Two ETF portfolios for capital growth: Four months on

How have the portfolios performed?

The past two months have been a bruising time for markets following the bursting of the Chinese bubble in July and Mr Liddell and Mr Aldous' portfolios have certainly felt the pain. The timeframe we analysed - 22 April to 2 September 2015 - has taken the Chinese stock market from frothy peak to a dramatic trough. Overall Mr Liddell's has fallen by 10.7 per cent, with Mr Aldous losing less at 8.2 per cent.

As capital growth portfolios, these were constructed with long time frames in mind and set at slightly higher-risk scales than our two ETF income portfolios. The falls are evidence that building a portfolio for growth means taking the rough with the smooth and not panicking every time markets wobble.

In April Mr Aldous took a bullish stance on Chinese and Japanese equities, putting 17 per cent of his model portfolio in those areas, which have since plummeted as a result of the stock market crash. His worst performing holding was HSBC MSCI China UCITS ETF (HMCH), which tumbled 34 per cent over the period analysed. The MSCI China index is composed of some of the largest Chinese companies traded on the Hong Kong stock exchange, which was swept up by the Chinese rout, after posting returns of almost 40 per cent between September 2014 and April. Poor performance also came from Db x-trackers Harvest CSI 300 ETF (RQFI), which offers exposure to domestic Chinese companies listed in Shanghai and dropped by 32 per cent.

HSBC MSCI EM Far East UCITS ETF (HMFE) fell by 28 per cent. The ETF tracks a market-cap index of the largest companies in China, Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand, none of which was immune to the market panic over the past two months.

Emerging markets equities were also the worst affected area of Mr Liddell's portfolio. Vanguard FTSE Emerging Markets UCITS ETF (VFEM) lost 25 per cent between the dates set.

The most successful ETFs over the period were defensive choices such as Mr Aldous' iShares UK Property UCITs ETF (IUKP) and ETFs aimed at producing uncorrelated returns, for example Mr Liddell's db x-trackers db Equity Strategies Hedge Fund Index UCITS ETF 3C (GBP hedged) (XHEG).

Property has been an enticing sector for income investors in recent years and ETFs offer a less expensive way to get in on the yield hunt without taking on excess risk. In this context the iShares ETF has been a strong diversifier, offering uncorrelated returns to the rest of the portfolio and losing just 0.3 per cent. The db hedged product plays a similar role using hedge fund strategies and also lost just 0.5 per cent.

A lesson in diversification

Despite taking the hardest knocks on some of his ETFs, Mr Aldous emerged on top. With only 2 per cent of the portfolio allocated to each Chinese equity and emerging market ETF and just 4 per cent exposure to HSBC MSCI EM Far East UCITs ETF, the actual impact on the portfolio was not severe when balanced with the range of other exposures.

In total he selected 17 different ETFs across 11 sectors and his losses were tempered by more defensive positions in gilts and property ETFs.

By contrast, the impact of the worst falls in Mr Liddell's eight-ETF portfolio were felt more keenly.

Mr Aldous also put a larger chunk of his portfolio into gilts and corporate bonds. He says: "Diversification is very important. If you have a very concentrated big bet portfolio that's exactly what it is, a portfolio taking big bets."

Mr Aldous' portfolio changes

Despite a bruising in some stocks Mr Aldous is reluctant to make any big changes which would mean exiting funds at their lowest ebb. He is also sticking to his guns on his original investment theories, believing that Japan and China remain solid bets.

"Equities are still looking attractive to me, even China, which has been a bit of a dog and where there is obviously a bit of soul searching to be done," he says. "If you look at all the major markets from 2011 and rebase them to GBP, they have all performed about the same over that period. But A-shares had a major spike and have come back down again now. Either way China is down around 30 per cent so this is not the time to bail out."

