As global markets continue upwards, all of our models are back in the black, so we are banking some profits and adding a few new faces.
Markets shook off a rocky start to 2018 to return to form during the second quarter – and propel the Money Observer model portfolios firmly back into the black.
All 12 of our portfolios beat the relevant FTSE UK Private Investor index benchmark during the three months to the end of June – some by as much as 3.5 per cent. That saw them recoup losses incurred during the volatility that pervaded investment markets in the first quarter of the year – and then some.
Strong fund selection helped to shield portfolios from some of the stock market slide during the first three months of this year (only seven out of 47 funds lost the same or more than the benchmark indices) and drive their outperformance in the second quarter.
The leader of the pack was Scottish Mortgage, the £7.6 billion global growth investment trust that has returned an incredible 20 per cent to its shareholders over the past three months alone. Its high-conviction managers favour global growth names that have the power to disrupt the markets in which they operate, and it is no surprise that their top 10 holdings feature large technology and consumer discretionary companies such as ‘e-tail’ giant Amazon and video streaming service Netflix.
The fortunes of FAANG stocks (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) catapulted Foxtrot, our higher-risk longer-term growth portfolio, to the top spot among our models, reflecting the fact that it had more than one-fifth of its assets in Scottish Mortgage. The portfolio notched up an 8.5 per cent total return during the quarter – outstripping a 5.8 per cent rise in the FTSE UK Private Investor Growth index and taking Foxtrot’s returns for the first half of 2018 to 5.1 per cent.
Golf, our medium-risk immediate income portfolio, and Lima, our higher-risk growing income portfolio, are the worst performers during the three months under review, but have nonetheless returned a respectable 4.2 and 4.3 per cent respectively – beating a 3.7 per cent rise in the FTSE UK Private Investor Income index. Both have been helped by their weightings to UK equity income stocks.
Lima has eked out the most modest return of all our portfolios so far this year, as president Donald Trump’s trade wars have hurt the performance of its emerging markets holdings. It owns investment trusts Utilico Emerging Markets and Schroder Oriental Income, the poorest performing constituents this quarter, having lost 6.8 and 2.9 per cent respectively as the US president ratcheted up his protectionist rhetoric.
The majority of our changes this quarter are to our growth portfolios. The strength of global equity funds has ramped up their weightings in these portfolios, so we are making a fund switch in some cases and taking profits to reduce holdings in others.
These portfolios have benefited from the epic bull run in growth stocks since 2009, led by the relentless rise in high-flying technology stocks. However, many market commentators believe that 2018 will be the year that value stocks (those that look attractively priced relative to the wider market) will overtake growth.
Alpha, our medium-risk shorter-term growth portfolio, has had a large weighting to two global growth funds in the form of Lindsell Train Global Equity and Fundsmith Equity, with both accounting for more than 20 per cent of assets. They were the second and fifth top performers out of 48 funds that made up our models during the second quarter, returning more than 12 per cent each.
They have a very similar ethos: Lindsell Train Global Equity, a Money Observer Rated Fund since 2015, is a concentrated portfolio of between 20 and 35 ‘exceptional’ companies; while Fundsmith Equity, a Rated Fund since 2013, holds 20 to 30 long-established firms with big brands. At this review we are swapping Lindsell Train Global Equity for its UK equivalent, LF Lindsell Train UK Equity, as there is little exposure to the UK stock market in this portfolio.
Another new name appears in our Alpha portfolio, but only by virtue of a rebrand. Old Mutual Wealth Management has changed its name to Quilter following the restructuring of its wealth business and the Old Mutual Cirilium Conservative Portfolio has been renamed Quilter Investors Cirilium Conservative Portfolio.
In Bravo, our medium-risk medium-term growth portfolio, we are removing Ardevora Global Equity in favour of Fidelity Global Dividend. The Ardevora fund is a 150/50 long/short equity fund, which means it can have 150 per cent of its assets in long positions and 50 per cent in short-selling positions. Although the fund’s aim is to achieve growth and minimise volatility, we have decided this strategy is better suited to our higher-risk growth portfolios. The replacement fund should prove to be a useful addition: its manager Dan Roberts not only seeks to provide a combination of income and capital growth, but also focuses on wealth preservation.
As Brexit approaches, we are also replacing Mercantile investment trust, which focuses on UK medium-sized and smaller companies, for the less volatile CFP SDL UK Buffettology fund. It is a new entrant to our models, but no stranger to Money Observer: it was named our Best Larger UK Growth fund this year, having been Best Smaller UK Growth fund in the previous three years. It has been a Rated Fund since 2016.
We have also changed some of the weightings to take profits from areas that have marched ahead and reinvest them elsewhere for a better asset mix: Fidelity Global Dividend has 10 percentage points less than Ardevora had, Buffettology has 5 percentage points more than Mercantile had, and existing holding Royal London Sustainable Diversified gets an extra 5 percentage points.
