As the quarter ended, stock markets around the world suffered sharp corrections. The catalyst was the slowdown in China, which was compounded when the Chinese Central Bank announced a change to the way it pegged its currency versus the dollar.
Although markets recovered again slightly after the shock, the FTSE All-Share was still more than 11 per cent down. Against this background, it was understandable that Money Observer's hypothetical balanced portfolio's value fell over the quarter.
It was down 9.2 per cent, compared with a 7.2 per cent decline in the FTSE WMA Balanced Portfolio index, which measures typical discretionary portfolio performance.
To view the balanced portfolio's holdings and trading chronology, click here.
REASONS FOR UNDERPERFORMANCE
On the positive side, however, it remains comfortably ahead of other benchmarks measured over the period since its inception last year.
Roddy Kohn, principal at Kohn Cougar, says that the main reason for the portfolio's recent underperformance is his continued underweight position in fixed interest securities, combined with the portfolio's exposure to oil. Its holding in an ETF tracking the price of one month Brent Oil was the heaviest faller over the quarter, down 25 per cent.
The positive early performance which this holding achieved after it was first purchased has disappeared. But Kohn does not believe now is the time to sell.
He explains: 'OPEC has been increasing supply in order to try and force higher-cost producers to cut output. It has not yet worked out as planned, but one thing is for sure: OPEC doesn't wish to see a prolonged suppressed oil price, so one way or another production will need to be cut in order to boost prices.'
The second largest price fall was at 3i Group, the private equity investment trust - previously one of the portfolio's best performers. Its shares declined by 18 per cent over the quarter. Kohn points out that investors tend to be especially nervous of unquoted stock when there are market upheavals.
He says: 'There is a fear of the unknown. With unquoted stock you don't know how the market has reacted. But because 3i is a large liquid fund it is easy for investors to get into and out of.'
The only holding in the portfolio which did not see its price fall over the period was Picton Income. It was up 2 per cent and was standing on a 3 per cent premium to net asset value at the end of the quarter, but because it accounts for less than 10 per cent of the portfolio its impact on performance was limited.
Kohn argues: 'Property is a good place to be when the equity market is so volatile. When you invest in property you are more exposed to the real economy.'
He does not think commercial property is becoming overheated, even though many property trusts have been standing on premiums. 'There is no sign that we are going into a recession, and there is still a good chunky yield on this trust,' he says.
Segro, the portfolio's other property holding, is a UK real estate investment trust that focuses on warehousing and light industrial property. It was the second best performer over the quarter, though it did fall back slightly.
The Argonaut fund had been doing well after agreement was reached over Greece, but it was hit by the general market slump in August. However, Kohn believes that Europe's increasing money supply and general recovery mean it is on the right track and that the fund will do well.
Personal Assets' resilience was for other reasons. It is traditionally very defensive. It includes the portfolio's only exposure to fixed interest securities, which currently account for around a quarter of the trust's holdings, with cash forming another quarter.
It also holds gold bullion, as well as some solid blue-chip equities. Even though Kohn is not keen on fixed interest, he sees this multi-asset trust as a good way of helping to balance the portfolio. It is currently the second largest holding.
The portfolio's only UK-focused holding is JOHCM UK Equity Income. It fell by 10 per cent but, as Kohn points out, this was less than the UK market overall.
Kohn expects global stock markets to be challenging for the foreseeable future. He says: 'There are many issues to be concerned about and it would be very easy to paint a worst-case scenario for each.'
However, he still feels that equities relative to other asset classes remain attractive bearing in mind that a global recession looks unlikely. As he points out: 'The US and less so the UK are looking to increase interest rates imminently which is not consistent with a struggling economy.'
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