Purposeful Portfolios - Capital Conserver: cash provides cover until markets stir

The proceeds from the sale of a stale holding will help shelter the portfolio until the market upturn produces a compelling investment opportunity.

The Capital Conserver portfolio is back in the black after a few months of markets in recovery mode.

The last time we looked at our cautious portfolio was in the midst of the volatility at the end of 2018. Just five holdings are down over the past four months, and the portfolio is up 1% over the period.

For the first time in months, there is a change to the portfolio. Manager Rob Morgan, of Charles Stanley, has ousted the Standard Life Global Absolute Return Strategies (GARS) fund. It returned 3.3% over the past four months, but it has had a tricky time over the past year, and Morgan says a number of personnel changes have caused him to lose confidence in it.

Morgan says: “If you trace GARS back to its beginnings, it has done a really good job, and it is hard to find an alternative with better resources and stronger ideas. But it is difficult to manage a fund suffering major outflows, and it has come off the boil in the past few years.”

He is also concerned about uncertainty as to how the merger between Standard Life and Aberdeen could affect the way GARS is run. A sticky patch in performance has seen the behemoth fund’s assets fall from a peak of £26 billion to just £10 billion today.

Morgan adds: “Overall, we have lost around £10 since inception in this holding, so I might as well have had the money in a savings account.” Indeed, that is effectively what he has done for now. With the market difficult to predict at the moment, he is leaving the £4,998 of proceeds from the sale of the holding in cash until a decent opportunity presents itself.

Prospects in property

That could well be in the property sector, where Morgan says there is a lot of value at the moment. F&C Commercial Property has had a dismal few months, down 9.5% since the last update four months ago, but its net asset value (NAV) has hardly moved. He explains that this means sentiment rather than fundamentals is driving performance at the moment, and that could open up an opportunity. The trust, which not long ago was trading at a premium to its NAV, is at a 13% discount. While it’s the worst performer in the portfolio over the past four months and since inception, Morgan says its reliable 5% yield makes it still worth holding.

He adds: “I have also considered investing in trusts such as RIT Capital Partners or Personal Assets Trust, because they have good records for capital preservation, but these are trading on high premiums at the moment. That tells you that people are feeling cautious and are willing to pay extra for protection.”

Bonds have been a difficult place to be in recent weeks, as the yield curve has inverted, so investors are being better compensated for holding short duration bonds than those with a longer duration. However, the Janus Henderson Strategic Bond and the Jupiter Strategic Bond funds have benefited from their managers’ decisions to increase allocations to government bonds in recent months. They are up 5.2% and 4.9% respectively over the past four months. Morgan says: “This is why I like strategic bonds; if you get a good manager who makes the right calls, they can be strategic and really add value.”

The Aviva Investors Strategic Bond fund has lagged, however, as it had a larger allocation to high-yield bonds, which have not performed as strongly.

Mixed results

For the first time in one of our updates, the Gold Bullion Securities exchange traded product is in positive territory, up 3.6% over the past four months. It has benefited from a change in direction from the US Federal Reserve, which is now not expected to raise interest rates this year. The result of this is a weaker dollar as foreign investors look elsewhere for the promises of strengthening currency, and that tends to be good for gold. It’s proof that having such insurance policy investments in a portfolio can pay off when times are a bit tougher in the markets.

Standard Life Equity Income Trust is the top performer in the portfolio since inception, up 10.6% over the past two years since and 1.7% over the past four months. The trust’s relatively high exposure to small- and mid-cap UK stocks means performance can wax or wane – depending on levels of positive or negative sentiment towards the UK and specifically Brexit – but Morgan is happy with the holding overall.

The Artemis Global Income fund has suffered because of its exposure to Europe – around 7% of assets are in Italy, 4.5% in Norway and 4.1% in Germany – and its value investment style. Jupiter Absolute Return has also suffered, because of contrarian calls in the portfolio. It has been betting against tech stocks for some time.

In coming months, Morgan will be looking for a good place to deploy his cash. He believes there is value to be found in the out-of-favour UK and European markets. Emerging markets are also appealing, but are perhaps not appropriate for a cautious portfolio , Morgan says.

Capital preservation with cautious gains is the aim of this portfolio, and Morgan says he had hoped to deliver inflation plus 1%. “I could have got a bit more juice out of the portfolio by being more geographically diverse, but I was very conscious that if the pound strengthened at all, that would have the opposite effect,” he explains. “When we started this portfolio, it was a difficult time to be a cautious investor – and somehow now it is even more difficult now.’

Manager prepares for pick-up in markets after a flat four months

Click here to see larger version of table

Capital Conserver portfolio table

Notes: Inception of the portfolio is 1 April 2017. Previously updated on 1 December 2018. *Invesco Perpetual Asian replaced M&G Recovery on 28 March 2018. **Standard Life Global Absolute Return Strategies sold on 28 March 2019. Source: Charles Stanley, as at 1 April 2019

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