Doubling value by bucking the trend

"I have been aiming for growth rather than income," she says. "I have always invested in investment trusts after a weekend course in 1994, which I am extremely grateful for. I used a stockbroker for 12 months but otherwise have done it self-managed.

I have tried to buck the trend. During the 2008-09 crisis I invested as much money as I could. I have doubled my portfolio value in three years and intend to do the same again. Even when I reach age 55 I plan to keep the majority of my portfolio in growth stocks and take lumps out when needed. So far, only 40 per cent of my portfolio is held within an individual savings account (Isa), but I will try to get as much as I can into Isas before then. Around 8 per cent of my portfolio is in a self invested personal pension (Sipp).

In the last 12 months I have been acting on tips in Investors Chronicle, in particular the ones in John Baron's column. When he said to put money into Japan I did so immediately, and with the same percentages and stocks he used. These have done very well.

I also look at the director's dealings reported in Investors Chronicle every week. If one of my stocks is a buy or sell, I buy or sell a proportion of that stock. This works very well.

For example, I had some North Atlantic Smaller Companies (NAS) shares. They were at a high in terms of price and I would not normally have bought, but as there was a substantial director's deal I doubled my holding and they increased a lot further in price. Last week there was a director's buy of Alliance Trust (ATST), so I bought more shares in that.

I think I probably now have too many different stocks as I do not always keep a close enough eye on everything. I don't buy individual stocks because I have done this about four times and each time I lost money. That is a different skill that I have not developed.

I cashed in about 8 per cent of my portfolio in January, thinking the FTSE would go down like last year. That was a mistake as it rose significantly after that. But, overall, I think I have developed a pretty good system.

Chris Dillow, Investors Chronicle economist, says:

You say you think you've developed a pretty good system. I agree, in four respects.

First, you're smart enough to have learnt your limitations. If you think you can't spot good individual stocks, there's no point wasting money trying. Instead, you've adopted a different strategy.

Second, it's often a good idea to follow directors' dealings. Insiders do sometimes know something - although I suspect this is more true for ordinary stocks than investment trusts - so we should follow the smart money. With investment trusts, we often have another buy signal - the trust's discount. When this is wide by its own historic standard, it is often a sign that investors are too pessimistic and so the stock is under-priced. I suspect you exploited this anomaly when you bought in 2008-09.

Thirdly, I like the fact that you are a contrarian, buying heavily in 2008-09. It's a useful rule of thumb to remember that, especially for entire markets, prices are often the inverse of expected returns: a low price means a high expected return and a high price a low expected return.

Finally, I like that you're aware of the importance of tax breaks. Always try to maximise your tax-free allowances.

But there are two things I don't like. One, which you know, is that you're over diversified.

If this were a portfolio of 30 individual stocks the problem wouldn't be so bad. But the thing about funds or investment trusts is that they tend to be highly correlated with each other, which means that one is a poor diversifier against others. Take, for example, your two biggest holdings, Foreign & Colonial Investment Trust (FRCL) and Scottish Mortgage Investment Trust (SMT). Since 1993, there have been 32 months in which Foreign & Colonial Investment Trust has fallen by 5 per cent or more. In only four of these months did Scottish Mortgage rise.

There's a simple reason for such high correlations. Any bundle of shares is highly likely to rise and fall to at least some extent as the world market rises and falls. Any two bundles will thus tend to rise and fall together because of their common exposure to the world market. As you add bundles together, therefore, you quickly end up with a portfolio that more or less tracks the world market.

This is not a catastrophe. There's a lot to be said for owning a global tracker fund. But what it means is that you're greatly diluting the impact of any good selections you make. In holding 30 trusts, the average trust is only 3.3 per cent of your trust portfolio. This means that even if one selection rises, say 50 per cent, which would be a great result, it would add only 1.6 per cent to your portfolio's performance. This is only the difference between an average single day for the market and a moderately poor one.

This brings me to something I dislike even more - your claim that you intend to double your portfolio in the next three years. It was possible to do this after 2009 because as we know now share prices then were abnormally low. But it's far from obvious that this is the case now. Doubling your money is thus unlikely.

