of index tracker funds.

A change has been made since the last portfolio review. On 10 May Jupiter Absolute Return was sold and the proceeds were split between buying a new stake in Jupiter International Financials and topping up an existing holding in Axa Framlington UK Select Opportunities, managed by Nigel Thomas.

The decision to sell Jupiter Absolute Return seemed surprising, as the fund was only purchased about three months earlier. However, Gilligan explains: ‘The logic when we bought it was that we wanted to be more cautious in the short term, as we believed a market correction was likely.’ But after markets went down in the second half of April, and the European Central Bank announced that it would buy euro-denominated government and corporate bonds, Gilligan decided it was the right time to switch out of the fund. He felt that riskier assets had become more attractive again and wanted to be more exposed to the markets. 

However, he left half of the proceeds with the same investment manager, Philip Gibbs, who runs both Jupiter Absolute Return and Jupiter International Financials, which invests in financial companies globally. Gilligan has been a long-time admirer of Gibbs and his ability to time the market, and the new fund, unlike the original Jupiter Financial Opportunities, also run by Gibbs, enables him to short individual equities as well as have long-term holdings.

The other half of the money was  invested in Axa Framlington UK Select Opportunities, making it the portfolio’s largest holding. It invests in companies with a good exposure to emerging markets. These types of equities had been sold down aggressively and he saw an opportunity to buy into them much more cheaply than before. This would enable the fund to benefit from the ongoing growth in the emerging markets even if European markets did not recover.

Unfortunately, since making this switch, both funds have fallen back. Over the quarter Axa Framlington UK Select Opportunities lost 6 per cent, although Gilligan points out that this was only half the fall in the FTSE All-Share index.

The steepest decrease in value over the quarter was suffered by City of London Emerging World, which fell by 7.5 per cent. Gilligan explains that investors have been moving out of so-called risk assets by selling holdings such as this one, where they had made profits, and switching into more defensive areas. However, he feels these falls provide useful opportunities for investors to add to their Asian and other emerging market holdings.

Overall, Gilligan believes equities are now oversold and the steam has been taken out of the markets. Although he intends to maintain his bond holdings in the portfolio, he believes equities are the more attractive place to be.

‘The next few months could actually be positive for the markets,’ he believes. ‘The only reason for selling equities now would be if you expected a further downturn. However, I don’t think a double dip on a global scale is likely. If China started slowing down significantly, for example, the authorities would do something about it.

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