The past three years have seen many ups and downs in stock markets, and a variety of political upsets, with 2016 proving the most volatile of all.
None of these events were predictable when Mick Gilligan, head of research at Killik & Co, agreed to run our £100,000 hypothetical growth portfolio three years ago. At the time, he said his aim was to achieve equity-like returns but with less risk than by investing purely in shares.
With a return of 22 per cent over the period, the portfolio has done better than equities as measured by the FTSE All-Share index, which produced a total return of 19.3 per cent. However, it lagged the FTSE Wealth Manager Association Stock Market Growth index, which is designed to reflect the performance of a typical discretionary managed portfolio.
To view the growth portfolio's holdings and trading chronology, click here.
BALANCE AND INSURANCE
Gilligan puts this discrepancy down to two key differences. He explains: 'First, the fixed income content of this index consists of long-dated gilts, which have done better than corporate bonds as interest rates have gone down.
'Second, it has had a greater exposure to the US, which has performed strongly over the period.'
The original portfolio consisted of 13 holdings, seven of which were equity-oriented and accounted for around three quarters of the investment; the remainder was invested in bond and hedge-type funds to provide balance and insurance against markets falling.
In the event, markets have been relatively benign, says Gilligan. 'If they had fallen, the portfolio would have shown its resilience better.'
Three years on and the portfolio still contains eight of its original holdings. Gilligan says his main regret looking back on the three years is that he did not sell his holding in Odey Swan earlier, although he points out that it did have the positive effect of helping to dampen the portfolio's volatility.
The fund, which is a regulated version of Crispin Odey's hedge fund, invests in a variety of assets and can short bonds as well as shares and currencies.
However, Odey seemed to have got more of its bets wrong than right over the period, and Gilligan's patience finally ran out in mid-December last year.
As a result he decided to switch out of the fund and invest the proceeds in Syncona, formerly Bacit, an investment trust which makes donations to charitable causes and also invests in early and late-stage healthcare companies with the aim of capturing the full value of UK science.
He explains: 'This trust also provides low equity market correlation, but with some interesting upside potential over the next 12-18 months.'
The portfolio's highest return over the three years came from its stake in Stewart Asia Pacific Leaders, which rose 46 per cent.
Gilligan says: 'It derived a dual benefit from investing in developed Asian markets such as Hong Kong and Singapore, which have performed well, as well as from its emphasis on high-quality stocks with predictable earnings profiles, for which declining interest rates proved helpful.'
Over the last quarter, though, the fund has fallen back slightly as quality stocks have been sold off in favour of more cyclical ones.
Another original holding is the portfolio's largest, Findlay Park American. This was a good asset allocation call although the fund has not done quite as well as the US market, reflecting the fact that it had some exposure initially to Latin America.
Additionally, the managers' cautious approach has meant that they have held at least 10 per cent of the portfolio in cash for most of the period.
However, recently the fund has been one of the portfolio's strongest performers, helped by the strength of the dollar and the market's expectations of Donald Trump's forthcoming US presidency.
OTHER STAR PERFORMERS
Other original holdings which produced good returns were City of London Emerging World and the portfolio's only exchange traded fund, HSBC MSCI Japan, but they only accounted for a small portion of the portfolio.
The latter rose nearly 40 per cent and Gilligan says that an actively managed Japanese fund would have done even better, but he has been reluctant to take too big a punt on that market when he wanted to limit risk in the portfolio.
He does not regret maintaining his bond fund exposure either. He wanted these funds to act as diversifiers if the equity holdings came under pressure. Invesco Perpetual Corporate Bond produced a total return of 12.5 per cent over the period, while M&G Strategic Bond returned 17.5 per cent.
Another of his 'insurance' hedge-type holdings, BH Macro was the portfolio's top performer over the most recent quarter. But it is basically back where it started three years ago.
The recent rise in its price came after its managers proposed a tender offer to buy back all its shares at 96 per cent of net asset value (NAV).
They had recently been trading at a discount of nearly 13 per cent below NAV. Gilligan says he will regret its demise and may opt for its sister trust BH Global instead.
Although Killik's hypothetical growth portfolio will not continue in its current form, readers may be interested to know that Gilligan says that if it had continued, he would have made two switches: Axa Framlington UK Select Opportunities for Vanguard FTSE All Share Tracker, and replace Highbridge Multi Strategy with Old Mutual Global Equity Absolute Return fund.
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