A week or so into August the jury was still out on whether the sharp correction in share markets – caused by the US credit rating downgrade, worries over eurozone government indebtedness and pessimism about global growth prospects – was likely to persist.

A modest bounce after the speedy and sizeable drop in late July and early August may be no more than, in market parlance, a ‘dead cat bounce’. 

The troubling events of those few weeks demonstrate that the portfolio does at least have some defensive qualities, and the portfolio’s performance has been enhanced by some £200 of dividend income from Vodafone and Compass.

However, it is in times like these, that the foundations of superior future portfolio growth can be laid if the right choices are made. So I am making a few changes this month, chiefly because I think higher-yielding defensive shares are going to be the way forward for some time to come. The impact of the US debt downgrade, the eurozone crisis and recent social unrest in the UK is likely to hamper confidence for some time and probably keep interest rates low for the foreseeable future.

In this environment – and with concern over government bond ratings growing, the property market stagnating, gold looking ‘toppy’ and cash returning little – generating investment income may be the only way to achieve meaningful investment returns. And high-yielding shares and good-quality corporate bonds look the best way to produce this income.

With this in mind, I have, for the moment, shelved the idea of investing in Raven Russia, and I am sticking to UK-based businesses. This is mainly for safety reasons, but also because value has suddenly appeared in some sections of the UK equity market.

With the exceptions of Compass and Stanley Gibbons, all the shares in the portfolio currently yield close to 5 per cent or more, so I see no reason to make major changes here. 

Stanley Gibbons has also proved defensive, because demand for collectables (in Gibbons’ case, primarily stamps) is being driven not only by collector demand, but also by the opening up of new markets, notably in Asia. ‘Safe haven’ demand for collectables as an alternative to cash or shares has also supported the share price. 

Defensive holdings held firm in awful August

Stanley Gibbons and Vodafone stood out as defensive performers in turbulent markets in the month to 9 August. 

Vodafone, for example, slipped by 2.3 per cent in a month in which the FTSE 100 fell by a double-digit percentage. Stanley Gibbons, helped by solid results, fell by just 3.7 per cent. 

The worst-affected share belonged to Cineworld, down 15.7 per cent.

The table below reflects the position after the switches and additions made to the portfolio mentioned above as well as related dealing costs. Before allowing for this, the portfolio and the market as a whole were up by roughly the same amount since inception: about 27.5 per cent. 

This is a marked improvement in the relative performance of the portfolio over the period, reflecting its defensive nature, which should be unaffected by the changes made this time. 

Last time around, the portfolio showed a gain of about 35 per cent since inception, while the market was up about 46 per cent in the period. There may be a rebound in the market in coming weeks, but investor confidence has taken a hefty knock it will take some time to recover from.

Share spotlight portfolio proves resilient

Notes: Prices as at close on 9 August 2011. Overall change in portfolio includes effect of reinvested income and capital gains. Date of inception: 5 December 2008

You can view the share spotlight portfolio online here.