Purposeful Portfolios: Performance still solid over long term

The long-term growth portfolio is down in value over the past quarter, but has still managed to outperform the FTSE 100 index.

This article was originally published in our sister magazine Money Observer.

A solid start to the year helped ease the pain of the final quarter of 2018 for Money Observer's long-term growth portfolio. All fund sectors were in positive territory in the first month of 2019. Those investors who held on through the tumult of the previous few months have been rewarded, as the stock market has recovered since the beginning of the year. 

The portfolio is down 3.8% over the past four months to 1 February, but manager Mike Deverell, partner and investment manager at Cheshire-based Equilibrium Asset Management, says he is pleased with that performance considering how hard stock markets have been hit. Indeed, the FTSE 100 is down by more than 8% over the same period and the S&P 500 by around 7.5%.

Hard going

The hardest-hit holdings in the portfolio have been our overseas investments. Baillie Gi­fford Japanese is down an eye-watering 14.9% over the period. Japan was particularly badly hurt by the strength of its currency; the yen is seen by many investors as a safe haven, so it tends to rally at times of uncertainty, such as during the sell-off in October. 

Japan is a major exporter of goods, so a strong yen is bad news for Japanese firms, as their products become more expensive and less attractive to overseas buyers – a situation aggravated by ongoing trade war concerns. But despite the losses in recent months, the fund remains in positive territory overall, up 6.3% since the portfolio’s inception in April 2017. 

BlackRock European Dynamic was another major faller over the past four months. It was down 13.5% as concerns about the Italian government's budget and uncertainty around Brexit weighed on sentiment towards Europe. The region is a big exporter that has suffered in the trade war between the US and China. The fund plunged in value by 13.5% over the past four months, although it is up 5.1% since the portfolio's launch. 

The Vanguard US Equity Index fund tracks the US stock market and followed it on its sharp downward trajectory at the end of last year. A sell-off in tech stocks hurt the US market, as did the US government shutdown, concerns about the US Federal Reserve's interest rate raising strategy and fears around the US-China trade war. The fund is down 8.1% over the past four months, but its previous gains mean it is in the black relative to April 2017, with gains of 10.8%. 

Marlborough Special Situations has suffered from the UK being out of favour. Investor concern over about the outlook for smaller companies and domestically focused firms hurt the fund in recent months. Top holdings such as biotech firm Oxford BioMedica (LSE:OXB) and premium mixer drinks maker Fevertree (LSE:FEVR) have fallen in value as investors have pocketed profits and sold out amid the market turmoil. Deverell says:

"These types of share are sensitive to worries about Brexit, but if a deal is struck, this fund should rally."  

The fund lost 13.1% over the past four months. 

However, it's not all bad news. Seven of our holdings are in the black over the past four months, and H20 Multi-Returns is up an impressive 8.6% over that period. The fund is now the top performer since inception, up 20.6%. H20 is able to take both long and short bets in bonds, currency and equities, so it can bet against assets and profit when they fall in value. Over the past quarter the fund has made the right calls. Deverell says:

"It was short on equities and long the dollar, and it made money from Italian bonds." 

Also in positive territory is Lazard Global Listed Infrastructure, which enjoyed more positive sentiment from investors towards the sector as memories of the collapse of Carillion faded and the likelihood of a Labour government diminished. The fund, which invests in the likes of National Grid (LSE:NG.) and Severn Trent (LSE:SVT), is up 1.7% over the past four months and 8.7% since the portfolio's inception. Deverell says:

"The L&G Allstocks Index Linked Gilt fund did very well too. It tends to react well in a 'risk off' environment and was boosted as the pound fell over the period."

Problematic politics

Despite all the volatility, just one fund in the group is in negative territory since inception. Invesco Global Targeted Returned is down 2.4% over the past four months and 4% since the launch of the portfolio in April 2017. Deverell says: "The fund has been disappointing, but many similar funds have also struggled. I think this is because a lot of market movements have been driven by central banks and politics, so trends have changed around quickly and the correlations between assets have broken down." 

He will be watching the fund’s performance and could eject it from the portfolio before the next review. Deverell fears absolute return funds are unlikely to outperform while politics is driving global markets. 

Our long-term growth portfolio is set up to buy a FTSE 100 tracker when the index falls significantly. The last time this happened was in the summer. We put our cash pile to work again in December when the FTSE fell to 6750 and we bought the L&G UK 100 Index Trust as a result. The portfolio is up 2.2% since then as markets have started to recover. Deverell will look to sell the holding and move the money back into cash if the FTSE moves much higher. 

The investment landscape seems gloomy at the moment, but Deverell is upbeat. He says: "I'm more positive on markets than I have been for some time. Markets have fallen, but earnings are still growing, so valuations have become more attractive. There are plenty of risks out there, but as long as there isn't a sharp global recession, there is room for a rally."

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.