Model Portfolio: Lima and India double investors' money

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The announcement that Article 50 of the Treaty of Rome would be triggered on 29 March, paving the way for the UK to leave the EU by 28 March 2019, did little to deter the stock market from continuing its strong run. 

The FTSE 100 has gone on to set several new record highs since the beginning of the year, and our model portfolios have made their own records too – we now have two portfolios that have returned more than 100 per cent since they launched in January 2012. 

By January, Lima, the higher-risk, growing income portfolio, had become the first of our 12 portfolios that would have doubled your money had you invested at inception. India has now also passed that impressive milestone; our medium-risk growing income portfolio was one of the few to which we made no changes at the five-year review. 

Performance across the rest of the portfolios has been sound, with all but one income portfolio beating the performance of the FTSE All-Share index over the past quarter, and the entire growth range surpassing it. Delta, our higher-risk, short-term growth portfolio, returned 6.9 per cent over the three months to 1 April and was our top growth performer, while Lima led the way for the income portfolios. 

After a major shake-up in our last review, we have made no changes to any of the portfolios this time round. We want to give our new funds a chance to bed in, and it is always better to trade as little as possible to keep costs down too. 

Income portfolios

Lima has been the strongest performer over the past quarter, returning 8.8 per cent over the three months to 1 April – more than double the 4 per cent return produced by the FTSE All Share in that time. 

In February we made the decision to remove Invesco Perpetual Income from the portfolio – one of just two funds that had been in the portfolio since launch. We left the Invesco Perpetual fund in our two medium risk income portfolios (Golf and Hotel) but decided that, for this higher-risk approach, we would back a slightly less conventional option.

Utilico Emerging Markets has since served investors well; it has been the second-strongest fund across all of the portfolio constituents over the past three months, returning 12.8 per cent. With investments in utilities and infrastructure across emerging markets, it also yields a healthy 3.2 per cent. Its performance was surpassed only by Scottish Mortgage, which returned 14.2 per cent and remains Lima’s largest holding, accounting for some 24 per cent of the portfolio. That weighting has grown as a result of Scottish Mortgage’s success, catapulting it into the FTSE 100 as a result. We shall be keeping watch over it and will consider reducing the holding at next quarter’s review. Lima has now returned an eyepopping 119.7 per cent since inception.

We also ejected Invesco Perpetual Income from the Juliet higher-risk, immediate income portfolio, replacing it with TB Wise Income; this fund has returned 6.1 per cent over the past quarter, compared to 3.4 per cent from Mark Barnett’s fund. 

Click on the tables to view a larger version.

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TB Wise Income has the freedom to invest across the spectrum of income-paying assets, and its exposure to property and infrastructure has boosted performance of late. Both the Juliet and the Kilo portfolios – to the latter of which we made no changes in February – returned 5.3 per cent over the past three months. 

Golf is producing the highest level of income of all our portfolios at the moment, with a meaty yield of 4.5 per cent. The highest-yielding holding within the portfolio is Schroder Income Maximiser, at almost 6.7 per cent. Manager Mike Hodgson holds many bluechip stocks, such as GlaxoSmithKline, BP and HSBC, which have been reliable sources of income in recent years. But the income is boosted by premiums from selling call options, which can dampen growth prospects. Golf ’s lowest-yielding portfolio constituent is Baillie Gifford Corporate Bond, but it is still producing a respectable 3.1 per cent yield. While its yield has been impressive, Golf has produced the lowest total return of all our portfolios over the past three months, at 3.7 per cent. 

Conversely, while India and Lima have now both managed to return more than 100 per cent since inception, they are our two lowest-yielding income portfolios, yielding 3.1 per cent and 2.9 per cent respectively. Foreign & Colonial Investment Trust has the lowest yield of India’s investments, but it has made the greatest contribution to the portfolio’s performance over the past year. 

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Growth

Four of our portfolios started this quarter without Kames Ethical Cautious Managed. We had been disappointed by the performance of the fund, which was first brought into our holdings in July 2015. Into Alpha and Delta, in its place, went the Royal London Sustainable Diversified fund, which has started off well, returning 5.5 per cent in its first three months. It is still a cautious growth option but we like its ability to invest outside of the UK. 

