Model Portfolios Review: models riding a wave of market resurgence

Money Observer's model portfolios bounced back into the black as stock and bond markets rose in tandem. 

A strong rebound in stockmarkets from the pounding shares received at the end of 2018 catapulted the Money Observer model portfolios firmly back into profitability during the first quarter of 2019.

While the 12 portfolios’ collective performance was awash with red last year – losses across the board during the fourth quarter meant all but two portfolios were in negative territory over the year – strong returns in the first three months of this year put almost all the portfolios back into the black. The exception is one of our lowest-risk portfolios, which has virtually stood still over the past year (-0.6%). The others have gained by anything between 2.6% and 10.4%.

Recognition that recession in the US is not imminent and the easing of trade tensions between the US and China restored global confidence and reversed the market slide. In the UK, the annual results season and accompanying dividend announcements supported the turnaround in fortunes in the face of heightened Brexit uncertainty.

Bonds – particularly ‘safe haven’ government bonds – have also risen sharply amid concerns over the outlook for economic growth and a softer stance among central banks on interest rate hikes. The buying of German and British sovereign paper was particularly vigorous at the start of the year, with the yield on 10-year German ‘bunds’ dropping to its lowest level since April 2017 (yields fall as prices rise).

“So far this year, stock and bond markets have rallied in tandem as the main central banks have become more cautious,” says Jean-Paul Jaegers, head of investment strategy at Barclays Investment Solutions.

He adds: “Stockmarkets have taken comfort in this general pivot towards cautious stances, as equity investors have been worrying about the potential for all-too-restrictive monetary policy in the US. Bond markets have taken it as a sign that interest rate rises are off the table for quite some time.”

Our growth portfolios led the charge, rallying by up to 10.2% as markets unwound from December’s hissy fit and stocks soared globally. The FTSE World index rose by 9.6% over the quarter, while the UK’s FTSE All-Share index gained 9.4% and the US’s S&P 500 surged by 13% – the best start to a year for the index since 1998.

All our models beat their FTSE UK Private Investor benchmarks in the three months to the end of March – some by as much as 3.6%.

Global equity funds, which typically have a slug of assets in the US, account for six out of the top eight constituents across our models. Some of the best gains are being seen in bombed-out areas of the stockmarket. Standard Life Investments Global Smaller Companies backs the small and medium-sized firms that led the market lower last year, as does Mercantile Investment Trust in the UK all companies sector.

The overall top performer, Temple Bar Investment Trust (+16%), and 10th best, Man GLG UK Income (+10.3%), favour UK equity income stocks that their managers believe the market has unfairly punished.

After undertaking the biggest shake-up in our portfolios’ constituents to date at the start of this year – notably by increasing exposure to fixed income in some models, and getting rid of index trackers to avoid blindly following the market lower and instead putting our faith in active managers with good records for long-term outperformance – we see little reason to tweak things further at this stage. That is not least because many of our newer constituents are proving good additions.

Model portfolio equity constituents stage strong revival*

Please click here to see larger version of table

Model portfolio equity constituents stage a revival table (600)

Notes: *Table shows performance, with income reinvested, of model portfolio constituents to 1 April 2019, ranked over three months. Not all constituents have been members of portfolios over the full periods stated. IT = investment trust/investment company. †Estimated share price discount or premium to net asset value Sources: AIC and FE Analytics (performance and yield data)

Growth portfolios

Medium risk

Alpha and Bravo, our medium-risk shorter- and medium-term growth portfolios, are neck and neck, having each returned 7.7% during the quarter. This is the lowest return among our growth portfolios, but it outperforms the 6.6% return from the FTSE UK Private Investor Growth index nevertheless.

These models are our best-performing portfolios overall over one year, having gained 10.4% and 9.3% respectively. Fundsmith Equity, which backs a select band of high-quality, resilient global growth companies that industry stalwart Terry Smith deems to be good value, remains the portfolios’ best performer, having gained 14.9% during the first three months of the year.

Its strong showing has pushed its weighting in Bravo to 23.3% – something we will keep an eye on with a view to taking profits should it rise much further.