However, he has decided to switch out of iShares MSCI Emerging Markets Minimum Volatility UCITS ETF (EMV) in order to buy db x-trackers MSCI India ETF (XCX5) on the back of a recent correction in the market, offering an attractive entry point. "India has had a good run and is now looking cheaper," says Mr Aldous. "The forecast economic growth for India is good and it's got a fantastic demography."

He says: "The minimum volatility ETF is the obvious one to sell if you're expecting a recovery to begin in the autumn."

Mr Aldous has also halved his exposure to Vanguard FTSE 100 UCITS ETF (VUKE) to take exposure to db x-trackers FTSE 100 Equal Weight ETF (XFEW), which he says will "behave interestingly compared to the FTSE 100. Over most time periods the equal-weighted FTSE 100 has outperformed, as has the S&P 500."

The new Commerzbank CCBI RQFII Money Market UCITS ETF (CCMG) has proved a dilemma for him. This is an ETF investing in renminbi securities which was impacted by the Chinese government's surprise move to devalue the currency last month. "I'm going to hold it for now," he says, "Hopefully, it will make back the substantial loss and become a good position to hold in the future."

His other tweaks include moving into a hedged German ETF in order to protect his returns from conversion between the DAX and a weak euro and switching from iShares MSCI Japan Monthly GBP Hedged ETF (IJPH) into the cheaper UBS MSCI Japan hedged to GBP ETF (UC61).

Mr Liddell's portfolio changes

Mr Liddell has been disappointed in the iShares MSCI World Value Factor UCITS ETF (IWVL) and wants to reduce that exposure. The smart beta strategy is designed to select undervalued stocks within the MSCI World index and lost 12 per cent between April and September.

He says: "I was hoping it might have fallen less than the market but that does not seem to have been the case." He has reduced exposure to 10 per cent in order to invest the remaining balance equally in Vanguard World High Dividend Yield (VHYL) and iShares Core MSCI World (SWDA).

He says: "With VHYL I can lock into some underperformance by high yielding stocks in the recent sell-off. I would also like to up the US allocation slightly, which I can do through the core MSCI ETF." (iShares Core MSCI World is 57 per cent invested in the US.)

But he adds: "I want to reduce the position in the value factor ETF but didn't want to lose entirely the kind of bounce back you might get for those sort of stocks in the coming months."

He has also decided to swap iShares MSCI Europe ex-UK UCITS ETF (IEUX) for Vanguard FTSE Developed Europe ex UK UCITS ETF (VERX) "on the basis the latter seems to have a much lower TER at 0.12 per cent".

Mr Liddell anticipates a rise in UK and European stocks, which he believes have fallen too far as a result of the China crash, and says volatility could remain a watchword for a while to come. "The UK market has fallen too far and in Europe the German market has been badly hit. Even though they do export a lot to China it isn't the end of the world. The FTSE 100 and FTSE All-Share were also bound to have been affected because of their concentration of mining and oil stocks but the kind of moves we've been having in stocks like Rio Tinto don't seem directly related to the fundamentals," he says.

The benefits of currency hedging?

Mr Liddell says currency impacts have added to the pain felt by the China crash in his portfolio.

"In my portfolio we've benefited from a strong euro but suffered from the yen and the dollar. The difficulty with international stocks is partly an issue with currency because they have been shooting all over the place."

Mr Aldous has chosen two hedged products in Germany and Japan in order to iron out some of those kinks. However, the results have been mixed. Over the long term, the popular UBS MSCI EMU 100 % hedged to GBP (UC60) has performed better than its plain vanilla counterpart, the UBS ETF MSCI EMU (UB06), with a positive return of 5.37 per cent over a year. However, it has lost more than its peer in one month.

Mr Liddell's original portfolio and performance

Mr Liddell's adjusted portfolio

Source: IpsoFacto Investor

Mr Aldous' original portfolio and performance

Source: Investors Chronicle using Trustnet data.

Mr Aldous' adjusted portfolio

Source: Charles Stanley Pan Asset.