That was probably just as well. Yet, despite its vagueness, Mr McCarthy's answer had merit. Put it this way, tweak it and we have a useful, generic justification for putting a holding into a portfolio; or, indeed, keeping one that's already there - it'll do a job for us.
That's more significant than it sounds. It acknowledges that, in investment, the portfolio is more important than its components. The analogy with a football team is obvious - what's needed is a collection of investments that will work well together; that will complement each other; that will, if you like, function as a team.
Certainly, 'Will it do a job in the portfolio?' is a basic question I ask when I'm looking at the Bearbull Income Portfolio. Let's take an example. Readers have been critical that I added no holdings to the income portfolio as London's equity market surged after last June's Brexit vote. As a result, the criticism goes, the fund lost out on the market's 10 per cent gain in the second half of 2016.
What happened is more subtle. I didn't deal because I reckoned I already had holdings in the portfolio that would do a job should UK voters decide to take the exit. There was the supplier of consumables for foundries, Vesuvius (VSVS), and speciality chemicals supplier Elementis (ELM). Both companies generate almost all their revenues overseas, so would benefit from sterling's weakness in the event of a vote to leave. That's how it panned out - from 23 June to the end of the year, shares in Vesuvius rose 13 per cent and those in Elementis 34 per cent. In the course of that, they brought £8,000-plus of gains to the Bearbull income portfolio. They did their job.
Now the aim is to find a new holding that can do a job. That means asking not just that its price can rise, but that it won't cycle in tandem with others in the portfolio. The answer will lie less in the statistical correlation of past price movements and more in the characteristics of a particular company that will make its shares perform differently from the rest. Hence the nine stocks shown in the table. Among the 70 or so shares quoted on the London market that fulfil the basic requirements for inclusion in the income portfolio, these should march to a different beat.
| Company | Code | Price (p) | Div Yield (%) | Div cover | Price/3-yr high (%) | % ch on 12 months |
|---|---|---|---|---|---|---|
| Next | NXT | 3,920 | 4.0 | 2.7 | 49 | -42 |
| Lancashire | LRE | 670 | 3.7 | 2.1 | 88 | 9 |
| Marston's | MARS | 136 | 5.1 | 2.0 | 77 | -10 |
| SIG | SHI | 105 | 4.8 | 1.8 | 49 | -21 |
| Hostelworld | HSW | 191 | 3.4 | 1.1 | 64 | -5 |
| Primary Health Properties | PHP | 108 | 4.7 | 1.2 | 95 | 0 |
| Picton Properties | PCTN | 77 | 3.9 | 1.3 | 100 | 11 |
| Pan African Resources | PAF | 16 | 7.7 | 1.6 | 66 | 62 |
| Berkeley | BKG | 2,787 | 3.6 | 4.0 | 74 | -21 |
Source: CapitalIQ
It seems remarkable that there is no retailers' shares in the portfolio (and there rarely have been), so the availability of a class act such as Next (NXT) has to be interesting. Class act or not, currently Next is suffering as its trading statement earlier this month made clear. The question is whether that suffering presages a long-term decline as Next runs out of growth. If that were so, then the 180p special dividend that Next intends to pay in the 12 months from May (and which is excluded from the dividend yield estimate in the table) would be more a return of capital than a statement of confidence in the future. As such, it would be more likely to atrophy the share price further than to boost it. I'll look further, but the market's response to Next firming up its special payouts was discouraging.
Meanwhile, the prospect of putting a mid-tier gold miner's shares in the income portfolio is intriguing. Perhaps in the case of Pan African Resources (PAF), it shouldn't be. After all, here is a smallish mining company - market capitalisation £301m - that has paid a dividend in six of the past seven years. In addition, its bosses say that henceforth they will distribute 40 per cent of free cash generated, which means the payout should rise usefully. We can add two further points. First, the share price comes with lots of volatility, which is probably a good thing for the income portfolio. Second, Pan African's connection to the gold price means that it could provide natural protection against the uncertainties of the World of Trump.
These two - Next and Pan African - deserve some number crunching. But there are others in that list that could work. Remember, the test is: can they do a job?
■ The gremlins got into the works last week and the chart on this page did not show total returns for the income fund and the FTSE All-Share index from 2000 to 2016 as it should have; it only went to 2008. For the record, the income fund's total return in 2016 was 5.1 per cent against the All-Share's 15.9 per cent.
