September has proved to be the best month yet for both portfolios in terms of performance relative to their respective benchmarks. The Growth and Income portfolios were up 10.5 per cent and 7.8 per cent, whilst their respective benchmarks were up 5.5 per cent and 3.5 per cent - all figures being total return.
This brings the overall performance since January 2009 (both portfolios having been created during the final quarter of 2008) to 51.8 per cent and 43.9 per cent respectively, compared with total returns of 27.3 per cent and 22.7 per cent for the Apcims Growth and Income benchmarks.
| Growth | Income | |
|---|---|---|
| Portfolio Total Return [%] | 51.8 | 43.9 |
| APCIMS Total Return [%] | 27.3 | 22.7 |
| Relative Performance [%] | 24.5 | 21.2 |
| Portfolio yield [%] | 1.1 | 2.7 |
Benchmark choices
After a period of time, it is wise for any investor to reflect on the chosen benchmark - if only to ensure it remains relevant to objectives and risk profiles. This is especially true if performance has deviated from the benchmark by any measure.
When these live portfolios were created, I chose the indices of the Association of Private Client Investment Managers and Stockbrokers (Apcims) as benchmarks to help measure how well the portfolios were performing. These figures are updated in each of my monthly columns.
The Apcims benchmarks are widely recognised. One of the attractions is that the different components of each benchmark are made up of actual indices, as illustrated by the pie charts. Occasionally, the asset allocations are changed in response to quarterly surveys to ensure the benchmarks continue to reflect investors' requirements.
But there is a big debate at present about which benchmarks to use, and just how relevant they are. The starting point for any investor is to determine risk tolerances. Some investors simply want a real or absolute return - such as RPI + 1 per cent or cash + 2 per cent. Risk is therefore minimised, but not eliminated.
For those who want superior returns over the longer term, and are willing to take on a commensurate level of risk, then the issue of benchmarks becomes more important. In my fund management days, I used to agree a composite benchmark made up from the relevant indices once risk tolerance had been identified. This suited most clients. The advantage to the investor is that they have something with which to gauge just how well the portfolio is performing. Regular assessments as to the relevance of the benchmark is essential - peoples' circumstances and risk profiles change, and the benchmarks should reflect this.
But things have moved on. There are now benchmarks that compare how well a portfolio is performing relative both to its peer group and the amount of risk inherent in the portfolio - in effect, measuring a unit of return against a unit of risk. For some equity portfolios are riskier than others. Is it right, for example, that a portfolio biased towards pharmaceuticals, tobacco and food retailers or one biased towards mining, technology and banks, should equally be measured against the FTSE All-Share?
It is helpful if investors are aware of risk-adjusted returns. But I maintain that for the majority of investors it is wise not to lose sight of how the indices themselves are performing. Otherwise peer-like comparisons can make for herd-like performance. This is one reason the Apcims benchmarks are widely used.
Portfolio changes
Having not made any changes to either portfolio during the three previous months, in early September I topped up on both portfolios’ holdings in Scottish Oriental Smaller Companies (SST) and Worldwide Healthcare (WWH).
Readers will be aware of my long-held enthusiasm for the Far East. In a column last year (, 11 December 2009), I highlighted that young populations and high savings ratios, when combined with low interest rates and cash-rich governments willing to invest heavily in infrastructure and social welfare projects, could result in domestic spending increasing significantly. Together with good relative growth rates, the region demands an overweighting in portfolios. SST has a superb track record and is geared into the Asian consumer.
As for WWH, the pharmaceutical and biotech sector is so out of favour at the moment that, given the positive longer-term fundamentals, again the investment case is compelling. The biotech sector in particular is valued at near historical lows, and the trigger for a re-rating may be M&A activity. Whatever, patient investors will be amply rewarded.
| Growth Portfolio | Allocation | Income Portfolio | Allocation |
|---|---|---|---|
| Fixed interest | Fixed interest | ||
| Perpetual Corp Bond Fund UT | 5.0% | M&G Optimal Income Bond UT | 8.0% |
| UK Income/Growth | New City High Yield IT | 8.0% | |
| Standard Life UK Small Cos IT | 5.5% | Perpetual Corp Bond Fund UT | 6.5% |
| Artemis Alpha IT | 4.5% | iShares Corp Bond ex-Fin ETF | 5.0% |
| Global Growth | UK Income/Growth | ||
| Scottish Mortgage IT | 9.0% | Temple Bar IT | 5.0% |
| Templeton Emerging Markets IT | 9.0% | Standard Life UK Small Cos IT | 5.0% |
| British Empire Secs IT | 6.5% | Artemis Alpha IT | 4.0% |
| Scottish Oriental Smaller Cos IT | 6.5% | Global Growth | |
| Witan Pacific IT | 6.0% | Scottish Mortgage IT | 8.5% |
| Jupiter European Opportunities IT | 6.0% | Templeton Emerging Markets IT | 8.5% |
| Edinburgh Worldwide IT | 4.5% | Scottish Oriental Smaller Cos IT | 5.5% |
| Themes | Witan Pacific IT | 5.0% | |
| City Natural Resources IT | 7.5% | Themes | |
| Polar Capital Technology IT | 6.0% | City Natural Resources IT | 7.0% |
| Gold ETF | 5.5% | Gold ETF | 5.5% |
| Finsbury Worldwide Pharma IT | 5.0% | Polar Capital Technology IT | 4.5% |
| Sarasin Agriculture UT | 4.5% | Finsbury Worldwide Pharma IT | 4.5% |
| Impax Environmental Markets IT | 3.5% | Impax Environmental Markets IT | 3.5% |
| Cash | 5.5% | Cash | 6.0% |
| Total | 100.0% | Total | 100.0% |
Performance figures are to end-September.
UT=unit trust, IT=investment trust, ETF=exchange-traded fund.
John Baron waives his fee for this column in lieu of donations by the FT to charities of his choice.
