Model Portfolios review: how did our models fare in the corona market crash?

The coronavirus pandemic proved to be the black swan event that broke the longest bull run in history – and derailed our model portfolios.

It hurts to look at the performance of a portfolio amid a brutal bear market, and it is no different looking at Money Observer’s model portfolios. Despite a few relatively bright spots – primarily among funds geared to capital preservation – the picture is an ugly one. The 12 portfolios shed between 8.7% and 26% during the first quarter of 2020.

Our six income portfolios have been hit the hardest. They notched up losses of 18.3% or more, wiping out gains made in 2019 and hugely underperforming the FTSE UK Private Investor Income index, which fell by 7.3%. Chief among the reasons for that is their use of investment trusts. These have a long history of growing dividends but the average discount to net asset value (NAV) has ballooned amid the sell-off, widening from an all-time low of 1.3% at the end of 2019 to 18.4% on 23 March, when it exceeded a global financial crisis high of 17.6% recorded on 31 December 2008.

Dividend-paying income stocks, particularly in the UK, have also been hit hard, especially those in the ‘value’ camp, a natural hunting ground for equity income-focused portfolio holdings.

Covid-19: the ultimate black swan event
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Stunted growth

Our six growth portfolios held on to some gains they made last year, but all bar the least risky, Alpha, underperformed a 12.8% drop in the FTSE UK Private Investor Growth index, with losses of 15.1% or more.

Across all 12, only Alpha has beaten its benchmark over all periods. The other 11 have underperformed over three, six and 12 months. The portfolios are, however, generally faring much better than pure equity indices, particularly our shorter-term models. This is because all bar our riskiest portfolio, Foxtrot, have some exposure to bonds, albeit typically less than their benchmarks.

Stock and bond markets could fall further, but with one exception (Lima, the higher-risk, growing income portfolio) we are resisting the temptation to modify the portfolios. A paper loss is not a real loss until it is crystallised, and we hope indiscriminately savaged holdings will rebound when risk appetite returns.

That depends on news improving. It will take a sustained fall in new infections and death rates, particularly in the US, to see markets regain lasting confidence. And that is before the economic damage Covid-19 has wrought can be meaningfully assessed.

However, investors can take solace in the fact that risk and reward are inextricably linked. Our longer-term portfolios – inherently the riskiest – have suffered some of the worst short-term performance but have made among the best long-term returns since their inception in January 2012, having almost doubled investors’ money over an eight-year period.

Our longer-term portfolios are designed to be held for 15 or more years, our medium-term ones for 10-14 years and our short-term ones for five to nine years. Countless investment analyses prove the worth of the adage that time in the market, not timing the market, counts. Thus a £1,000 investment in the average investment trust in October 2007, when the FTSE 100 was near its pre-financial crisis peak, would have fallen to £587 by February 2009 but be worth £2,115 by the end of the first quarter of this year – a 111% return, even after the recent market sell-off, figures from the Association of Investment Companies show.

‘Buy low, sell high’ is another investment adage, and those with a longer time horizon who have kept some of their powder dry could now deploy it, given current knock-down prices. Some 26% of investors polled by interactive investor (Money Observers parent company) between 23 and 25 March were bargain-hunting among investment trusts, far outstripping the popularity of other funds, both active and passive.

Growth portfolios

Medium risk: Alpha (-8.7%) our short-term, medium-risk growth portfolio, is the best-performing of our models by a considerable margin. Although all 56 funds that populate our models lost money during the quarter, five of the seven that made a mere single-digit loss are in Alpha.

One of them, Capital Gearing (-4.2%), is held across all three medium-risk growth portfolios to provide ballast in uncertain times. Manager Peter Spiller is able to invest across asset classes with the aim of producing an absolute return. The trust entered 2020 defensively positioned, with just 16% in equities.

Alpha has another two of its top performers in common with Bravo (-15.1%), our medium-term, medium-risk portfolio – Jupiter Strategic Bond (-2%) and Fundsmith Equity (-7.9%). Avoiding losses is the top priority for Ariel Bezalel, manager of the Jupiter fund, and at the end of 2019 he had 36% of assets in AAA-rated bonds. Terry Smith is bearing up better than other equity fund managers, thanks to Fundsmith Equity’s portfolio of 30 high-quality, resilient global growth companies.

