Leaders, laggards and switches - Model Portfolio July 15 update

Leading income holding

PFS Chelverton UK Equity Income

There was a revival of interest in small and medium-sized companies with a UK bias following the general election result, which benefited PFS Chelverton UK Equity Income. It focuses on income-oriented stocks with yields of at least 4%.

David Chelverton and David Taylor, the managers, say that they like these 'dull but worthy' companies, which tend to be overlooked by other investors.

Among the fund's holdings that performed well recently were a number of its housing-related stocks - these were boosted by the absence of a mansion tax and the potential pick-up in housing transactions since the election.

Leading growth holding

CF Miton UK Value Opportunities

CF Miton UK Value Opportunities, which was also our top performer overall, appears in two of the growth portfolios. It invests in companies which the managers, George Godber and Georgina Hamilton, believe to be undervalued by the rest of the market.

It can invest in companies of any size but currently over 40% of its portfolio is invested in smaller companies and AIM stocks. The managers carry out rigorous analysis to ensure the companies they invest in are financially strong.

Lagging income holding

Newton Asian Income

Explaining the Newton Asian Income's lacklustre performance earlier this year, the then-manager, Jason Pidcock, said that the bulk of its income came from four main sectors: telcos, utilities, property and toll roads - all of which had lagged the market this year.

The yield criteria also meant that the fund had no exposure to some markets and certain popular stocks. Also Australia, which accounts for over a third of the fund, had been one of the weakest markets in the region due to low earnings growth. More recently, Asian markets have reacted negatively to events in China.

Lagging growth holding

JPMorgan Global Emerging Markets Income

Although this is an income-oriented trust, JP Morgan Global Emerging Markets Income appears as the lagging growth holding because it is included in two of our higher risk growth portfolios. Its performance has suffered recently as emerging market equities have fallen out of favour relative to developed market equities.

The managers, Richard Titherington and Omar Negyal, attribute this partly to weaker earnings, which have faced currency headwinds.

Although they had recently reduced the trust's exposure to China to around 22% of the portfolio, the sharp decline in Chinese shares has also affected the trust's returns. However, investors are still benefiting from its 4.4% yield.

Out

Newton Asian Income

We are removing this fund from the higher risk, growing income portfolio following the news that its manager, Jason Pidcock, has left to join Jupiter Fund Managers. Pidcock had been lead manager on the fund since launch.

It is now to be managed on a team basis, although the team will include Caroline Keen, who has worked with Pidcock since 2009, and the team will employ the same investment process.

The company says that the expanded team will mean more staff are working on the fund. Nevertheless the jury is out as to whether the formula will be as successful as the previous structure, so we have decided to move manager.

In

Schroder Oriental Income

For long-term income investors, who are prepared to take more risk, we believe that it is a good idea to have exposure to the Asia Pacific region. Accordingly, we are introducing Schroder Oriental Income into the Lima portfolio in place of Newton Asian Income.

This investment trust has been managed since launch in 2005 by the experienced and much respected Matthew Dobbs. The trust pays a fractionally lower income than Newton Asian income, with a yield of 3.7%, but its dividend growth has been strong, at 7.5% a year since its launch.

Dobbs' approach is to focus on quality companies in the region with strong balance sheets, cash flows and corporate governance, at attractive prices.

Out

Newton Real Return

When a fund seeks to deliver positive returns regardless of market conditions, its low-risk approach can mean that its returns end up looking rather pedestrian. Newton Real Return has provided a useful bedrock to four of our portfolios and has achieved modestly positive returns over most periods since inception, even though it did lose ground over the past quarter.

While we believe this general approach still has a valuable role to play in our two short-term growth portfolios, we have decided to replace it in the medium- and longer-term, medium risk portfolios with a slightly less risk-averse fund which we consider to be more likely to generate better returns for investors over these periods.

In

Kames Ethical Cautious Managed

We have decided to replace Newton Real Return in the medium and longer term, medium-risk portfolios, Bravo and Charlie, with Kames Ethical Cautious Managed. This still gives the portfolios a solid anchor, as the fund invests in a mixture of equities and bonds, but we hope it will provide the portfolios with greater growth potential.

It is managed by Audrey Ryan and Iain Buckle and has achieved good, consistent performance over the years. In 2013 it won our best socially responsible mixed asset fund award. Its ethical stance limits the type of companies it can invest in but has not prevented it from achieving good returns.