Japan holding remains fit for purpose despite dip - balanced portfolio June 14 update

The mood in investment markets has see-sawed since the hypothetical balanced portfolio was re-established three months ago.

Initially, equity markets were shaky, and then share prices started to decline because of worry about the Ukraine crisis and concern about corporate earnings.

But after mid April the dust settled and investors become more positive again. Shares made up the lost ground, resuming their upwards trend.

By the end of the first three months of the portfolio's relaunch, the FTSE All-Share had gained 1.18 per cent. The portfolio did rather better, rising by 2.6 per cent over the same period. Only one of its holdings slipped back slightly.

To view the balanced portfolio's holdings and trading chronology, click here.

negative on bonds

Returns might have been somewhat better if it had had less exposure to cash. The portfolio's manager Roddy Kohn, principal of Kohn Cougar, says: 'Cash in the underlying funds and money held on deposit accounts for almost a fifth of the portfolio, and it inevitably acted as a drag on performance.

'The reason for this position is that we retain a negative view on bonds and are using cash as a proxy for bonds until better buying opportunities present themselves.'

The portfolio would have done better if the performance of one of its largest holdings and its smallest had been reversed. Its smallest holding is the Picton Property Income trust, which accounts for just over 5 per cent. It was the best-performing holding in the portfolio, gaining 9.3 per cent, and it made a dividend payment during the quarter.

Kohn says the surge in the trust's performance reflects a positive change in sentiment towards the property sector. He adds that the prospect for further modest capital growth, coupled with a healthy 4.8 per cent dividend, bodes well for investors facing continuing low interest rates.

In contrast, one of the portfolio's largest holdings was one of the weakest performers over the period. JO Hambro UK Equity Income, which has previously been a top performer in its sector, gained less than 0.5 per cent.

Kohn says: 'The fund's weighting to mid caps hurt performance, as large caps have done all the running over the past quarter, with the FTSE 100 beating the FTSE 250 by about 5 per cent. The fund has around 55 per cent in large caps.

'Its exposure to Raven Russia, a Guernsey registered property investment company specialising in commercial real estate in Russia, also hurt it, although its overweight position in UK property helped offset these negatives.'

commercial property exposure

The portfolio's other direct property holding, the real estate investment trust Segro, was also a strong performer during the quarter. Its price rose 4.4 per cent and it paid a good dividend.

It focuses on secondary commercial property, which it owns, manages and develops. This includes modern warehousing, light industrial and data centre properties, principally concentrated in London's western corridor (including the Thames Valley), and in key conurbations in France, Germany and Poland.

The company is benefiting from growing confidence in property investment, which is finally beginning to spread beyond purely prime property locations.

The only holding in the portfolio that lost ground slightly over the quarter was JO Hambro Japan. Kohn points out that it had a volatile start to the year, but he remains sanguine about the Japanese market.

'While many investors were rattled [in the early part of the year], we feel the opportunities for further share price growth remain,' he says. 'The market remains cheap on many metrics, but as usual, much will depend on Shinzo Abe's government being able to see through structural reforms. Any evidence to the contrary will see the market respond negatively.'

The managers of the fund, Scott McGlashen and Ruth Nash, also feel optimistic. They point out that 'Abenomics' has meant that the government has been working with, rather than against, the market. But what excites them most is that Japanese companies are finally reaping the rewards of many years of cost cutting and, through dividend increases and share buybacks, sharing those rewards with shareholders.

However, they point out that the global macro funds that chose to bet on Abenomics last year appear to have moved on, so the Japanese market is no longer the focus of attention among foreign investors.

Broader exposure to foreign markets through the iShares MSCI World index exchange traded fund also benefited the portfolio. This invests in large and medium-sized companies across 23 developed markets.

us and europe

It was buoyed by a strong showing from the US, which accounts for just over half of the fund's exposure. Nevertheless, data from the US remains mixed. Although the US economy shrank by 1 per cent in the first quarter, growth is expected to rebound in the second quarter. The US Federal Reserve remains rather dovish about interest rates.

Elsewhere, Jupiter European Special Situations showed modest positive growth as a result of the more optimistic economic outlook for the region at the start of the year. Kohn points out that further economic stimulus in the eurozone should mean more growth to come. But he cautions that political uncertainty will lessen optimism for the remainder of the year.

However, over the longer term he feels investors will be rewarded. 'The fund's focus on undervalued shares and an unconstrained investment style will go some way towards providing long-term returns that should comfortably outperform cash,' he says.

Kohn is currently rather cautious about the future. He points out that, while he is not keen on bonds - believing their risk/reward characteristics to be unattractive - he is neutral on equities. 'We feel shares have much of the good news priced into them. However, compared to cash and bonds, they remain attractive.'

He feels markets have reached the stage when the easy wins have been banked and selective stockpicking will become the dominant trend for the foreseeable future.

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