Sentiment takes a risk-off turn, but income yields helped soften the blow to portfolio returns.
As we usher in the new year, James Brumwell, the manager of our Regular Income portfolio, has made a number of changes over what has been a truly torrid period.
The past few months have been dismal for the stockmarket, and it also began 2019 in poor spirits as it tumbled more than 1% on its first trading day of the year. Uncertainty around Brexit and concerns about the trade war between the US and China are largely to blame for the poor outlook, and such a bleak backdrop often means it’s time for change.
Brumwell says: “We have outperformed most equity indices over the period, but it has still been a bit bloody. We are now down to a gross return of just 4.06% since inception (at the last update we were up more than 13%), but at least that is still significantly better than cash.”
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The F&C Commercial Property trust had previously been on the watchlist after a period of poor performance. Brumwell bit the bullet and sold the shares at 138.3p. That meant a loss of £330 from the purchase price of 144.5p, but with £450 of income pocketed since inception, it gives us an overall profit of around £1,201. With hindsight Brumwell is pleased with the timing of the sale too, as shares were languishing at 124.5p by the end of the year. He says: “The trust has suffered the double headwind of Brexit uncertainties in the commercial property sector and the general malaise of the retail sector.”
That said, he admits he will consider reinvesting in the trust in the future because of its decent 4.5% yield and the fact that shares are now trading at a discount to their net asset value.
The second casualty is the General Accident Preference shares, which Brumwell has “reluctantly” cut from the group. While the shares had an attractive yield of almost 6%, which was unlikely to be outstripped by gradually rising interest rates any time soon, he says the holding was a laggard in its sector, down 5% at the time of disposal.
The shares were sold at a loss of £979, but taking into account dividends of £632 over the holding period, the actual loss was £347.
In place of these shares, Brumwell has introduced Balfour Beatty 10.75% Convertible Preference shares. The shares in the housebuilding giant are short in duration, maturing in July 2020, which is an attractive feature in a fixed income investment at a time when rates are rising. By the time the shares mature, we should have received 21.5p per share in dividends – a total of £1,397.
Infrastructure is back
The next name to join the group is a familiar one. HICL Infrastructure has previously been in the portfolio but was sold at a loss in January last year, as the outlook for the sector looked in doubt amid the collapse of outsourcing giant Carillion and the prospect of a Labour government.
“The infrastructure sector has recovered since then and has outperformed the market. HICL has a healthy yield and the lowest premium to NAV of its peers,” explains Brumwell.
But while he is confident about the current shape of the portfolio, there is no escaping the fact that we are in a period of deep uncertainty. The portfolio has been ravaged over the past four months. Aberdeen Standard Equity Income is down an eye-watering 17.9% over that period, and Scottish Mortgage has lost 17.1%.
When dividends are considered, the picture is, perhaps, not so bleak. Just four holdings are in negative territory in total return terms. The stellar performance of Scottish Mortgage up until now means it has produced an 18.8% return since the portfolio’s inception in April 2017, despite its recent struggle. Scottish American, meanwhile, has produced a total return of 10.3% since inception, and Finsbury Growth & Income 9.7%.
Brumwell adds: “The income from the portfolio continues to nudge up too – it is now producing £4,530 a year, up from £4,052 at launch, so our primary aim of achieving a regular and increasing income is being achieved.” The portfolio has generated income of £7,310 since inception 20 months ago, giving regular income-seekers around £365 a month.
New City High Yield has been our most lucrative investment in terms of income, with dividends totalling £509.45 to date, closely followed by the NatWest and Invesco Perpetual Enhanced Income holdings.