Income portfolios excel as investors flee risk

Money Observer's model portfolios were benefiting very nicely from rising stockmarkets this year until share prices went into a tailspin towards the end of May and June. The downturn followed a speech by Ben Bernanke, chairman of the Federal Reserve, indicating a gradual end to quantitative easing.

Such uncertainty always makes markets nervous. But nobody who invests in funds should be surprised by some hiccups along the way.

Find out which individual funds have made the most progress, and which have fallen behind, in: Growth and income portfolios: Leaders and laggards July 2013.

When we suggested these portfolios at the beginning of 2012, with a view to helping people who like making their own investment decisions, we warned anyone who could not tolerate any monetary losses should steer clear. Fortunately, despite the losses recorded by many of the holdings over the past quarter, most of the portfolios show strongly positive returns since inception.

Performance to 1 July 2013
The Income Portfolios Medium risk Higher risk
Immediate 26.1% 20.5%
Balanced 24.3% 32.8%
Growing 29.1% 37.8%
The Growth Portfolios    
Time horizon 5-9 years 11.5% 18.1%
Time horizon 10-14 years 17.9% 18.8%
Time horizon 15 years+ 20.1% 26.3%
Period from 1 January 2012-1 July 2013, bid-to-bid, net income reinvested. Source: FE Analytics.
FTSE APCIMS benchmark performance for the above period:
FTSE APCIMS Stock Market Income Index: +12.6%
FTSE APCIMS Stock Market Growth Index: +19.6%

The growth portfolios have done less well, though, underlining the overwhelmingly cautious approach of investors in general over the period.

Income portfolios thrive

Despite a difficult quarter, all six of our income-oriented portfolios made positive progress. The more defensive nature of stocks held within income funds and the strong demand for yield, due to low interest rates, helped to provide support.

But there was no clear trend, even across the income portfolios. Both the best and the worst-performing versions were in the higher-risk category, with the balanced portfolio giving the top return for the quarter of 2% and the immediate income portfolio gaining a modest 0.4%. The reason the balanced portfolio did so well is that it was fortunate enough to contain the three top-performing holdings across all of our portfolios during the quarter: Unicorn Income, CF Miton UK Multi Cap Income and Temple Bar.

We are particularly pleased with CF Miton UK Multi Cap Income, which returned 3.8% over the quarter. This fund was added to the balanced and the high-risk immediate income portfolio last quarter, replacing Kames High Yield fund. We felt that equities were looking less risky than bonds and the Miton fund proved us right in this instance. It is managed by the highly experienced Gervais Williams and Martin Turner, and currently has a bias towards smaller companies which is an area of the market that has held up well recently.

Liontrust Income, on the other hand, got off to a less good start. We brought it into two of the medium-risk income portfolios last quarter to replace Trojan Income after it was "soft closed" to new business. However it has lost 1.4% over the quarter, though this was less than the fall in the UK market generally, which was down 1.7% measured by the FTSE All Share Index.

A month after we had decided on the fund, the managers also announced they were expanding its mandate so that it can invest globally. But we are happy about the change because it will give our medium-risk balanced and growing income portfolios more international diversification. Currently, they have is 67% and 53% in the UK respectively.

Growth portfolios suffer setbacks

The growth portfolios, unfortunately, proved to be almost the mirror image of the income portfolios with all six of them losing ground over the quarter as investors became more risk-averse. It was some consolation that the three medium-risk portfolios showed less volatility than the higher-risk versions, which was our aim. Similarly those portfolios designed for investors with the shortest time horizons in each category also proved the most resilient.

Our medium risk 5-9 year growth portfolio held up best, with a fall of only 1.1%. This return was mainly thanks to the positive performance of Artemis Strategic Assets, which we discuss elsewhere.

All of the other holdings lost ground, although Fidelity Moneybuilder Balanced held up well with a loss of less than 1%. It invests in a mixture of equities and bonds and though its main aim is to produce income, we pointed out that growth investors can opt for this to be reinvested. We felt that this would be quite a defensive holding as it has proved to be. Newton Real Return, a targeted absolute return fund, was the most disappointing holding here as it fell 3% over the quarter.

However, the heaviest losses over the quarter were suffered by the higher risk 10-14 year and 15 year+ portfolios, which both fell by 5%. Both have a relatively high exposure to Asia Pacific equities, partly through their holdings in Templeton Emerging Markets Investment Trust, which was our worst-performing holding over the quarter. This area was hit by concerns about China's economy, as well as the tapering of quantitative easing in the US. However, we believe the longer-term prospects for the region are still strong and therefore intend to maintain our exposure.

We are also somewhat disappointed in M&G Global Basics, though its lacklustre performance is not surprising given that it is primarily a resources-oriented fund and the lack of global demand has depressed these stocks. But we believe it is important to have some exposure to this area as it could bounce back strongly when global growth prospects improve.

Troy Spectrum has also failed to live up to our expectations. Its 11% exposure to gold has not helped as the metal has been going through a tough time recently. Still, we believe it does provide valuable diversification to the portfolios.

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Fund Data
Name1 Year (%)3 Years (%)5 Years (%)Rating
Artemis Strategic Assets2.6017.6061.152 star(s)
CF Miton UK Multi Cap Inc27.20--N/A star(s)
Fidelity Moneybuilder Bln9.7033.6179.245 star(s)
Kames High Yield Bond10.4625.4791.032 star(s)
Liontrust Global Income13.6034.4899.724 star(s)
M&G Global Basics-1.24-7.0453.655 star(s)
Newton Real Return4.668.0436.841 star(s)
Spectrum5.8211.2957.731 star(s)
Temple Bar Inv Tst PLC11.7946.46150.222 star(s)
Templeton Emerging Markets2.78-10.6560.221 star(s)
Unicorn UK Income19.9458.77208.375 star(s)

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