No window dressing

The question prompts the only reasonable answer. Yet it's a given that the majority of City fund managers - and certainly those running retail funds - would use the complacent, self-serving option, confident that an even bigger majority of their investors would not spot the flaws. So, for instance, in window-dressing mode, I'd stress that the total return from the income portfolio in the first half was running at an annualised rate of 10.8 per cent and - very neatly - that was exactly twice the rate of returns from the FTSE All-Share index. What's not to like about that?

A couple of things, actually. First, the income portfolio's distribution for the first half was down on 2014's first half. True, the decline was just 2 per cent (see table) and, I could argue, that was wholly down to a shift in the timing of its dividends towards the second half of the year. Even so, a core aim of an income fund is to throw off a rising stream of income, so it's a bit miserable when it doesn't.

Second, the income portfolio's value grew by just 3.2 per cent in the first half. Fears about 'Grexit', which surfaced in June, hampered performance. That month, the All-Share index lost 6 per cent, its worst one-month showing since May 2012. Obviously, that dragged down the income portfolio, the value of which was up 6.7 per cent in the first five months. Yet it's difficult to get excited about what was a pedestrian performance in the first half, even if it was market-beating.

The best performances came from aircraft broker Air Partner (AIP) and support services provider Mitie (MTO). Last autumn - depressingly soon after I had bought the portfolio's holding - Air Partner's share price crumpled for no clear reason. I was in the Far East when the price fell through its stop-loss level and, on my return, it seemed reasonable to hold on. From its low point in October, the share price has since bounced 60 per cent. In the process, that has accounted for over half the income portfolio's £10,000 gain in the first half and has put the fund's investment in Air Partner into profit. Meanwhile, a trading statement last month provided reason enough to stick with the shares, especially as the dividend yield is running at over 5 per cent.

The half-year's second most profitable holding was Mitie, providing £3,400 of the portfolio's rise in value. Despite that, I still reckon Mitie's credentials as a growth stock no longer stack up (see Bearbull, 16 January 2015) and that, at its current 309p, the share price is badly overcooked. That's a reason to tighten the stop-loss, which I have done, rather than to sell. But the absence of a sale also reflects the paucity of high-yield alternatives.

Besides, I may have bigger worries. The portfolio's longstanding holding in pharma major GlaxoSmithKline (GSK) is under threat as the share price has dropped through its stop-loss level. Granted, for some years I have had doubts about Glaxo; after all, its time in the sun is clearly long past and the pressures it faces are sufficient to question for how long the company will be able to maintain a dividend that, at the current 1,344p price, generates a 6 per cent yield. Last year (19 September 2014) I showed how there was a seemingly inexorable decline in Glaxo's free cash flow relative to the cost of its dividend. Meanwhile - and in the absence of sales growth - Glaxo's bosses are increasingly relying on financial engineering to raise earnings per share.

The feeling is that a crunch is coming at Glaxo and I may not want to be holding its shares when it arrives. Then again, it is unlikely to be imminent and there are other priorities. In particular, back in April, with reference to copper miner Antofagasta (ANTO), I said that its "days in the portfolio must be numbered" after management cut the dividend. That the shares are still there is another comment on the lack of alternatives.

Despite these reservations, I am not unhappy with the shape of the income fund. If the test of an equity portfolio is to ask whether the owner would be content with their holdings if the stock market shut down for the next five years, I could imagine much worse. None of the companies is in any sort of financial difficulty and all serve demands that will be around for years to come and - let's face it - I can't expect many holdings with clear-cut growth opportunities in an income portfolio. Still, it would be nice to get one or two more. Let's see what the current shake-out brings.