In Charlie, our medium-risk longer-term growth portfolio, we are replacing Ardevora Global Equity with the punchier Old Mutual Global Equity, which is arguably more suitable for a longer-term portfolio.
In Echo, our higher-risk medium-term growth portfolio, we are banking some profits from Standard Life Investments Global Smaller Companies. A newcomer to our Rated Funds and models for 2018, it has been a great addition thus far, being the standout performer during the first quarter sell-off (when only three of our constituent funds managed to deliver a positive return) and the fourth-best fund during the second quarter.
It is streets ahead of F&C Global Smaller Companies investment trust, which it replaced in January. While the outgoing trust has managed a 2.3 per cent return in the first half of 2018, the SLI fund is up 15.1 per cent.
However, this strong showing means it now represents 23 per cent of the portfolio, so we are reducing this holding by 5 percentage points and reinvesting it in Seneca Global Income & Growth, a mixed asset fund that aims to deliver an annual total return of at least inflation plus 6 per cent after costs, with low volatility.
We are introducing Standard Life Investments Global Smaller Companies to Foxtrot, the riskiest of our portfolios. It replaces Old Mutual Global Equity, which aims to ‘follow the money’ and is therefore more sensitive to market movements.
Delta, our higher-risk shorter-term growth portfolio, is unchanged. It was our worst-performing growth portfolio during the first quarter, but has bounced back thanks to all of its holdings making gains during the second quarter, led by Fundsmith Equity.
We are not making any changes to our income portfolios at this review. They have made solid progress during the quarter thanks to a 9.2 per cent rise in the FTSE All-Share index that has boosted the performance of UK equity income holdings.
We are keeping a watching brief on bond markets, and will consider reintroducing more bond exposure in coming reviews because many funds are starting to look more attractive from a yield perspective. We reduced bond exposure around three years ago following the general collapse in yields on many popular funds such as M&G Optimal Income. The prospect of higher interest rates is a key factor that has dampened returns across the global bond markets so far this year. Yields rise as prices fall, and 10-year US Treasury yields reached around 3 per cent at the end of June, meaning that bonds are beginning to offer better value.
Three of our models – Golf, Hotel and Kilo – hold Baillie Gifford Strategic Bond, a Rated Fund since 2013, which has been renamed from Baillie Gifford Corporate Bond to better reflect its flexibility to invest in its managers’ ‘best ideas’ across the high yield and investment grade universes. The fund consistently ranks in the first quartile of its peer group.
Juliet, our higher-risk immediate income portfolio, is yielding 4.4 per cent – less than the 5 per cent yield on medium-risk Golf. However, the longer-term performance of Juliet is far superior, so arguably investors are benefiting from higher growth in asset values, which will have contributed to a higher overall income over time. Nevertheless, we may look to boost Juliet’s initial yield in future reviews.
Both portfolios hold Picton Property Income investment trust, which is planning to turn itself into a real estate investment trust (Reit) later in the year. A director of the Association of Investment Companies confirmed that it will retain its membership and, therefore, its eligibility for our portfolios.
Keeping the faith with income laggards
Two funds that feature in our riskiest income models are floundering at the bottom of the performance table, but we are keeping faith in them in the belief that they remain relevant for income investors.
The worst performer is Utilico Emerging Markets, which has lost more than 10 per cent this year and has underperformed since it was introduced to Lima in January 2017. It has been a Rated Fund since 2014 on the strength of its long-term track record: its net asset value has risen by almost 300 per cent since its launch in mid-2005.
The portfolio has a decent yield of 3.5 per cent and offers a lower-risk way to gain exposure to emerging markets infrastructure and a progressive dividend. It invests predominantly in listed companies involved in infrastructure, utility and related sectors operating in emerging markets, which gives it considerable defensive qualities.
The income shares of JP Morgan European investment trust, a constituent of Lima and Kilo, is the second-worst performer, having lost 6.6 per cent in the first six months of the year. However, it has outperformed the wider European market by 30 per cent over five years.
The portfolio’s overweight in financial stocks has dented performance. At the same time it is less exposed to some of the defensive areas of the market that did well, such as consumer staples and healthcare, where dividend yields are lower.
The fund yields 3.9 per cent. The board increased the final dividend in February, taking the total for the year to 5.8p – an increase of 16 per cent on the previous year – in recognition of the ongoing growth in earnings and dividends in European markets.
Both of these trusts can be bought at a double-digit discount to the value of their underlying assets – an attractive entry point and a potential cushion against future volatility.
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Model Portfolio Weightings
In used to get Model Portfolio Weightings from Interactive Investor but since they stopped selling the portfolios, the weightings data has disappeared.
Where do I find weightings now? since they don't seem to be published with the quarterly reviews.