Six model growth portfolios make solid progress

There seems to have been general agreement among investment experts this year that investing in shares is the best option for longer-term investors because of continuing low interest rates.

Yet stockmarkets are not rising smoothly. Although the FTSE 100 (UKX) index of the UK's biggest companies hit 6865 at the end of February, almost reaching its all-time high of 6930 recorded in December 1999, it subsequently suffered another wobble due to the problems in the Ukraine and general concerns about the health of the world economy.

Despite the wobbles, all of our model portfolios continued to make progress over the first quarter of the year. In both the growth and income portfolios, it was the higher-risk versions that averaged slighter higher returns than the medium-risk models.

To find out why a Marlborough fund is the best-performing growth holding, read: Growth and income portfolios - leaders and laggards April 2014.

But investors who class themselves as medium risk-takers should not regret their choice, because stronger moves upwards can be followed by larger dips. Our goal, when constructing the portfolios, was that the medium-risk versions should provide a smoother ride.

Click here to view the constituents and factsheets of all 12 Money Observer Model Portfolios.

Growth portfolios solid

All of the growth portfolios also made progress in the first quarter, though to varying degrees. On average their return was only slightly behind that of the income portfolios. In both the medium-risk and higher-risk ranges, the longer-term versions produced the best results, which reflects their higher exposure to shares and the fact that this asset class is currently receiving the most support from investors at the moment.

The long-term (15 years-plus) medium-risk portfolio benefited from the inclusion of Legal & General UK Alpha in particular. This fund, which has been a past winner in the Money Observer annual fund awards, got off to a relatively poor start in the model portfolios (it is also included in the medium-term, higher-risk portfolio). But over the past year it has taken off again.

It is managed by Richard Penny, who takes a long-term view. He maintains a concentrated portfolio of holdings he believes are significantly undervalued or have strong growth prospects. Many of his holdings are listed on the Alternative Investment Market, and around a quarter is currently invested in technology stocks.

Another holding that has seen its fortunes revive recently is Monks Investment Trust, managed by Gerald Smith and Tom Walsh. A holding in the four medium and long-term portfolios, it had suffered previously because the markets had favoured defensive, yielding stocks.

As tastes have changed, the trust has benefited. It has a significant medium and small-company weighting, with almost 60% of the portfolio invested in companies with market capitalisations of £5 billion or less. The trust's share price is still on a considerable discount.

The long-term version also produced the best performance in the higher-risk range; indeed it was the best-performing of all the model portfolios. Its returns were boosted in particular by Marlborough UK Micro Cap Growth, managed by Giles Hargreave and Guy Field, which invests primarily in smaller UK companies with a market capitalisation of £250 million or less at the time of purchase. Smaller-company shares have performed well, as investors have become prepared to take on more risk.

Other holdings that performed well in the 15-years plus portfolio include Pantheon International Participations and BlackRock World Mining.

The BlackRock trust, which was added at the last review, is benefiting from the progress that mining companies have made in reducing their costs and increasing their cash flows and the general perception that further share price falls are unlikely. It was also added to the medium-term, medium-risk portfolio.

Portfolio switch

Templeton Emerging Markets to JPMorgan Global Emerging Markets Income

Emerging markets have been through a challenging time over the past year due to a slowing Chinese economy, discussion of tapering of the US quantitative easing programme and other concerns. Negative sentiment has led to large amounts of capital being withdrawn from these markets and transferred to the perceived relative safety of developed markets.

We still believe it is a good idea to have exposure to the emerging markets in longer-term growth portfolios, but we are concerned about the underperformance of the Templeton trust in the past few years compared to other trusts in the sector. Although the trust has a good long-term track record, it appears to be stuck in a rut.

We have therefore decided to switch out of the Templeton trust into the JPMorgan Global Emerging Markets Income trust. This trust has an income as well as a capital-growth objective, but growth investors can opt to have dividends reinvested to boost their return. It is managed by Richard Titherington, head of the emerging markets equity team, assisted by deputy manager Omar Negyal.

They look for companies to invest in that have potential to grow as well as pay dividends. They tend to split the portfolio between domestic and export-oriented sectors. They also favour stable growth sectors over more cyclical ones, which helps to make the trust less volatile than the market.

JPMorgan Global Emerging Markets Income is one of our sister site, Money Observer's, 2014 Rated Funds.