Purposeful Portfolios long-term growth: US and tech stocks deliver a boost

Beefed-up weightings to the US, Japan and Asia have profited the portfolio, and the Money Observer model ends on a high.

Over the past three months, the long-term growth purposeful portfolio has returned more than 14%, ending with a total return of £14,123 from the original £100,000 invested.

The quarter has broadly been a good one for markets, with asset prices rebounding strongly following earlier dramatic falls. Manager Mike Deverell says: “The last time we had an update on the portfolio was at the end of March, and that was almost the low point.” Since then every holding has made a gain.

The best performer over the three months was Baillie Gifford American, which was added to the portfolio at the start of May. Deverell says: “I wish we’d done this a month before. We thought maybe we were a bit late to the party in May, but the fund is up 27% since then nevertheless.”

Weightings shift

Deverell was previously more underweight in US equities, with Vanguard US Equity Indexhis only US holding. However, things have changed. First, technology stocks have been boosted by both quantitative easing and near-zero interest rates. “Both are supportive of the US stock market, particularly big tech growth stocks, with lower bond yields meaning higher implied valuations.” He adds: “Previously, we had worried that rates might rise. That’s not likely to happen anytime soon now.”

On top of that, Deverell says the pandemic has resulted in some structural changes, particularly in regard to home working. He adds: “As a result, we wanted more tech in the portfolio and did that via Baillie Gifford American, which includes holdings in companies such as Shopify and Amazon.”

Deverell likes the growth prospects of Japanese equities, themselves very tech-oriented although they trade at much lower prices. As a result, the portfolio has a large weighting towards Baillie Gifford Japanese. This has served him well, having produced a 21% return over the past three months. He says: “Japan was slightly less hard-hit than other countries, and the market fell slightly less.”

Another substantial Asian holding, Schroder Asian Alpha, returned roughly 23%. The fund has a high weighting towards China-focused stocks that, having been sold off at the start of the year, have recently performed very well.

The fund is “one of our highest conviction long-term growth prospects,” Deverell says. “The main theme we’d expect to play through is the growing middle class [in the region] and its increasing disposable income. So we are looking at more Asian consumer stocks, which this fund provides.”

At the start of the year optimism around UK stocks was riding high, but that has evaporated. Deverell’s UK funds have not performed badly, but generally “overseas holdings have rebounded more than UK equities”.

Largely, this was due to the UK economy being more vulnerable to the economic damage of the pandemic. Deverell says: “The UK was harder hit economically than other parts of the world because it has a service-led economy. As you might imagine, manufacturing has generally bounced back more quickly. UK manufacturing has picked up too, but it only accounts for about 20% of the economy.”

In the previous round-up Deverell sold some bond funds. Their prices subsequently fell, as he expected. He says: “We thought corporate bonds would be quite hard hit in this recession.” However, he soon repurchased both TwentyFour Dynamic Bond and Royal London Short Dated High Yield Bond. He says: “The US Federal Reserve intervened [in the bond market], so we bought back at a lower price and with a higher yield than before.”

Risk outlook

This is the last update for the portfolio. Deverell says the main issue he envisages with the portfolio going forward is knowing what level of risk to take. On the one hand, equity markets look expensive on a variety of metrics. If the economic fallout from the pandemic is worse than expected or there is a significant second wave of Covid-19 contagion, there could be a sharp pull-back. On the other, if a SARS-CoV-2 vaccine appears or economies recover strongly, those underweight in equities risk missing out on strong equity market gains. Deverell concludes: “It is something of a balancing act: you want decent market exposure, but also some lower-risk assets.”

The portfolio delivered a healthy return as markets bounced

Notes: Purchases: TwentyFour Dynamic Bond, bought £5,000 on 2 April 2020; Royal London Short Dated HY Bond, bought £5,000 on 2 April 2020; Baillie Gifford American, bought £5,000 on 1 May 2020. £10 dealing cost per trade taken from remaining cash. Source: Equilibrium Asset Management, as at 1 July 2020.

Mike Deverell is a portfolio manager at Equilibrium Asset Management.