Model growth portfolios: four-year review

Our six growth portfolios are divided into three categories. One category is designed for short-term investors (5-9 years), one for the medium term (10-14 years) and one for the long term (15 years-plus).

With the shorter-term portfolios we have tried to place a greater emphasis on capital preservation so a more cautious approach is taken, even with the higher-risk version. Due to this approach the returns on the two short-term portfolios since inception have been at the lower end of the spectrum.

Generally speaking the more time you have on your side, the more speculative you can be as you have longer to ride out market fluctuations. This can sometimes also produce good short-term results, but during 2015 our higher-risk portfolios were outperformed by their medium-risk counterparts.

Click here to find out how our model income portfolios have fared over the past four years.


Alpha: Short Term Growth

7.4 per cent gain over one year, 33.1 per cent over four years to 01/01/2016

Alpha achieved its highest annual return in 2015 and was the third best performer of all the portfolios last year. Its four-year performance is still on the modest side and it is still lagging the FTSE All Share index over this period but it is beginning to make up the ground.

Last year, it benefited in particular from the strong performance of Lindsell Train Global Equity and Fundsmith Equity. The Lindsell Train Global Equity fund was added to the portfolio in January 2015, replacing Investec Cautious Managed.

The managers' strategy of constructing a concentrated portfolio of 'exceptional' companies, with a focus on those businesses with truly sustainable business models and/or established resonant brands, and investing for the long term, made it one of our best performing holdings.

Terry Smith, manager of Fundsmith Equity, has a similar mindset. He has adopted what appears to be a highly successful formula of investing in high-quality, resilient, global growth companies that are good value and then holding them for a long time.

The most disappointing holding in this portfolio has been Newton Real Return, which only just held its ground during 2015. We have now replaced it with Kames Ethical Cautious Managed fund, because it has a good track record rather than because of its ethical approach, although that is a bonus.

Bravo: Medium Term Growth

8.5 per cent gain over one year, 51.1 per cent over four years to 01/01/2016

Bravo was our best performing portfolio during 2015, after a similarly strong 2014. All but one of its holdings produced positive returns during the year, led by Fundsmith Equity, Edentree UK Equity Growth and Ardevora Global Equity.

One of the star performers, Edentree (formerly Ecclesiastical) UK Equity Growth is a fund that can invest in the shares of British companies of any size but has traditionally had a bias towards smaller companies. In 2015 there was a change of manager.

Although such a change can lead us to consider a switch, we decided to stick with this fund for the time being. The new manager Phil Harris, who took over in September, has over 20 years' experience managing UK smaller and mid-cap funds which we believe will stand him in good stead.

One change was made in this portfolio during 2015. Newton Real Return was replaced by Kames Ethical Cautious Managed fund in July because we felt that the performance of the Newton fund was proving too pedestrian.

The Kames fund, which invests in a combination of equities and bonds, was chosen on the basis of its reliable performance record. Producing a return of 7.2 per cent last year, it has certainly earned its place in the portfolio.

Charlie: Longer Term Growth

8.3 per cent gain over one year, 53.8 per cent over four years to 01/01/2016

It was another good year for Charlie. It is also our best-performing growth portfolio over the past four years.

Three of its six holdings are the same as they were at outset - Stewart Investors (formerly First State) Asia Pacific Leaders and HSBC FTSE All Share Index funds, plus the investment trust Witan.

Witan, which uses external investment managers chosen by its chief executive Andrew Bell to run much of its portfolio, has returned more than 90 per cent over the past four years.

At the beginning of 2015, CF Miton UK Value Opportunities was added to this portfolio. It turned out to be our best performing holding overall during the year.

Although this fund was only launched in March 2013, its managers, George Godber and Georgina Hamilton, had a successful record running a similar fund for another company, so we were expecting good things of them.

Our faith has been justified. Not only do they focus on buying companies at the right price, they try to sell at the right price too. They follow a disciplined target price approach, arguing that even the best companies can be risky investments if owned at too high a price.

In the middle of 2015 another switch was made. This time Kames Ethical Cautious Managed is being brought into the portfolio in place of Newton Real Return.


Delta: Short Term Growth

5.9 per cent gain over one year, 46.5 per cent over four years to 01/01/2016

After an impressive growth spurt in 2014, Delta, our short-term, higher-risk growth portfolio produced a more pedestrian performance in 2015.

Strong returns from its globally diversified holdings Fundsmith Equity and Witan were offset by muted progress made by Stewart Investors (formerly First State) Asia Pacific Leaders and Newton Real Return.

While there are obvious reasons for poor returns from Stewart Investors Asia Pacific Leaders last year as Asian markets suffered a loss of confidence due to China's economic problems, it remained a top quartile performer in its sector.

Although its lead manager Angus Tulloch is stepping back, new manager David Gait, who has worked alongside Tulloch for several years, will continue with the policy of investing in quality companies. We are happy to retain this holding as a result.

However, we have now decided to replace Newton Real Return, which has proved to be one of the worst performers since the inception of the portfolios. Kames Ethical Cautious Managed is being brought in instead as we feel it provides more growth potential.

At the start of 2015, we introduced the accumulation shares of Rathbone Income into the portfolio to replace Investec Cautious Managed to provide a defensive but steady growth element, which it has done.

Echo: Medium Term Growth

0.7 per cent gain over one year, 31.1 per cent over four years to 01/01/2016

Echo is our worst performing portfolio over the past four years. During 2015, it produced a positive return of less than 1 per cent. For 2015, it also had the distinction of including both our best and worst performing holdings - CF Miton UK Value Opportunities and BlackRock World Mining.

Fortunately it is designed for investors with a high risk tolerance and a timescale of at least 10 years so there is still time for it to recover. However, we regret that it is lagging so badly at this stage, so have decided to make two switches.

The two main detractors from the portfolio's performance last year were BlackRock World Mining and JPMorgan Global Emerging Markets Income. Both have been hit by the decline in global growth post the financial crisis and by the slow-down in China's economy in particular.

There will be a sharp recovery at some point, but we have decided that two generalist global funds are likely to produce more predictable growth for this portfolio by being able to access any country or sector.

We have therefore brought in Ardevora Global Equity and Old Mutual Global Equity whose managers exploit market trends in very different ways.

Foxtrot: Longer Term Growth

2.5 per cent gain over one year, 47.2 per cent over four years to 01/01/2016

Despite containing our two worst performing holdings, Foxtrot still managed to achieve a small but positive return in 2015.

This was largely thanks to its holdings in funds focused on small and medium-sized UK companies whose businesses have benefited from their focus on the domestic economy.

Marlborough UK Micro Cap Growth was the portfolio's star performer. This fund invests primarily in very small UK companies of £250 million or less in size, with a significant portion allocated to companies valued at less than £150 million.

Strong returns were also generated over the year by our tracker fund HSBC FTSE 250 Index. This fund, which tracks the fortunes of medium-sized UK companies, performed much better than the other main market indices.

Another good contribution came from Herald, an investment trust that specialises in smaller companies in the areas of communications and multi-media.

The two main detractors from the portfolio's performance in 2015 were BlackRock World Mining and JPMorgan Global Emerging Markets Income. Mining shares have been hit hard by the slump in commodity prices as demand around the world has fallen.

But bearing in mind the timescale of this portfolio we are retaining the BlackRock trust because we believe it will recovery sharply at some point. However, we are replacing the JPMorgan fund with Old Mutual Global Equity, which has the scope to benefit from market gains wherever they occur.

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