Purposeful Portfolios - Long-term growth: Tactical twist to build a solid base

A cautious overall approach combined with a strategy of capitalising on sporadic market volatility has kept the long-term growth portfolio on the rise. 

Even long-term investors occasionally take advantage of a short-term opportunity in the stock market. Mike Deverell at Equilibrium, manager of our long-term growth portfolio, sprang into action in February when the FTSE 100 index slipped.

He set up a so-called trigger whereby if the stock market fell below 7200, cash would be used to buy units in a fund tracking the FTSE 100. The units would automatically be sold when a gain of 5 per cent had been achieved. Experts know that trying to time the market rarely works. But by setting up an trigger, you can take advantage of a short-term dip without getting emotionally involved in the trade.

When the FTSE 100 fell below 7200 on 7 February, £3,000 of the £5,000 held in cash in this portfolio was invested in the L&G UK 100 Trust. These units were automatically sold on 1 May when the FTSE 100 reached 7520, and £3,153, less our trading costs, was put straight back into cash.

Deverell says: ‘We call it a volatility trade, and it’s something we can do a few times a year when the stock market dips. The FTSE actually continued climbing after we sold the investment, so you could argue that we shouldn’t have sold, but that is not the point. Doing this means we can have a portfolio positioned cautiously but still able to make significant gains. If the market doesn’t recover as quickly as it did this time, we may have two such trades running concurrently, as we will set up another trigger in case it falls further.’

The quick trade has helped performance in what was a volatile four months: the portfolio has returned 1 per cent since our last update. Deverell says: ‘I’m reasonably pleased with that. If you had told me we would be in positive territory a month or so ago, I’d have been surprised.’

Fixed-interest holdings, including the Jupiter Strategic Bond and the TwentyFour Dynamic Bond, have been the greatest drag since our previous update, largely due to interest rate hikes in the US. The H20 fund held up well during initial market volatility, as it had short positions in US Treasuries; but it has suffered recently, as it has been invested in Italian bonds that have taken a hit. Deverell says: ‘The fact that the fund went up when the market went down shows it’s a good one to have – it’s important to invest in funds that do something different.’

Invesco Perpetual Global Targeted Returns is the only holding in the red since inception, and it could be sold. ‘There are 20 or so strategies in the fund, so it’s difficult to pinpoint what has gone wrong. It has plays on bonds and currencies, and some of those have not worked,’ Deverell says. 

Meanwhile, UK equities, currently unloved by many investors, have been some of the best performers in recent months. Lindsell Train UK Equity is up 6.2 per cent since the previous update, largely driven by its investments in big overseas-focused firms. Deverell says: ‘Part of that performance is currency-related, but it’s also just a very good fund that tends to outperform over the long term.’

He also likes small-cap companies where, he believes, there are bargains to be had. The Marlborough Special Situations and Miton UK Multi Cap funds tap into this conviction. They have returned 3.1 per cent and 3.5 per cent respectively over the past four months. The former is up 22.9 per cent since our portfolio launched in April 2017.

Mutable markets

Less strong has been BlackRock European Dynamic, which has lost 0.5 per cent over the past four months, despite a stellar start. This is partly the result of recent upheaval in Italy, but it also reflects the negative effect on continental companies of a strong euro last year starting to come through.

Lazard Global Listed Infrastructure sold off sharply at the beginning of the year but has recovered. Negativity towards the sector after the collapse of Carillion, along with a sell-off in bond markets, hurt the trust, which has managed to claw its way back to a loss of just 0.2 per cent for the period. Deverell says: ‘It’s a perfect illustration of what this quarter has been like: sharp sell-offs and then strong recoveries.’

Our Asian investments have had a difficult quarter, but are among the top performers in the portfolio since inception. Baillie Gifford Japanese has returned 22.7 since launch and Schroder Asian Alpha 22.8 per cent. Deverell thinks they have further to go, as equities in these markets are still cheap relative to worryingly expensive US shares. He says: ‘I am a bit concerned about the US and have a lot less invested there than other people might.’

Indeed, only around 6 per cent of the portfolio is invested in the region, compared with some 60 per cent in the MSCI World Index. The reining in of quantitative easing in the US is Deverell’s main concern. He fears that if the US Federal Reserve tightens its monetary policy too quickly or aggressively, the US’s stock markets and economy could suffer.

Summing up, Deverell says: ‘This past quarter has been one of two halves, with a dip and strong gains since, which will hopefully continue. Generally, our strategy of having less in bonds and more in alternative investments has worked, and I think we’ll be sticking with it.’

Fund Sector Value at inception (£) Current value  Change since inception (£) Change since inception (%) 4-month change (£) 4-month change (%) 
Cash n/a  5,000   5,143.00   143.00  2.9 143 2.9
Royal London Short Dated High Yld Bond Global high yield  4,990   5,092.29   92.29  1.8 11.92 0.2
BlackRock Corporate Bond Tracker n/a  4,990   5,056.53   56.53  1.1 -26.61 -0.5
Jupiter Strategic Bond £ strategic bond  4,990   5,048.95   48.95  1 -58.45 -1.1
TwentyFour Dynamic Bond £ strategic bond  4,990   5,231.67   231.67  4.6 -92.06 -1.7
L&G Allstocks Index-Linked Gilt Index n/a  4,990   5,014.77   14.77  0.3 105.83 2.2
Kames Property Income Property  4,990   5,315.15   315.15  6.3 72.79 1.4
H2O Multi-Returns Targeted absolute return  4,990   5,478.35   478.25  9.6 28.14 0.5
Invesco Global Targeted Returns Absolute return  5,990   5,928.72   (71.28) -1.2 -128.28 -2.1
Old Mutual Global Equity Absolute Return Targeted absolute return  5,990   6,494.97   494.97  8.2 75.19 1.2
Lazard Global Listed Infrastructure Equity - other specialist  4,990   5,246.68   246.68  4.9 -13.14 -0.2
CF Miton UK Multi Cap Income UK equity income  3,990   4,569.90   569.90  14.2 155.81 3.5
Royal London UK Equity Income UK equity income  3,990   4,421.41   421.41  10.5 120.44 2.8
Lindsell Train UK Equity UK all companies   3,990   4,718.01   718.01  18 276.89 6.2
Marlborough Special Situations UK smaller companies  3,990   4,917.89   917.89  22.9 149 3.1
Baillie Gifford Japanese Japan   7,990   9,818.90   1,818.90  22.7 -51.44 -0.5
BlackRock European Dynamic Europe Ex UK  4,990   5,924.56   924.56  18.5 -27.29 -0.5
Vanguard US Equity Index n/a  5,990   6,584.39   584.39  9.7 206.26 3.2
Schroder Asian Alpha Asia Pacific Ex Japan  7,990   9,820.26   1,820.26  22.8 63.71 0.7
Total    99,820   109,826.40   9,826.30  9.8  1,011.72  1

Notes: Net value includes £10 broker fee. Inception date of the portfolio is 1 April 2017. 7 February: £3,000 used to buy 1,370.93 units in L&G 100 UK Index Trust. 1 May: units in L&G Trust sold. £3,153 less £10 dealing cost moved to cash. Source: Equilibrium, as at 30 May 2018 

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