Growth portfolios make up ground - model portfolio April 15 update

All of our model portfolios made positive progress during the first quarter, thanks to strong stockmarkets worldwide. Although none managed to outperform the FTSE World index, up by 7.5% over the three months, eight of the 12 portfolios were ahead of the FTSE All Share, which rose 4.7%.

It is particularly good to see that several of the growth portfolios - which initially lagged behind the income-oriented versions when we set up the model portfolios just over three years ago - are now starting to make up ground. This is the result of stockmarket investors becoming interested in a wider range of shares, having previously focused on more defensive, income-producing stocks.

A few of the portfolios have done less well than we would have hoped, but this is mainly for obvious reasons relating to the funds and assets they are holding. One of the most obvious detractors from performance has been BlackRock World Mining. However, we are sticking with this holding, as we explain later. We are, though, adjusting two of our bond fund holdings, which we hope will improve things.

Find out which holdings were the best, worst and which got the chop in the latest leaders, laggards and switches update.

The income portfolios

Among our income portfolios, it is those with a growing income objective, India and Lima, which have produced the best returns - in excess of 6% over the quarter. They have lower starting yields than the other income portfolios, currently 2.82% and 3.26% a year respectively. Much of their returns during the quarter have thus come from the capital growth produced by their holdings in funds and trusts such as Artemis Global Income, Bankers and Scottish Mortgage.

We do expect these portfolios to pay out an increasing income to investors over time; in January, for example, Bankers achieved its 48th year of consecutive dividend increases. However, the benefit of growing capital it that it means investors can dip into their investment from time to time if they need to supplement their income.

Thanks to the strength of stockmarkets, our higher-risk income portfolios generally performed better than the medium-risk versions over the period. The higher-risk portfolios tend to have a greater exposures to shares. Our immediate income, medium-risk portfolio, on the other hand, which produced the lowest return over the period - although still a respectable 2.9% - has the lowest exposure to equities, with 45% of the portfolio invested in bonds, property and money market holdings.

We still believe it is important to keep some exposure to fixed income securities in our medium-risk portfolios in particular, for diversification. However, as we explain in relation to the switches we are making this quarter, we are planning to use broader-based bond funds.

It has been a fairly active year for the income portfolios as we also made some changes at the beginning of the year, and these seem to be paying off. In the immediate income, higher-risk portfolio, for example, we brought in Marlborough Global Bond fund in place of AXA Global High Income. The Marlborough fund has since returned 4.5% compared with a 2.4% return on the AXA fund. Liontrust Global Income was removed from the balanced and growing income, medium-risk portfolios, and replaced by Newton Global Higher Income and Artemis Global Income respectively. Artemis Global Income in particular has done well since then.

The growth portfolios

Our three top-performing portfolios over the first quarter were growth-oriented. They were led by the short-term, higher-risk, Delta portfolio, with a return of 7.5%. The other two strong performers were the medium and long-term, medium-risk growth portfolios, Bravo and Charlie, which each achieved returns of around 7%.

The stand-out performer in these portfolios was First State Asia Pacific Leaders fund, which returned 10.3% over the quarter. It has benefited from its exposure to India, which now stands at 24% of the fund. The Indian market has been performing particularly well since the election of last May of prime minister Narendra Modi and his Bharatiya Janata Party (BJP), which is committed to economic reform.

Another strong performer was Witan with an 8.1% return over the quarter. It has seen its returns improve markedly in recent years under chief executive Andrew Bell, such that its shares are now standing at a small premium to net asset value after several decades at a discount.

A strong holding for both the Bravo and Charlie portfolios was Ardevora Global Equity which produced a return of 9.6% over the quarter. This fund is managed by a four-strong team, including company founders William Pattisson and Jeremy Lang, who look for stocks they think 'the market' has got wrong.

The back marker for all three portfolios was their holding in Newton Real Return, which returned 4.2% over the quarter. Nevertheless, for an absolute return fund, which holds a mixture of assets, this was a good result considering its aim is to be less volatile than equities and it is therefore unlikely to keep up with equity-only funds in strongly rising markets.

The worst-performing growth portfolio over the past three months and over the past year as a whole was our longer-term, higher-risk Foxtrot portfolio. A major drag on its performance over the past year has been its holding in BlackRock World Mining (for more detail see the Leaders and Laggards section). However, bearing in mind the timescale of this portfolio and the medium-term, higher-risk Echo portfolio, which also includes this holding, we still believe that the trust will make a positive contribution eventually.

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.