Interactive Investor

How balanced portfolio profited despite Brexit

16th September 2016 15:28

Helen Pridham from interactive investor

Since the last review of our hypothetical balanced portfolio, the volatility in world markets which initially followed the Brexit vote has receded. After recovering their equanimity, investors soon decided to make the best of the situation.

As a result, by the end of the quarter the FTSE All-Share index was up 9%, while the S&P 500 index in the US had risen 3%. The portfolio, managed by Roddy Kohn, managing director at Kohn Cougar, has also recorded a solid gain of 5.4% over the past three months.

It would have performed even better if two of its overseas holdings - Liontrust European Enhanced Income and JOHCM Japan - had not been hedged back to sterling. This meant they both lost ground after the pound fell in value following the Brexit vote.

Brexit regret

Reflecting on his approach to Brexit, Roddy Kohn admits: "In hindsight, the one thing I wish I had done is taken the currency hedge off these funds prior to the vote, but it was not the result I was expecting.

"If the country had voted 'remain', the pound would have stayed strong and we would have been sitting pretty. As it is, sterling has now recovered a bit and we think it will strengthen further, so we are not going to change these holdings now."

While some investors now shy away from European markets, Kohn is happy to stay inDuring the quarter, however, there was a change in the name of the European fund from FP Argonaut European Enhanced Income to Liontrust. This followed Liontrust's acquisition of the fund along with its manager, Olly Russ.

Russ, who has managed the fund since its inception, will continue using the same investment process, combining a portfolio of high-yielding stocks with a covered call strategy to boost its income.

While some investors are now shying away from European markets, Kohn is happy to maintain this investment.

He points out: "Europe is a big place with some excellent companies operating there. Russ is a total stockpicker, who looks for those businesses he believes will prosper. The fund's yield is 4%, which I am also happy to collect."

The portfolio's other overseas holdings benefited from the currency effect. The best return over the quarter was produced by the iShares MSCI World ETF, which rose by 14.6%. The index captures the performance of large and mid-cap companies across 23 developed markets.

Opposite directions

Another strong performer, for the second consecutive quarter, was the 3i Group, which gained 12.8% despite a reduction in its share price premium to net asset value (NAV) from 25% to 20%.

At the time of the last portfolio review, Kohn said that with the trust on such a large premium, he was going to look for other opportunities in the sector.

However, after considering the situation, he has decided to maintain his holding. He explains: "Its portfolio generally is in good shape, and it has other holdings which are doing well. It is continuing to realise its assets."

He says that one of the problems with the premiums on private equity funds is that the values of their underlying holdings can change rapidly.

"If a holding such as Action is revalued, it can boost a trust's NAV overnight," he continues. "And we still think 3i has plenty going for it.

"Overall we still believe 3i is a good holding because its progress is not dependent on what is happening in markets generally." Its recently announced policy of increased dividends also makes it attractive.

Meanwhile, the balanced portfolio's two commercial property holdings moved in opposite directions. Segro, a real estate investment trust that specialises in modern warehousing and light industrial property, produced a positive return of nearly 5%, while Picton Income was down 3.6%.

After Brexit, Kohn said he would wait until the dust had settled before making any changesUnlike some investors, Kohn is happy to continue holding property post the Brexit vote.

"As is so often the case, normality soon returned and listed property funds recovered from their low points. If sterling remains weak, we expect overseas property buyers to be enticed back."

Another reason Kohn is sticking to property is because of his views on bonds, and gilts in particular.

He says: "This is a balanced portfolio and we are certainly happier holding property than fixed interest securities which we believe - despite the fact that gilts have performed so well recently - will at some point experience large capital losses, due to increased inflation and higher interest rates."

Immediately after the Brexit vote, Kohn said he preferred to wait until the dust had settled before making any changes. Now he is sticking to his "buy and hold for the long term" approach.

This article was originally published by our sister magazine Money Observer here

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.