Purposeful Portfolios: Capital Conserver - shaky sterling poses a problem

Rob Morgan was tasked with building a portfolio which would protect investors’ cash in times of uncertainty, and provide some growth if the going was good. The first four months have provided a political challenge that should have put it through its paces, with a UK general election, a French election and countless changes to the US administration, though in practice markets have continued to take such events in their stride. After four months, the portfolio is up 1.8 per cent, with an average yield among its holdings of 2.5 per cent.

Domestically focused investments have been among the strongest holdings, as post-Brexit fears that the UK economy would dramatically slow have eased and sterling has gained some ground against the dollar.

The Standard Life Equity Income trust (SLET) has been the standout performer in the group, with an impressive return of 10.3 per cent over the first four months. The trust’s leaning toward small and mid-cap companies has certainly helped drive performance as the dollar has weakened, taking the edge off the international earners which thrived in the uncertainty following last year’s EU referendum.

Morgan says: ‘We are now seeing a reversal of that trend which has played out since Brexit, which I hoped would happen – it’s the whole reason this trust was included in the portfolio and the performance has been really pleasing.’

As well as delivering a substantial return and yielding 3.7 per cent, investors will have received an extra boost as the discount on SLET has narrowed from around 8 per cent to 5 per cent. That wide discount was the reason Morgan opted for the closed-ended version of this fund rather than its open-ended counterpart, but he says that if the discount narrows much further he may crystallise the gain and switch into the open-ended version, which has the same manager and largely the same portfolio.

However, there are no changes to the portfolio as this point. ‘I’m not going to tinker for the sake of it. Nothing has moved so far out of line that I want to rebalance the portfolio or switch anything in or out at the moment,’ explains Morgan, although he says if the pound continues to strengthen that could change.

‘I might initiate a very small position in Asia and emerging markets if there is an opportunity. They have done very well over recent months and I slightly regret not including them, but I was aware that this is a cautious portfolio and we want to limit volatility, which is exactly what it has done,’ he adds.

Among the other strongest contributors to performance have been infrastructure trust International Public Partnerships (INPP) and F&C Commercial Property (FCPT). The two produce a steady income – they yield 4.1 per cent and 4 per cent respectively – which Morgan says helps to iron out any short-term volatility.

But there are four holdings in the table which are in negative territory. Jupiter Absolute Return has been hurt by its strategy of betting against stocks in the US. If the stock market in America, and particularly the technology sector, takes a tumble then it will be well set to benefit, but there has been some pain in recent months while the US market has continued to climb.

Newton Real Return is marginally in the black over the period, up just 0.3 per cent, which Morgan says is disappointing. The fund focuses on defensive stocks, which have held back performance. Standard Life GARS is the best performer of the three absolute return funds in the portfolio, up 1.5 per cent. 

But, while the absolute return funds have disappointed, it is gold that has been the worst performer: the Gold Bullion Securities exchange traded product is down 3.5 per cent since inception. However, Morgan is surprisingly happy with the loss: ‘This is the fund you want to go down. The gold price has fallen, which is unusual at a time when the dollar has weakened, but it shows that the overriding economic picture is pretty rosy. Gold is your disaster insurance and its poor performance shows people aren’t seeing the need for it.’


M&G Recovery was included in the portfolio in the hope that there would be a shift in investor sentiment from growth to value stocks, a change which Morgan admits has not yet played out. Out-of-favour value stocks had a rally at the start of the year, but this has since eased off. He had also hoped that trend would have been driven by an increase in merger and acquisition activity, which might have seen the share prices of takeover targets soar, but that too is yet to materialise.

Morgan says: ‘Fundamentally, the value trade has not worked out. With hindsight, it might have been better to have a small- or mid-cap fund in the portfolio instead of a recovery fund, but I’m going to stick with it for now as it helps keep us diversified.’ The fund has returned 1.8 per cent since inception. 