UK small and medium-sized firms have suffered more than larger ones in the sell-off – hitting Mercantile (-33%) and making longer-term Charlie (-18.9%) the worst performer of this trio.

Higher risk: Delta (-14.5%), our short-term, higher-risk growth portfolio, holds four funds with single-digit losses – Capital Gearing and Fundsmith Equity, in common with Alpha and Bravo, as well as Rathbone Global Opportunities (-6.9%) and Royal London Sustainable Diversified Trust (-7.4%). The Rathbone fund has all its assets in developed equity markets overseas, so it has benefited from sterling weakness, as well as a bucket of defensive firms. The Royal London fund has 40% in bonds and no exposure to oil and gas stocks, battered amid the Saudi Arabia/Russia oil price war and resultant oil price slump.

Echo (-21.7%) and Foxtrot (-21.1%), our medium- and longer-term, higher-risk growth portfolios, are neck and neck. Ardevora Global Equity (-10.3%) and Monks (-15.3%) helped offset losses from Miton UK Value Opportunities (-34.6%) and Seneca Global Income & Growth IT (-31.1%) for Echo. Beleaguered value stocks have plumbed new lows to the detriment of the Miton fund, while significant holdings in specialist investment trusts have sharply de-rated, hammering the Seneca trust. Its holdings in Fair Oaks Income, Merian Chrysalis and Sequoia Economic Infrastructure Income were trading on discounts of 60%, 22% and 11% respectively at the end of March.

Scottish Mortgage (-1%) is Foxtrot’s and our overall top performer thanks to electric vehicle maker Tesla rallying 25% and becoming the trust’s largest holding at 10% of assets. Henderson Smaller Companies (-36.4%) and Pantheon International (-34.8%) dragged Foxtrot lower, due to UK smaller companies exposure at the former and discount to NAV widening to 40% at the latter.

Growth portfolios lose less than income

  Total return (%), with income reinvested, to 1 April 2020 after:        
  3 mths 1 year 3 yrs 5 yrs Since inception*
Alpha: Short Term Growth, Medium Risk -8.7 0.1 17.6 45.6 91.4
Bravo: Medium Term Growth, Medium Risk -15.1 -5.5 11.6 40.4 108.0
Charlie: Longer Term Growth, Medium Risk -18.9 -9.1 -1.7 19.0 80.7
Delta: Short Term Growth, Higher Risk -14.5 -7.0 3.7 28.4 90.2
Echo: Medium Term Growth, Higher Risk -21.7 -10.9 -0.2 17.2 60.0
Foxtrot: Longer Term Growth, Higher Risk -21.1 -9.4 2.8 31.1 94.2
Benchmark indices          
FTSE All Share index -25.1 -18.5 -12.2 2.9 47.8
FTSE UK Private Investor Balanced -10.4 -3.8 5.0 24.9 74.9
FTSE UK Private Investor Growth -12.8 -5.3 4.6 26.8 83.2

Notes:*Inception date of our Model Portfolios is 1 January 2012.
Source: FE Analytics, as at 1 April 20201

Income portfolios

Medium riskGolf, Hotel and India, our three medium-risk income portfolios, have performed in a narrow range, losing 18.3%, 20.2% and 20.9% respectively. Sterling strategic bond funds such as Jupiter Strategic Bond (Golf), Baillie Gifford Strategic Bond (-10.1%, Golf and Hotel), Man GLG Strategic Bond (-13.8%, Hotel), Artemis High Income (-15.3%, Golf) and Royal London Sterling Extra Yield Bond (-16.1%, India) suffered less than equity income fund constituents – Man GLG UK Income (-31.2%, Hotel and India), Schroder Income Maximiser (-29.9%, Golf), City of London (-25.8%, Golf and Hotel), Henderson International Income (-25.7%, India) and Artemis Global Income (-24.5%, Hotel and India).

With huge swathes of the world’s population in lockdown, company earnings and dividends are under intense pressure. There is likely to be further pain for income portfolios as waves of firms postpone or cancel dividend payments to protect their balance sheets. Around 45% of UK-listed companies have axed or will axe payouts worth £28.2 billion, in 2020 according to Link Group.

