Model Portfolios' diverse fund choices keep losses in check

After a difficult start to this year, with stockmarket volatility that tested the nerves of many investors, we are pleased to report that half of our model portfolios managed to make modest progress over the first quarter.

Although just over half of the individual holdings lost ground, these decreases were offset in most portfolios by positive returns on the remaining holdings.

While our 12 model portfolios are designed to fulfil differing purposes and to perform somewhat differently, we frequently caution that nothing can be guaranteed, as markets are rarely predictable. So it is reassuring when these portfolios do perform as we intended.

No switches

Over the first quarter, for example, our two short-term growth portfolios achieved the best results. This is the way we hoped they would perform because when investors' timescales are short, it is important that their portfolios stay on an as even a keel as possible.

At the other end of the table, the two backmarkers over the quarter were both high-risk portfolios, which is not unexpected as they will always tend to contain more volatile holdings.

But investors in these portfolios should generally have a longer time horizon which means they should be able to ride out these fluctuations.

Below we look in more detail at how the portfolios have progressed since the beginning of this year we should highlight two points.

First is that we now monitor the performance of the lower-cost, "clean" fund share classes that are constituents of the model portfolios offered on the Interactive Investor platform, where each can be purchased for an all-in cost of £10.

Previously, where open-ended funds were included in a portfolio, we mainly monitored the "master" share class, which often levied higher annual fees.

Secondly, no portfolio switches have been made in this quarter. A number of changes were carried out at the beginning of this year and we do not believe that any further switches would be helpful at the present time.

Although some holdings are lagging, in current market conditions this is not very surprising and we would expect their performance to improve before too long. However, we will naturally keep all holdings under review.

The growth portfolios

Alpha and Delta, our short-term growth portfolios, were two of the three best-performing portfolios overall during the first quarter. A major reason for their resilience was the strong return generated by Fundsmith Equity, which is held in both portfolios.

Manager Terry Smith's strategy of buying and holding high-quality businesses such as Microsoft, Intercontinental and 3M has proved a good defence against international uncertainties over the period.

Alpha also benefited from the good returns produced by Lindsell Train Global Equity, while Delta gained from the recovery in Stewart Investors Asia Pacific Leaders as negative sentiment towards emerging economies subsided.

The returns produced by these three funds managed to offset the losses on other holdings in the short-term portfolios.

At the bottom end of the performance table was Foxtrot, our longer-term, higher-risk portfolio. This portfolio includes BlackRock World Mining, which has held the portfolio back for the past year or more.

So it was ironic on this occasion that the trust was its star performer while many of its other holdings lost ground over the period.

Holdings in specialist trusts Herald and Pantheon International were particularly hard-hit as investors took risk off the table. However, the portfolio's latest addition, Old Mutual Global Equity, made some positive progress, helping to mitigate the losses made by other holdings.

Despite the fact that the majority of their holdings went south, Bravo and Charlie (the two other medium risk growth portfolios) were rescued by their holdings in one of the two strong performers already mentioned, Fundsmith Equity in the case of Bravo and Stewart Asia Pacific Leaders for Charlie.

Rather surprisingly, given the volatility of the UK stockmarket, the HSBC FTSE All Share Index tracker fund helped to keep five out of our six growth portfolios on a relatively even keel over the first quarter, with a loss of just 0.4%. It mirrors the returns from over 600 UK shares that make up this index.

Because it covers all stockmarket sectors, one of the advantages of this holding is that it means investors do not lose out on any unpredicted rallies in unexpected parts of the market, as happened when the oil price started to bounce back in mid February and mining shares recovered.

Our remaining growth portfolio, Foxtrot, also holds a passive fund, the HSBC FTSE 250 Index, which tracks the performance of medium-sized UK companies. However, these companies did not do so well and this fund lost 2.6% during the quarter.

The income portfolios

Our best performing income portfolio was Hotel. This portfolio aims to provide a balanced income and has a medium risk profile.

It holds our best-performing income fund over the quarter, Newton Global Income, which has gained from its broad exposure to markets in Asia as well as the US. It is managed according to a strict yield discipline, which helps it to focus on some of the strongest companies.

Other holdings which contributed to Hotel's progress were Artemis Global Income and Threadneedle UK Equity Income, which both turned in steady returns. Only two of the portfolio's holdings lost ground during the quarter.

By contrast, two of our income portfolios, India and Lima, posted declines over the quarter. This is not entirely surprising, however, as both portfolios are designed to produce a growing income, which means they are almost entirely invested in long-term equity funds.

Although their short-term performance can be somewhat volatile, these two portfolios are among our three strongest performers since the inception of the portfolios in January 2012, along with Kilo - the higher-risk, balanced income portfolio.

Lima, the higher-risk growing income version, contained three of the worst performing holdings over the quarter - Bankers, Scottish Mortgage and Lowland.

All three are investment trusts, which means their returns can be made worse by widening share price discounts to net asset value, as has happened with these trusts since the start of the year.

However, this does not affect their ability to pay an increasing income and Bankers and Scottish Mortgage have once again appeared among the Association of Investment Companies' list of "dividend heroes", with 49 and 32 years respectively of consecutive dividend increases.

Strong underlying performance can offset the discount effect, as was the case with Schroder Oriental Income, which was Lima's best performing holding over the quarter despite a widening in its discount.

Meanwhile India's losses, incurred through its holding in Bankers and Scottish Mortgage, were offset by solid returns from Newton Global Income, Artemis Global Income and Threadneedle UK Equity Income.

The remaining income portfolios - Golf and Juliet, our two immediate income portfolios and Kilo, the higher risk balanced income portfolio - all managed not to lose money over the quarter. Only one of Golf's holdings lost ground, while the others had two holdings which suffered negative returns.

The strongest performer in both immediate income portfolios was Schroder Income Maximiser, which combines a value-driven equity income portfolio with a call-option strategy to generate extra income.

The managers' value investing approach was out of favour last year, but there was an improvement in their performance this spring as markets bounced back after an exceptionally poor January.

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.