Balanced Portfolio: Well-crafted balancing act pays off

The third of our professionally run £100,000 hypothetical portfolios is being wound up after three years. The Balanced portfolio has been run by Roddy Kohn of wealth manager Kohn Cougar. He discusses his choices and reflects whether, in hindsight, he would have managed it differently.

Managing a portfolio is not just about choosing the right constituents initially, but also about knowing when and if to sell holdings, and what to replace them with. Too much switching can erode value, but hanging on to funds past their sell-by date can also be counter-productive.

Kohn's approach, despite a challenging three years, has been mainly to stick with his initial choices. Overall it has paid off, with the portfolio achieving a total return of over 32% - outpacing other indices, most notably the FTSE All-Share index.

The challenge he faced right from the start was that traditionally a balanced portfolio would have included fixed interest securities, but Kohn felt that there was such a lack of value in the bond sector at the time that it did not make sense to include them in the portfolio.

Yet, looking back he concedes that, contrary to his expectations, "gilts defied gravity over the three years, returning over 24%".

In place of bonds, he decided to hold some cash initially and an increased weighting to commercial property.

Despite a blip following the Brexit vote last year, both of the property holdings - Segroand Picton Property Income - have comfortably outperformed the fixed interest sector as well as being strong performers within their own sector.

Both are up around 40% in capital terms, with total returns boosted by dividends, especially in the case of Picton, which has a yield of 4%.

Picton benefited from its high exposure to London and the South East. Meanwhile, Segro has profited from its edge-of-town warehousing in view of the increased demand for online purchasing.

A year after the portfolio was set up, Kohn decided to use his £10,000 cash reserve to buy a holding in ETFS Brent 1 Month Oil Securities.

Having watched the price of oil decrease sharply in previous months, he believed the fall had been overdone and that the price of oil would bounce back before too long.

But it has taken longer than he expected. Despite a strong recovery over the last year, the ETF is still down 16% on the price he paid for it. However, its diversification attributes mean Kohn is willing to be patient with the fund.

The only other change he made to the portfolio was that after six months he decided to swap Jupiter European Special Situations for Liontrust (previously Argonaut) European Enhanced Income.

Kohn's rationale for the switch at the time was that the majority of the Argonaut fund was hedged into sterling, whereas the Jupiter fund was unhedged.

At the time, the euro had been losing ground against sterling and Kohn expected this trend to continue. Since the Brexit vote, the tables have turned, but Kohn says it was also the manager's value-driven approach that held the fund back.

The portfolio's biggest winner over the three years was 3i Group, the internationally diversified private equity and venture capital investment trust. Over the period its share price has increased by 66% and it has produced a total return of 79% with dividends included.

Kohn has been a long-term supporter of this trust, especially since Simon Burrows was appointed as its chief executive in May 2012. Burrows has successfully slimmed down and refocused 3i, and it is now trading on a premium to net asset value of over 20%.

The two largest holdings in the portfolio throughout the period were iShares MSCI World and Personal Assets. Each was included for different reasons. Kohn wanted to buy iShares MSCI World Index, the second best performer in the portfolio in capital terms, partly to gain exposure to the US stock market.

The fund, a low-cost tracker ETF, has a 54% weighting to the US. Kohn's rationale was that because many active managers fail to outperform the US market, he preferred to gain exposure through a tracker. The MSCI World Index also covers 22 other developed markets.

The changing fortunes of sterling also helped this holding over the three years. As Kohn points out: "Along with strong returns from the US market, the 34.6% fall in the value of sterling against the dollar since the portfolio's inception has benefited the fund."

Kohn describes Personal Assets trust as his 'contrarian play' in the portfolio. He says that the manager Sebastian Lyon is notoriously cautious and the trust's portfolio reflects this, with 53% invested in gold, cash and index-linked gilts.

Despite its contrarian stance, the trust returned 28% in total over the three years. Kohn points out that one of the reasons he decided to overweight this trust was because of the portfolio's lack of exposure to conventional fixed interest stocks.

Another large holding in the portfolio at outset was the JOHCM UK Equity Income fund, which Kohn concedes has underperformed over the three years.

He explains: "Clive Beagles and James Lowen's value style was not in vogue over the first two years. Overvalued defensive sectors powered ahead instead. However, over the last six months the fund has started to recover, and we believe this trend will continue and the fund will benefit."

It was currency hedging that held another of the portfolio's holdings back. The JOHCM Japan Hedge suffered mainly as a result of the yen being hedged.

Although the portfolio might have performed better if Kohn had done things differently, he is satisfied with its overall performance. His conclusion: "[With hindsight]... would we have done things differently? The long answer is: No."

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.