Investment trusts with decent dividend reserves should be able to cushion the blow.

Higher riskJuliet, Kilo and Lima, our three higher-risk income portfolios, shed 26%, 24.8% and 25.6% respectively.

Temple Bar is Lima’s and our overall worst performer. Its shares have almost halved in value (-47.3%), and contrarian fund manager Alastair Mundy has now stepped down as manager for health reasons, leaving the trust in the hands of colleagues at Ninety One (formerly Investec).

We are therefore switching to Franklin UK Rising Dividends. The current historic yield, of 4.7%, may prove to be lower over 2020, given the likelihood of widespread dividend cuts, but we like the fund’s underlying strategy. The starting point is to identify firms that have increased their dividend in eight out of the past 10 years and not decreased their dividend during that time. This helps ensure portfolio companies do not ‘over-distribute’ but reinvest earnings instead to fund future growth and, it is hoped, secure a rising dividend stream.

Lowland (-37.1%), managed by James Henderson and Laura Foll at Janus Henderson, is second-bottom performer overall and Kilo’s weakest constituent. The managers are also believers in the importance of capital growth to generate rising income.

While headline losses look startling, income investors should remember the purpose of their investments. If portfolio income fell by 30%, UK equity income investment trusts such as Lowland and City of London would still be able to grow their dividends by 3%, thanks to their revenue reserves, analysis by Investec shows.

Income generation is particularly important for our immediate income portfolios. Our analysis shows the income-generating ability of these portfolios: an investor who split £7,000 equally between the seven constituents would have received £952 in income after three years from Golf and £1,037 from Juliet.

These portfolios have in common BMO Commercial Property (-34.6%), whose shares slid to a 66% discount in March and ended the month at a 42% discount to NAV. In mid-April, the board announced that the trust’s NAV had declined by 5% in the first quarter of 2020. Because of the uncertainty over when the UK lockdown might end, the board has suspended the monthly 0.5p dividend payments. However, we are reluctant to sell the trust at this depressed level and will reassess its prospects at the next quarterly review.

Income portfolios take a hefty hit

  Total return (%), with income reinvested, to 1 April 2020 after:        
  3 mths 1 year 3 yrs 5 yrs Since inception*
Golf: Immediate Income, Medium Risk -18.3 -12.9 -8.3 1.4 49.9
Hotel: Balanced Income, Medium Risk -20.2 -12.9 -9.1 5.7 57.4
India: Growing Income, Medium Risk -20.9 -12.9 -3.9 16.8 93.2
Juliet: Immediate Income, Higher Risk -26.0 -19.1 -17.4 -3.5 52.3
Kilo: Balanced Income, Higher Risk -24.8 -18.1 -16.9 -0.5 64.4
Lima: Growing Income, Higher Risk -25.6 -18.0 -9.6 11.8 98.7
Benchmark indices          
FTSE All Share index -25.1 -18.5 -12.2 2.9 47.8
FTSE UK Private Investor Balanced -10.4 -3.8 5.0 24.9 74.9
FTSE UK Private Investor Income -7.3 -1.5 6.2 23.4 64.3

Notes:*Inception date of our Model Portfolios is 1 January 2012.
Source: FE Analytics, as at 1 April 2020

Nothing escaped the carnage, but some were mauled*

To see a larger-sized version of the table below, please click here

Model Portfolios April 2020: funds and trust performance chart 600

Notes: *Table shows performance, with income reinvested, of model portfolio constituents to 1 April 2020 ranked over three months and their quartile rankings in official sectors. Not all constituents have been members of portfolios over the periods stated. **Letter denotes portfolio identifier: A = Alpha, for example. Funds in blue type added to a model portfolio. Funds in red type removed from a model portfolio or weighting reduced. Source: FE Analytics. 

Portfolio constituents and new weightings †

Growth-oriented portfolios

Growth Model Portfolio weightings April 2020

Income-oriented portfolios

Income Model Portfolio weightings April 2020

Notes: †As at 1 April 2020, except for Lima portfolio, as at 8 April 2020. Holding in blue indicates new holding. See for more information.

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