There was no cash spare to play the market recovery in the last quarter, but on-tap redemption flows means the portfolio manager is on the hunt, reports Tom Bailey.
Since the last update to our investment trust-oriented, income-producing portfolio, which looked at performance to the end of February, markets have been on something of a wild ride. Fears over coronavirus had already started to send markets downward. This descent gained further momentum in March as it started to become apparent that Europe and the US, as well as Asia, would have to enter into some sort of economic lockdown.
However, since mid-March markets around the world have been in recovery mode, particularly in the US. As the portfolio manager James Brumwell notes: “The Nasdaq is now not far off a new all-time high. It’s just bizarre and not something anyone would have forecast a while ago.”
Brumwell, however, says he was not able to play this market rollercoaster by buying into any holdings that had been heavily sold off - “buying the dip,” as it is often known. Principally, this was because the portfolio has no spare cash. Being an income-producing portfolio, dividends cannot be reinvested, the assumption being that the hypothetical owner of the portfolio will be using the proceeds for income.
Buying in the sell-off, therefore, would have required Brumwell to sell holdings. The problem, he says, was that almost everything was down at one point. “I’ve not seen that kind of baby and bathwater sell-off since 2008/09,” he adds.
Selling assets at a loss was not an appealing prospect. “To try and be cute, and buy and sell in the middle of all this going on – it’s hard. Even if your judgment is right, it’s easy to get the timing wrong,” he explains.
Large caps in vogue
The only way to raise cash would have been to sell the few holdings in profit, which was not a particularly appealing prospect. “There were only about two things you could see at profit for much of the sell-off.” One of these was Scottish Mortgage investment trust. Brumwell notes: “In the end, it was a good move not to sell.” Indeed, Scottish Mortgage was the best performer over the three-month period to the end of May, returning a whopping 29%.
This, says Brumwell, was not so surprising in hindsight. “Its biggest holdings are Tencent, Tesla, Amazon, llumina – mostly things you could have guessed would have, if not thrived, at least survived in this environment.”
Another strong performer was Scottish American, which returned around 7% over the period. Brumwell points out that its holdings are international high-quality stocks, including Roche, Proctor & Gamble, Coca-Cola and Microsoft among others. However, he notes: “Its number one exposure is to North America, which has been a leading market.” In this sense its performance is much like that of Scottish Mortgage, based on exposure to large-cap US and global stocks, albeit with more of a tilt towards quality rather than pure growth holdings.
JP Morgan Global Growth and Income also performed relatively well, returning around 8%. It should come as no surprise that among its top holdings are Amazon, Microsoft and Alphabet (Google).
Finsbury Growth & Income also started to see stronger performance again, gaining roughly 4%. “This had been an underperformer since the Woodford fund suspension, due to misplaced liquidity concerns,” says Brumwell. Now, however, it appears the trust is starting to nudge back up.
Capital not preserved
Among the more disappointing performers over the last three months has been RIT Capital Partners. Brumwell notes: “This trust is meant to perform better when other funds do badly.” The trust has been held back partly because it has less US focus than many other funds, and also a large weighting to emerging markets (22%). As already noted, the US has been the leading market over the past three months (as it has been for the past decade). The trust’s US exposure is 37%, much lower than that of the MSCI World index (65.8%).
The main thing holding them back has been their UK exposure, says Brumwell. “The fact is that they are UK-oriented, and so they are bound to have some oil and banks and may likely have a land or building company, all of which have been smashed.”
In particular, Merchants has Shell and Land Securities. Brumwell notes: “Four or five of its top 10 are going to be suspending or reducing dividends, and at least for the short term it looks like they will be under the cosh.”
City of London, meanwhile, has large holdings in HSBC, Lloyds, Shell and Taylor Wimpey, all of which have faced dividend cuts. However, Brumwell notes that City of London has the cushion of large dividend reserves, meaning it is likely to defend and even increase payment. “The fact is that the trust is king of dividend growth, with a record of continuously raising its payment more than any other trust. Even if it only raises dividends by a fraction of a penny, it will be desperate to keep that record.”
Fixed income lags
The portfolio’s bond funds have also underperformed over the past few months. In the case of Twenty Four Select Monthly Income fund, Brumwell observes that it is heavily exposed to UK banks and insurance companies. Worries over banks, therefore, explain its 15% loss.
Brumwell, however, is little concerned. He says: “You would assume that the fact that these bonds have priority over dividends would suggest they can keep paying their coupons in the current climate unless things get an awful lot worse.”
One of the better-performing bond funds was Invesco Enhanced Income, which has lost just 6%. Brumwell puts this down to the quality of its holdings. He notes: “The fund’s biggest holdings are bonds from companies like Barclays, RBS, AT&T and Virgin Media. These are decent names and I wouldn’t expect any of them to default.”
Broadly, Brumwell is pleased with the portfolio’s performance. He notes that other than iShares Global High Yield Bond, everything has held or increased its dividend since last quarter, which is what you would want from an income-focused portfolio. He also points out: “Over the past 12 months, we have just cleared £5,000 in dividends.” With dividends, the portfolio has returned £10,983.56, or 11.9% since its inception.
As noted above, he has not bought or sold anything in the last quarter; but that may soon change.
As previously mentioned, the portfolio has no spare cash to invest. However, Brumwell points out that his Balfour Beatty holding is due to redeem in July, which will mean a cash injection of £7,000 for the portfolio. “I’ve got to work out what to do with that cash,” he notes. “If I could find another short-duration bond, I would go for it, but I’ve not found anything.”
Nonetheless, says he plans to add a new holding with the capital rather than topping up anything he currently holds. When the next portfolio update comes around, we should know what new holding he has added.
He also notes that he will be watching the performance of Merchants and Murray International, both of which have seen poor performance since the portfolio’s inception. “We are going to have a look across the spectrum and see if we can switch these trusts for something else, but only a few trusts would qualify.”
Bonds and UK-focused trusts underperform, but US tech stocks provide strength
|Fund||Quantity||Cost price||Value at inception (£)||Current value (£)||Gain/loss
3-month period (£)
3-month period (%)
|Income (£)||Yield (%)||Total return
since inception (£)
|Invesco Perpetual Enhanced Income||9000||79||7,120.00||6,120.00||-396.00||-6.08||450.00||6.3||462.50||6.50|
|CQS New City High Yield||11500||62.25||7,168.75||5,462.50||-1184.50||-17.82||511.75||7.1||-61.75||-0.86|
|Twenty Four Select Monthly Income||6500||93.6||6,094.00||5,248.75||-926.25||-15||412.30||6.8||-530.45||-8.70|
|iShares Global High Yield Bond (£ Hedged)||47||9855||4,641.85||4,247.86||-310.67||-0.38||220.80||4.8||-173.19||-3.73|
|Balfour Beatty 10.75% Conv 01/07/20||6500||111.12||7,268.91||6,500.00||-195.00||-2.91||349.38||4.8||279.23||3.84|
|National Westminster 9% Series A Non Cum||5150||140||7,256.05||6,952.50||-1055.75||-13.18||463.50||6.4||1,086.95||14.98|
|JPMorgan Global Growth & Income||2400||292||7,053.04||7,872.00||624.00||8.61||312.96||4.4||1,698.80||24.09|
|City of London||1700||416.5||7,125.90||5,516.50||-977.50||-15.05||323.00||4.5||-603.85||-8.47|
|Finsbury Growth & Income||850||705.21||6,044.22||7,055.00||297.50||4.4||141.10||2.3||1,449.33||23.98|
Notes: Includes income from previous holdings. Portfolio inception was 1 April 2017. Source: FE Analytics, as at 31 May 2020.