Another area which has disappointed is overseas equities. M&G Global Dividend and Artemis Global Income, which both have a large weighting to the US, have not seen the benefits even though the S&P 500 has hit multiple new highs. The reason for that, says Morgan, is because the dollar has depreciated at the same time, so the gains are worth less when converted back into sterling. The two funds are down 1 per cent and 0.6 per cent respectively as a result.

Currency moves could have a big impact on the portfolio over the next few months too, and it’s something Morgan will be keeping an eye on. A stronger pound could boost the UK-focused funds in the portfolio, while those stocks with international earners could come under further pressure. Morgan says: ‘So much is being driven by currency by the moment and that is largely being driven by expectations around US interest rates, so that is what I will be watching over the next few months.’.tg {border-collapse:collapse;border-spacing:0;}.tg td{font-family:Arial, sans-serif;font-size:14px;padding:0px 1px;border-style:solid;border-width:1px;overflow:hidden;word-break:normal;}.tg th{font-family:Arial, sans-serif;font-size:14px;font-weight:normal;padding:0px 1px;border-style:solid;border-width:1px;overflow:hidden;word-break:normal;}.tg .tg-54zg{font-size:12px;background-color:#fcfbe3}.tg .tg-1anj{font-weight:bold;font-size:12px;font-family:"Arial Black", Gadget, sans-serif !important;;background-color:#fef7f4}.tg .tg-afnn{font-size:12px;background-color:#f3eddf}.tg .tg-arnm{font-size:12px;background-color:#f3eddf;text-align:center;vertical-align:top}.tg .tg-45z5{font-weight:bold;font-family:"Arial Black", Gadget, sans-serif !important;;background-color:#fcfbe3;text-align:center;vertical-align:top}.tg .tg-xc79{font-size:12px;background-color:#f3eddf;text-align:center}.tg .tg-kr94{font-size:12px;text-align:center}.tg .tg-k6pi{font-size:12px}.tg .tg-uh82{font-weight:bold;font-size:12px;background-color:#f3eddf}.tg .tg-m3bg{font-weight:bold;font-size:12px;background-color:#f3eddf;text-align:center}.tg .tg-pi53{font-weight:bold;font-size:12px;text-align:center}.tg .tg-38jx{font-weight:bold;font-size:12px;background-color:#f3eddf;text-align:center;vertical-align:top}.tg .tg-ir4y{font-weight:bold;font-size:12px;text-align:center;vertical-align:top}.tg .tg-subx{font-size:12px;background-color:#fef7f4}.tg .tg-rg0h{font-size:12px;text-align:center;vertical-align:top}

The capital conserver portfolio
Name Sector Weight (%) Purchase price
Value at
inception (£)

Current value (£)
Change since
inception (%)

Current yield (%)
Artemis Global
Global equity income
5 131 3,821 5,006 4,977 -0.57 2.8
Aviva Investors
Strat Bond
£ strategic bond
10 74 13,563 10,037 10,176 1.39 3.0
F&C Commercial
Property - direct UK
5 944 53 5,010 5,219 4.18 4.0
Gold Bullion
5 145 3,455 5,006 4,828 -3.56 0.0
Strategic Bond
£ strategic bond
10 217 4,600 10,000 10,281 2.81 3.6
Int'l Public
5 156 3,205 5,000 5,303 6.07 4.1
Jupiter Absolute
Targeted absolute return
10 56 17,899 10,023 9,939 -0.84 0.0
Jupiter Strategic
£ strategic bond
5 97 5,166 5,011 5,070 1.18 3.0
M&G Global
Global equity income
10 179 5,583 9,994 9,893 -1.01 1.8
UK all companies
5 130 3,853 5,009 5,098 1.77 1.2
Real Return
Targeted absolute return
10 113 8,846 9,996 10,025 0.29 2.3
Perpetual Inc
& Growth IT
UK equity income
10 376 2,661 10,005 10,515 5.09 3.4
Standard Life
Eq Inc Trust
UK equity income
5 413 1,209 4,993 5,511 10.37 3.7
Standard Life
Targeted absolute return
5 58 8,635 5,008 5,085 1.54 1.2
100,096.90 101,919.39 1.82
Charles Stanley Direct, as at 1 August 2017

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