Alpha, our medium-risk, short-term growth portfolio, is up 6 per cent over the quarter, with Fundsmith Equity providing the greatest outperformance over the period. The fund, which accounts for 24.3 per cent of the portfolio, returned 8.4 per cent over the past three months. As with Scottish Mortgage’s high weighting in the Lima portfolio, this is another holding we will be keeping a close eye on in forthcoming reviews. 

Nick Train’s Lindsell Train Global Equity fund, which is the second-largest holding in Alpha, returned a meaty 7.2 per cent, helped along by stakes in big consumer brands businesses such as Unilever and Diageo, and a holding in London Stock Exchange. 

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Delta, our higher-risk short-term portfolio, returned 6.9 per cent. It benefited from strong performance across its two largest holdings - Fundsmith Equity and Witan Investment Trust - over the quarter.

Replacing the Kames fund in Bravo and Charlie we brought in Capital Gearing trust, a flexible strategy with an absolute return approach. It returned 2.6 per cent in its first quarter, achieving its inflation-beating mandate. The trust has a third of its assets in inflation-linked government bonds and just 15 per cent in equities. 

The Miton UK Value Opportunities fund was a strong contributor to Charlie’s performance. The fund had a change of manager last year but we decided to stick with it, and a rally in value strategies saw it produce a hefty 8.9 per cent return over the quarter. Exposure to housebuilders and construction firms should continue to help drive performance forward. 

Our higher-risk growth portfolios, Echo and Foxtrot, saw investment trust Caledonia ousted in favour of RIT Capital in February’s reshuffle. We wanted a more flexible, highly rated trust to generate long-term growth as well as providing some capital preservation. But RIT was down 0.7 per cent over its first quarter in our portfolios – one of just two losers across all our portfolios, the other being Pantheon International, which was down 0.8 per cent. 

Echo returned 5.4 per cent over the quarter. Its performance was boosted by F&C Global Smaller Companies, which benefited from a small-cap recovery that began at the back end of last year in the US and UK, where it has 46 per cent and 24 per cent of its assets respectively. 

Foxtrot was the only one of our portfolios to which we made two changes in February’s review. Also ejected from its holdings was small-cap technology investment trust Herald, which we removed in favour of a trust with a broader remit. Scottish Mortgage had already performed well in Lima so we made the decision to add it to Foxtrot too; its strong performance helped to offset Pantheon and RIT’s returns, which weighed on Foxtrot over the quarter. The portfolio returned a total of 5.2 per cent over the period, the weakest performance of our growth portfolios. 

Bravo, which saw no changes made to its portfolio in our annual review, returned 5.4 per cent over the period. Among its top-performing holdings were Ardevora Global Equity, which returned 7.9 per cent. Manager Jeremy Lang tries to spot mispriced companies. Among the biggest holdings is online retailer Alibaba.

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Portfolio leaders and laggards

Leading income holding 

Scottish Mortgage Previously only held in our Lima portfolio, Scottish Mortgage’s strong performance has also benefited the growth oriented Foxtrot over the most recent quarter. A high exposure to US equities has helped propel performance forward over recent months, as optimism about American economic growth under Donald Trump has boosted the stock market. The trust invests in big US technology names set to benefit from corporation tax cuts. 

Leading growth holding 

Stewart Investors Asia Pacific Leaders Also putting in an impressive performance over the past three months in our growth portfolios was Stewart Investors Asia Pacific Leaders, which returned 9.1 per cent. Featuring in Charlie, Delta and Echo, the trust has almost a third of its assets in India, as well as investments in Taiwan and Hong Kong. Growth in these regions is being driven by favourable demographics, with lots of young workers and a rising level of wealth. India, in particular, has benefited from a raft of reforms under prime minister Narendra Modi. 

Lagging income holding 

Marlborough Global Bond Featuring in the Juliet portfolio, Marlborough Global Bond returned 2.2 per cent over the quarter. Manager Geoff Hitchin said uncertainty around the new US president and his policies made forecasting difficult, and there had already been a number of surprises this year that had been difficult to predict. He is focused on limiting the risks of volatility and keeping the portfolio diversified both geographically and on a currency basis.

Lagging growth holding 

Pantheon International Three months ago Pantheon International was our leading growth holding, but it has had a disappointing quarter, falling by 0.8 per cent. However, this is perhaps not surprising given its stellar showing in 2016, when it returned nearly 40 per cent. The fund of private equity funds, held in Foxtrot, has 58 per cent of its money in US companies. 


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