Having been defensively positioned of late in both portfolios relative to benchmarks, in May I purchased equities and suggested investors should be buying on weakness. During June, I continued to top up existing holdings in both portfolios. I continue to believe sentiment trails fundamentals, and that we are in the midst of a major buying opportunity.
Market timing
The overall philosophy of both portfolios is to broadly remain invested. Wiser investors than me can pinpoint major market turning points. But history suggests it is wise to stay invested if your time horizons and risk tolerances allow. Within this approach, I do allow myself the flexibility to tap the tiller when it comes to positioning portfolios relative to benchmarks.
Of late, both portfolios have been modestly defensive – with overweight positions in bonds, decent-yielding blue-chips and other defensive holdings (such as HICL Infrastructure trust, gold and cash). Concerns over the eurozone crisis, the Chinese economy and the US deficit continue to rumble on. Investors are worried and cash piles are growing. This is not helped by eurozone politicians who continue to believe in sticking plasters, and who ignore the central cause of the problem.
Sentiment is understandably very negative. The market is expecting the worst. Accordingly, during June, I sold some bond holdings in both portfolios and invested the proceeds in equities.
In the Growth portfolio, the Corporate Bond exc Financials ETF (ISXF) was top-sliced after a good run. The money was added to existing holdings of Herald trust (HRI), Jupiter European Opportunities (JEO) and Scottish Oriental Smaller Companies (SST). Discounts at the time of purchase were 21 per cent, 10 per cent and 5 per cent, respectively. In the Income portfolio, I took profits in the Gilt ETF (IGLT) and added to existing holdings of Scottish Mortgage trust (SMT) on a 9 per cent discount, Jupiter European Opportunities (JEO) and Scottish Oriental Smaller Companies (SST).
Of course, I have not picked the bottom of the market. There will be volatility and dark days ahead. No amount of shifting the enormous eurozone debt around the system, between government and bank and back again, will conceal or erode its scale. The day of reckoning has to come. But investors need to judge how much bad news is priced into markets. I sense we are nearly there.
Accordingly, I will be looking to further add to equity positions in the months ahead, raising cash from defensive holdings, if necessary. Volatility can be an investor's friend once a course has been set. You just have to keep your nerve.
M&G High Income Trust
In my last column, space did not allow me to explain why I had introduced the income shares of M&G High Income trust (MGHi) to the Income portfolio.
Western governments and consumers may have taken on too much debt, but corporate balance sheets are robust. Companies are cautious in their outlook, and stockpiling cash. Dividend prospects therefore look good. Both portfolios benefit from income-generating trusts. However, for the benefit of the Income portfolio, during May I added MGHi in order to capitalise on this theme further.
The share capital of this split trust is divided between the zeros (entitled to the first 123p of assets on wind-up in 2017), the income shares (entitled to the next 70p, and dividends), and the capital shares (any residual assets). The challenge is to keep an eye on the net asset value (NAV) of the complete package – presently around 130p. But NAV and dividend growth of 5 per cent a year produces an attractive gross redemption yield of 12 per cent or more.
The trust is run by the well respected Richard Hughes, has a running yield of around 4.2 per cent and is split between 90 per cent equities and 10 per cent bonds. This bodes well for dividend growth ahead of inflation – assisted by revenue reserves of 0.7p. I also note that the portfolio has outperformed the FTSE All-Share since inception. The share capital structure means MGHi has a running yield of 12.6 per cent and a market capitalisation of around £100m – so marketability should not be a problem.
Investors will remember the split capital investment trust scandal. The trusts were marketed from the late 1990s as low-risk investments, but they turned out to have borrowed from each other in what has been dubbed a "magic circle". High gearing and intricate cross holdings made for a volatile mix, and culminated in many investors losing out. Many of them ended up worthless after the stock market crashed in early 2000. However, this split capital trust is straightforward and ungeared. As such, the income shares look attractive.
I have funded the purchase by taking profits in the Income portfolios holding of the leveraged gold ETF (LBUL). The outlook for gold remains positive. But the outlook for gold mining companies is more positive still given relative valuations. The sale was encouraged by the dividend bias of the Income portfolio and the fact that both portfolios retain their holdings of City Natural Resources trust (CYN), which has significant exposure to gold miners. The Growth portfolio retains its holding of LBUL.
