A good five years

This outperformance adds to a good longer term record. Looking back over the five years, the portfolio figures are 128.9% and 102.6% compared to benchmark returns of 70.7% and 55.7%. These are pleasing performances, but one is never complacent – there are always lessons to be learnt.

The rationale

My monthly column was started five years ago because of a concern that, whilst there was no shortage of good financial commentary on individual stocks and markets, there was very little to help investors manage or monitor their portfolios as a whole. Good investment is not just about getting more decisions right than wrong – difficult though this can be. It is about weaving these together in a coherent strategy via a portfolio which correctly balances risk with reward, geographic exposure with theme, capital growth with income etc, in order to reach one’s overall objectives.

And this absence of ‘holistic’ advice remains the case today. In fact, with fewer investors consulting IFAs, the banks withdrawing financial advice from the High Street, and the wealth managers raising their minimums, it could be argued that such help and advice is needed more now than ever before.

The column’s aim is to help both the expert and novice investor to either run their own portfolios or monitor those who manage their portfolios. Each month, any changes to the portfolios are highlighted. In a very transparent manner, successes and failures are shared with readers. Almost uniquely, these portfolios are ‘real’ or ‘live’ – they are not virtual or make believe.

Furthermore, to help investors objectively assess performance, both portfolios are benchmarked using the appropriate (Capital growth or Income) FTSE APCIMS indices. These were established by FTSE International and the Association of Private Client Investment Managers and Stockbrokers (APCIMS) – to be renamed the Wealth Management Association (WMA) – for this very purpose.

Having run portfolios for charities and private clients when in the City, I approach the column in the same way as if I was updating a client as to progress – except in this case, the update is monthly instead of quarterly or half yearly. As such, provided a suitable execution-only service is established and the risk profiles and yields are broadly appropriate, there is no reason why investors could not run their portfolios by simply adhering to the column’s advice – as some readers already do.

This is particularly the case as I tend to choose trusts which have a market capitalisation minimum of £100million – with many holdings being much larger in size. A number of very profitable opportunities have been shunned because of this principle. But the principle means that investors should have no trouble in acting upon column recommendations. It also means that these two portfolios are ‘scalable’ – being suitable for readers’ portfolios of all sizes, including those worth many £millions, which I ran when in the City.

Changes to the portfolios aim to focus on those investment trusts which are looking attractive relative to their underlying theme, whilst monitoring the progress of existing holdings. The trust managers at the coal face are doing the hard work. I aim to add value through choice of trusts, asset allocation and themes – whilst maintaining portfolio balance.

Each portfolio is broken down into six sectors – ‘Bonds’, ‘UK equities’, ‘International equities’, ‘Themes’, ‘Commercial Property’ and ‘Cash’.

Presently, both portfolios are broadly neutral of their respective benchmarks when it comes to the combined weightings of bonds and cash. With bond weightings of around 10% in the Growth portfolio and 37% in the Income, both in excess of their benchmarks, the emphasis is on bonds rather than cash – and this will continue.

Relative to benchmarks, both portfolios tend to be underweight the UK and International equity sectors. Within these sectors, as regular readers know, holdings have been influenced by my long held mantra of ‘Go high, go deep, go east’ – the focus being on higher-yielding blue-chips, smaller companies and the Far East (including Japan from the end of 2012).

Part of the reason for underweighting these sectors is that both portfolios are overweight ‘Commercial property’. However, the key reason for the underweighting is that both portfolios have a ‘Themes’ section which is not represented in either of their benchmarks. This is because of my belief that, as globalisation gathers pace, ‘thematic’ investing will become an increasingly important contributor to investment returns.

The Biotech sector is a good example. Not only is this a very specialist subject, challenging to the more ‘generalist’ manager focussing on a particular country or region, but certain regions can be poorly represented making valuation comparisons difficult. International trends can also influence prospects.

Portfolio changes

A number of changes were instigated in both portfolios during December. Sales were focused on those investment trusts looking expensive relative to prospects or alternatives.

In the Growth portfolio, Baillie Gifford Shin Nippon (BGS) was sold when standing at a 7% premium, whilst European Assets Trust (EAT) was top-sliced when standing at a small premium. Within the Income portfolio, RCM Technology Trust (RTT) was also sold when standing at par. Finally, Worldwide Healthcare Trust (WWH) has been sold in both portfolios again when standing at par.

With the monies raised, as in previous months, I continue to increase exposure to UK small and mid caps in the Growth portfolio. Accordingly, I have doubled the holding of BlackRock Throgmorton Trust (THRG) when standing on an 11% discount given its good track record. I have also again added to City Natural Resources High Yield Trust (CYN) given its 20% discount and my belief that sentiment towards commodities will turn this year.

With the proceeds of WWH, I have also added to both the Biotech Growth Trust (BIOG) and International Biotechnology Trust (IBT) when on discounts of 7% and 12% respectively. Readers will be aware of my long held enthusiasm for the biotech sector – optimism shared by the management of WWH which has approximately a 25% weighting to the sector. The effect of these changes is to give greater focus to biotechnology whilst on relatively attractive discounts.

Within the Income portfolio, I have added to Invesco Perpetual Enhanced Income (IPE) [formerly Invesco Perpetual Leveraged High Yield: ILH] which is yielding 7.2%, and to Henderson Far East Income (HFEL) yielding 5.6%. I have also introduced both BIOG and Herald Investment Trust (HRI) – the latter when standing at a 15% discount.

Finally, I wish all readers a healthy and prosperous 2014 – it should be a good one.

View John Baron's updated Investment Trust Portfolio.