Purposeful Portfolio - Capital Conserver: Hard to hide from the perfect storm

The UK stock market has had a miserable first quarter and is impacting investors’ lives.

Our Capital Conserver portfolio is tasked with providing a steady return when times are good and, crucially, protecting capital during the bad times. The past four months since our last update (January 2018 issue) are best classed as the latter, showing that giving protection is not easy.

Rob Morgan, investment analyst at Charles Stanley, who is running the portfolio, says: ‘These past few months have been a perfect storm, where everything that could go wrong for this portfolio has gone wrong. That being the case, I’m pleased we are only down 1.2 per cent since inception at the start of last April.’

It’s been a year since our Purposeful Portfolios were launched and they have faced a number of challenges; geopolitical uncertainty, violent swings in sentiment and the first UK interest rate rise in a decade.

Just one of the Capital Conserver holdings is in the black since our last update in November – F&C Commercial Property, up 0.9 per cent. Moreover, it is one of six holdings showing a positive return since the portfolio launched.

A sell-off in the bond market has posed a particular problem for cautiously positioned portfolios. As yields have risen, prices have fallen, which has hit returns. Strategic bond funds should, in theory, provide the flexibility needed to navigate a rising interest rate environment. Morgan is pleased with the performance of Janus Henderson Strategic Bond, up 2.3 per cent since inception, with a healthy yield of 4 per cent.

Widest discount in years

Rising bond yields have had a knock-on effect on other areas, too – investors are less willing to take on risk for income when they can get it from perceived safer assets, as can be seen in the performance of our infrastructure investment trust International Public Partnerships.

Infrastructure focused investments have been hard-hit, despite the asset class being viewed as a reliable holding across the market cycle due to its high barriers to entry and pricing power. International Public Partnerships, for example, is down 8.7 per cent over the past four months. In addition, the trust has swung from a 17 per cent premium to a 3 per cent discount – its widest since the financial crisis. The high-profile collapse of construction company Carillion cast a shadow over the infrastructure industry, while speculation about what a potential Labour government would mean for the sector has further harmed sentiment.

But Morgan is confident about the future prospects of the trust. ‘This isn’t a niche investment; it is a £2 billion FTSE 250 trust involved in some of the biggest infrastructure projects in the UK, which are critical to the economy, so it’s a good investment proposition. I’m hanging in there.’ At its widest discount in a decade, now could be a buying opportunity, but Morgan is holding off: ‘This is the danger you have with investment trusts – you have that extra layer of uncertainty about the discount or premium.’

Defensive funds disappoint

Now should be a time when absolute return strategies come into their own – they are designed to deliver a positive return, irrespective of the performance of the stock market or wider economy. Morgan admits to being sceptical, but says that ‘it’s important to have things that are supposed to go up when others go down’.

But Jupiter Absolute Return has proved a particular disappointment. Manager and head of strategy James Clunie holds some contrarian positions, using his shorting abilities to bet against popular technology stocks, such as Tesla. These bets are costly to make and are yet to come off, evidenced by the fund being down 3.9 per cent over the past year. Morgan will be watching the holding over the coming months.

Newton Real Return is another which is yet to prove itself. Morgan says: ‘In many ways, the fund has the same strategy as this portfolio, and it demonstrates in a single holding the difficulties I have had: currency and gold haven’t worked as protection, bonds haven’t helped, nor have blue-chips.’ Down 3.1 per cent since the last update, the fund remains as we wait to see how the next quarter of the year plays out.

Overall, the portfolio is marginally in the red over the past year. That could have been worse were it not for the performance of the Standard Life Equity Income Trust. It’s had a difficult few months, down 3.2 per cent, but has delivered a return of 10.6 per cent since inception. By far the strongest performer of the group, it has been boosted by exposure to small- and mid-cap UK stocks, with more than half the portfolio in FTSE 250 and small cap firms, and 10 per cent in Alternative Investment Market (Aim) companies.

Cautious investment portfolios tend to be UK-centric as they avoid racy emerging markets and developing regions. This too has hurt the portfolio as the domestic stock market remains out of favour with international investors.

In addition, the pound marching higher against most global currencies has impacted on the blue-chip companies, as it dilutes their overseas earnings. That has hurt holdings such as Perpetual Income and Growth– managed by Mark Barnett – which is down 7.5 per cent since the last update. Morgan says: ‘Barnett is a contrarian so has money in unloved areas. I am confident it’s going to perform in the long term.’

M&G Recovery has been disappointing since the outset and Morgan has decided to act. The fund has been ejected from the portfolio in favour of overseas exposure, Morgan backing the Invesco Perpetual Asian fund instead.

It’s a racier choice for a conservative portfolio, but will account for just 5 per cent of assets and will diversify the investments away from the UK, with holdings in South Korea, Hong Kong and Taiwan, including technology giant Samsung and Chinese internet company Baidu. Morgan adds: ‘This fund is well-rounded with good growth. Share prices are not too expensive, so the time is right to invest.’ The first year has proved a testing period, but Morgan is confident his ‘combination of resilient assets’ will deliver. 

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Name Purchase price
Value at
inception (£)
Current value
(£) 28/03/18
Change since last
update 30/11/17 (%)
Change since
inception (%)
Yield (%)
International Public Partnerships IT 156 3205 4999.80 4649.81 -8.7 -7.0 4.9
Artemis Global Income 131 3821 5005.51 4915.41 -4.5 -1.8 3.4
Aviva Investors Strategic Bond 74 13563 10036.62 10066.73 -1.0 0.3 2.7
F&C Commercial Property 145 3455 5009.75 5079.89 0.9 1.4 4.3
Gold Bullion Securities 9445 53 5005.85 4730.53 -0.2 -5.5 0.0
Janus Henderson Strategic Bond 137 7299 9999.63 10229.59 -1.2 2.3 4.0
Perpetual Income & Growth IT 376 2661 10005.36 9435.05 -7.5 -5.7 4.2
Jupiter Absolute Return 56 17899 10023.44 9632.53 -0.7 -3.9 0.0
Jupiter Strategic Bond 97 5166 5011.02 5071.15 -0.8 1.2 3.4
M&G Global Dividend 179 5583 9993.57 9853.66 -4.2 -1.4 1.6
M&G Recovery* 130 3853 5008.90 4878.67 -4.6 -2.6 1.1
Newton Real Return 113 8846 9995.98 9736.08 -3.1 -2.6 2.3
Standard Life Gbl Abs Ret Strategies 58 8635 5008.30 5023.32 -1.5 0.3 1.2
Standard Life Equity Income Trust 413 1209 4993.17 5522.44 -3.2 10.6 4.3
98824.86 -3.0 -1.2
Notes: * M&G Recovery exited the portfolio on 29 March, it has been replaced by Invesco Perpetual Asian.,Inception date of the portfolio 1 April 2017. Source: Charles Stanley, as at 28 March 2018.

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