Newcomer Mid Wynd International is a close second in Alpha, having returned 12.3% since the start of the year, when we initiated the position. Its managers favour high-quality firms that benefit from global themes. Companies that play to the trust’s automation theme rallied during the period amid a resolution to most of the issues standing in the way of a deal to end the long-running US-China trade dispute.

Significant contributions for Bravo also came from F&C Investment Trust (+9.8%) and Artemis Global Growth (+5.9%). Jupiter Strategic Bond was introduced at the start of this year to Alpha, Bravo and Golf. It has since returned 3.7%, a respectable gain for a fixed-income fund.

Charlie, our medium-risk longer-term growth portfolio, is up 9.7%, having reaped the rewards of a re-rating in UK small and medium-sized companies, and greater exposure to emerging markets introduced at the start of the year.

Mercantile Investment Trust, which has a smaller companies bias, is its top performer (+14.8%). Fidelity Emerging Markets and Schroder Asian Total Return Investment Trust are proving to be solid additions, having earned 10.8% and 10% respectively.

Capital Gearing Investment Trusta notable contributor last year, was the poorest performer for Alpha, Bravo, Charlie and Delta, and our weakest constituent overall, having returned just 2.2%. Its capital preservation mandate meant it missed much of the market rally.

Growth portfolios stage solid first-quarter bounce

  Total return (income reinvested)
to 1 April 2019 after:
  3 mths (%) 6 mths (%) 1 year (%) 3 yrs (%) 5 yrs (%) 7 yrs (%)
Alpha: Short Term Growth, Medium Risk 7.7 0.9 10.4 40.5 61.9 91.3
Bravo: Medium Term Growth, Medium Risk 7.7 -1.5 9.3 46.7 69.6 120.2
Charlie: Longer Term Growth, Medium Risk 9.7 -2.8 2.6 30.3 46.4 98.8
Delta: Short Term Growth, Higher Risk 8.7 -1.2 7.9 38.6 61.0 104.4
Echo: Medium Term Growth, Higher Risk 10.2 -3.9 4.5 36.8 37.5 79.2
Foxtrot: Longer Term Growth, Higher Risk 9.4 -6.0 2.7 48.1 47.1 114.3
Indices and benchmarks            
FTSE All-Share index 9.4 -1.8 6.4 31.3 34.5 81.3
FTSE UK Private Investor Balanced index 5.7 -0.3 6.7 29.8 44.5 80.8
FTSE UK Private Investor Growth index 6.6 -1.3 7.5 34.5 49.1 92.1
FTSE World index 9.6 -2.4 11.1 51.4 79.9 147.8

Notes: Inception date of our Model Portfolios is 1 January 2012. Data source: FE Analytics as at 1 April 2019

Higher risk

Fundsmith Equity is Delta’s top performer, while Capital Gearing tempered gains to give an overall rise of 8.7%. The latter is new to this portfolio – a 10% allocation was introduced at the start of the year to provide ballast given the shorter-term remit of this model. It has a big slug of fixed interest and alternative investments that aim to generate a positive return in any investment climate, and should come into its own when volatility returns; indeed, there have been signs recently that the stockmarket rally is faltering.

Schroder Recovery, our replacement for a FTSE All-Share index tracker, underperformed the index, with a 4.5% rise, but we believe its active approach and focus on firms that have suff ered a severe setback in share price or profitability will deliver long-term.

Echo, our higher-risk medium-term growth portfolio, posted the biggest quarterly gain of all (+10.2%), spurred on by its significant weighting to global equity funds. We put 15% of this model into Monks Investment Trust at the start of this year, and it has been the portfolio’s top performer since (+15.4%), thanks to its focus on growth stocks and a hefty allocation to US equities.

A new allocation to JPMorgan Emerging Markets Investment Trust is also bearing fruit (+7.7%), but recent introduction CFP SDL UK Buffettology is yet to make an impact (+3.9%). This highly concentrated portfolio of UK growth companies carries a lot of stock-specific risk.

Foxtrot, the riskiest of our portfolios, returned 9.4% by virtue of greater allocations to smaller companies at the start of the year.