How unlikely? As a rule of thumb, I'd work on the assumption that equities will give a real return of 5 per cent a year, the average for the world market since 1900, with a standard deviation of 20 per cent. Simple maths tells us that on these assumptions you have a less than 1 per cent chance of doubling your money. If you were to hold a more concentrated portfolio, your chances would increase, but with more chance of losses.

This poses the question. On a more reasonable assumption of a 15 to 20 per cent rise in your portfolio over the next three years (or 30 to 40 per cent over the next six), could you afford to retire? If the answer is no you have several options. These include going for a higher-risk, more concentrated portfolio; postponing retirement; saving and investing more now; or changing your habits so you live more frugally.

Gavin Haynes, managing director at Whitechurch Securities, says:

You have used your knowledge of investment trusts to good effect. You've benefited from good timing, and being brave when others were fearful, to exploit a stock market recovery since 2009.

The portfolio is focused on equities with a significant amount of it exposed to higher-risk areas of global stock markets, so you certainly need to be comfortable with a high attitude to risk and be aware of the consequences for your retirement funds if stock markets reverse.

While you are taking a long-term approach this is fine, but as you approach retirement you may want to consider some lower-risk options. If you want to remain focused on investment trusts then offerings such as (IC Top 100 Funds) Ruffer (RICA) or Personal Assets (PNL) are good defensive multi-asset propositions.

Within equities, the portfolio is well diversified, although I would agree with your comment that 30 holdings in collective investments (which already have a spread of investments within them) is excessive and there is an element of over-diversification. This can make it difficult to keep a close eye on all the holdings and I would also question how much value that small positions under 1 per cent are adding. It would be a good discipline to reduce the number of holdings. A portfolio of 20 collectives should provide sufficient spread within an equity portfolio.

You have certainly done your research and there is little in the way of lame ducks in the trusts and open-ended funds you have selected.

The exposure to a selection of global growth trusts accounts for over one-third of the portfolio and provides a solid core. However, a spread of eight different trusts in this area is perhaps too many and this may be one area to reduce the number of holdings.

Like the vast majority of UK private investors, you have very little direct exposure to the US stock market, although the global trusts will have a meaningful exposure to boost your overall weighting. Although the US has had a good run, it is still looking easily the strongest of the major western developed economies and continues to have global-leading companies across a variety of sectors. If looking to add core US exposure to the North Atlantic Smaller Companies trust, then I like (IC Top 100 Fund) JPM American Investment Trust (JAM). Or you could consider a low-cost passive fund as this is a market that is notoriously difficult to outperform.

Keeping an eye on directors' dealings has proven to be successful for you. There is much theoretical evidence supporting this strategy and a number of professional investors will look at this when selecting stocks. However, this should not be the sole reason for buying a trust or share, and should be considered alongside valuation and fundamentals.

When it comes to valuation, I am sure that being an experienced investment trust buyer you are keeping a close eye on discounts and premiums. Murray International (MYI) and F&C Global Smaller Companies (FCS) are trading on meaningful premiums and their Z score measurements show that they are looking expensive relative to history, so this is something to be aware of.

With regard to holding cash, you certainly shouldn't be too hard on yourself about taking some profits and holding an 8 per cent cash position in January. This was a prudent move following such a strong run in the areas you are invested. Trying to second-guess short-term market movements is a thankless task, but holding some cash on the sidelines will allow you to move quickly if we see some short-term volatility over the summer months.

Finally, you are correctly making sure you shelter your investments within Isas and, depending upon your earnings, you could also look to increase the amount you hold within your Sipp.

Lucy Pattinson's portfolio

Source: Morningstar & Investors Chronicle, *iShares as at 30 May 2013

Last three trades:

■ Alliance Trust - buy

■ Biotech Growth Trust - buy

■ TR Property Investment Trust - buy

Watchlist:

■ Utilico Emerging Markets

■ Henderson Smaller Companies