Interactive Investor

Dollar's draw and energy aversion safeguard gains in Growth Portfolio

26th January 2015 09:09

Helen Pridham from interactive investor

The final quarter of 2014 was characterised by very wobbly stockmarkets. There were several reasons for this. In particular, concern grew about the situation in Greece and the forthcoming election there, while the falling oil price began to spook investors.

The FTSE All Share index just about managed to remain positive with a gain of less than 1%.

However, it was a good quarter for our hypothetical £100,000 growth portfolio. Although some of its holdings lost ground, overall it managed to achieve a relatively strong gain of 4.7% over the quarter.

To view the growth portfolio's holdings and trading chronology, click here.

Long-short strategy

This put it ahead of comparable portfolios in the FTSE Wealth Managers Association Growth index, which rose by 3.45% over the same period; it was also ahead of the flexible mixed-asset fund sector, which recorded an average gain of 2.85%.

The portfolio's best performer was Odey Swan, a long/short fund. The fund led the field for the second consecutive quarter with a gain of nearly 10%.

Mick Gilligan, head of research at stockbroker Killik & Co and manager of the portfolio, says it struggled earlier in the year because it was aggressively short on European equities and the euro (selling those assets without owning them, in the expectation that they would fall in value) and long on Japan and the US (buying into those markets in expectation of price rises).

However, its long/short strategy is now paying off handsomely, although as this fund only accounts for 10% of the portfolio, the effect of this on overall performance has been modest.

Findlay Park American's good performance over the quarter had a greater impact. The fund is domiciled in Ireland and denominated in dollars, and it is the portfolio's largest holding. Its dollar price rose by nearly 7% over the quarter. But it did even better in sterling terms, with a gain of nearly 11%.

Currency weakness

Gilligan explains: "The recent currency weakness in Europe has benefited the dollar and stockmarket conditions in the US have been pretty decent. Although the market there now looks fully valued, it still seems to be going strong.

"The companies this fund invests in are also doing well, because they are still growing. At the same time, it is quite conservatively invested and its managers are holding some cash in the portfolio, which I think is a good position in the current environment."

A good return was also posted by another of the portfolio's larger holdings. Majedie UK Income, which accounts for more than 10% of the portfolio, gained 6%. Gilligan says it has had a good period because it invests in many stable defensive areas, which were quite strong over the period.

He adds: "Another plus is that it does not have oil exposure, which has been advantageous, but it does hold easyJet, which is a beneficiary of the lower oil price. It is also overweight financial stocks such as Man Group - which has done well recently - life insurers, Lloyds vehicles and others."

Other large holdings in the portfolio - AXA Framlington UK Select Opportunities and Invesco Perpetual Income - also rose in value. Gilligan says Mark Barnett, who took over the management of Invesco Perpetual Income after the departure of Neil Woodford, has managed the outflows well.

However, Gilligan admits he is considering a switch to Woodford's new fund, because it has the advantage in being smaller and more nimble, and it therefore has greater flexibility to invest in interesting situations.

The portfolio's biggest loser was Veritas Global Equity Income. Its price was down 3.5% over the quarter. It also lost ground in the previous quarter. Gilligan says the main reason for its recent poor performance is that it went into 2014 with a large exposure to the oil and gas sector.

Oil and gas

One of its major holdings was the Norwegian oil and gas company Statoil. Gilligan says that although the fund's managers have trimmed back their exposure, it is still net overweight in this area.

It is also underweight the US and overweight Europe, which has not helped its performance recently either. However Gilligan is philosophical. "The damage has been done. The yield on the fund is attractive. I am still happy to hold it from here," he says.

The other faller over the quarter was City of London Emerging World, except that this trust is also denominated in dollars, so while its dollar price declined by 2.5%, its sterling price rose by 1.4% thanks to the strength of the dollar versus the pound.

The trust holds a portfolio of closed-ended funds whose investment policy is directed mainly towards emerging markets. It has a global spread and is principally weighted towards Asia, but it was unable to escape completely unscathed after market falls in Russia and Brazil.

The portfolio still holds two fixed-income funds, although they only account for around 6% of the total. "It is a bit odd having bonds in a growth portfolio, but they are there for diversification, and they have both made a positive contribution recently," observes Gilligan.

"As long as the spectre of deflation is around and defaults are low, we will probably hold on to them. But if we see an environment in which bonds start to struggle - gently rising inflation and interest rates, which will be good for the rest of the portfolio - we will reconsider. We want to be prepared for all eventualities."

At present, Gilligan still believes equities are the best default asset class on a medium-term outlook, even though there currently seems to be strong resistance to gains in the UK stockmarket, which has been falling back whenever the FTSE 100 index gets close to 6,900. If it were to break through that level, Gilligan believes it is likely to keep rising.

Published in Money Observer's February 2015 edition.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.