We put extra capital to work in this model’s top quarterly performer, Standard Life Investments Global Smaller Companies (+10.9%), initiated a new position in Henderson Smaller Companies Investment Trust (+10%) and allocated extra to Baillie Gifford Shin Nippon (+9.8%), which focuses on high-growth smaller companies – all great moves.

Income portfolios

Medium risk

Golf and Kilo delivered the lowest returns in the quarter (+5.2%), but still edged ahead of the FTSE UK Private Investor Income index (+5%). City of London Investment Trust, with its focus on big blue-chips, has driven Golf’s performance: no less than 47 of its top-flight stocks posted double-digit percentage gains in the first quarter, and shares in the investment trust rose by 8.8%.

The rest of Golf’s constituents are among the bottom third of the 55 constituents of our models, which is not that surprising given this portfolio’s objective of producing immediate income from medium-risk assets. The model yields 4.9% at present, second only to the higher-risk version, Juliet, at 5%.

Schroder Income Maximiser, reinstated to both portfolios at the start of the year, is up 5.4%, while fellow newcomer Fidelity Multi Asset Income has got off to a good start with a 4.8% gain.

Given its balanced income remit, Hotel is populated with equity income and strategic bond funds. Its 6.8% gain in the quarter came from UK equity income funds in the form of Man GLG UK Income(+10.3%) and City of London, as well as global equity income funds Artemis Global Income (+7.1%) and Sarasin Global Higher Dividend (6.2%). Its three sterling strategic bond fund holdings have returned between 3.1% and 4.6%.

India, which focuses on growing income, is the second-best performing income portfolio over the quarter (+7.8%), led by global investment trust Bankers (+12.7%). It saw the fewest changes at the end of 2018. Its only incoming fund, Troy Income & Growth Investment Trust, is its third-best performer over the quarter (+9.4%).

Income options well-placed after higher bond allocations

  Total return
(income reinvested)
to 1 April 2019 after:
  3 mths (%) 6 mths (%) 1 year (%) 3 yrs (%) 5 yrs (%) 7 yrs (%)
Golf: Immediate Income, Medium Risk 5.2 -0.2 2.9 20.6 25.4 72.1
Hotel: Balanced Income, Medium Risk 6.8 -2.6 5.0 23.5 32.3 80.7
India: Growing Income, Medium Risk 7.8 -3.3 6.2 34.9 52.5 121.4
Juliet: Immediate Income, Higher Risk 5.6 -3.6 2.6 20.4 33.2 88.1
Kilo: Balanced Income, Higher Risk 5.2 -6.2 -0.6 19.4 32.6 100.6
Lima: Growing Income, Higher Risk 8.0 -3.2 2.8 37.6 55.0 142.8
Indices and benchmarks            
FTSE All-Share index 9.4 -1.8 6.4 31.3 34.5 81.3
FTSE UK Private Investor Balanced index 5.7 -0.3 6.7 29.8 44.5 80.8
FTSE UK Private Investor Income index 5.0 0.4 5.7 24.7 39.0 66.0
FTSE World index 9.6 -2.4 11.1 51.4 79.9 147.8

Notes: Inception date of our Model Portfolios is 1 January 2012. Source: FE Analytics as at 1 April 2019

Higher risk

Lima has risen the most (+8%), thanks in part to it being the only model to invest in Temple Bar (+16%), the top performer during the period.

This contrarian fund is conservatively managed but well-suited to a higher-risk portfolio. It has been ploughing money into firms significantly marked down during last year’s stockmarket slump and has reinstated gearing, currently at 9%. That, coupled with Royal Bank of Scotland returning to the dividend list , has seen Temple Bar grow its dividend by 10% this year and deliver exceptional total returns.

Lowland Investment Company, another UK equity income investment trust held in Lima, sits near the bottom of the performance league (+2.4%). Co-manager Laura Foll attributes this to an underweight position in consumer staples and to stock-specific issues.

The introduction of Murray International Investment Trust (+5%) has benefited Kilo (+5.2%), our higher-risk, balanced-income portfolio, while newcomer Sanlam Strategic Bond (+3.1%) is off to a decent start.

Constituents and new portfolio weightings†

Click here to see larger version of table

Constituents and new portfolio weightings table (600)

Notes: †As at 1 April 2019. Click here for more information


Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment