One of the guiding themes of both my portfolios is not to take big bets on the short-term direction of the market. The tendency has been to stay invested, despite volatility, as missing a few good days can be very costly when it comes to performance.
Take this example: £1,000 invested in June 1992 and left until June 2007 would, with dividends reinvested, have produced a total return of £4,612 – despite the ups and downs of the market during that time. Had the 10 best trading days been missed, then the return would have collapsed 34 per cent to £3,041. Clearly, time in the market is more important than market timing.
However, despite being sanguine about markets longer term, there can be times when it is prudent to tap the tiller of any portfolio, particularly when storm clouds are gathering. This is what I’ve done during May.
Portfolio performance
| Growth | Income | |
|---|---|---|
| Portfolio Total Return [%] | 35 | 30.2 |
| APCIMS Total Return [%] | 21.1 | 15.9 |
| Relative Performance [%] | 13.9 | 14.3 |
| Yield [%] | 1.3 | 3.1 |
Storm clouds
Prospects for the world economic recovery have certainly deteriorated. In the US, recent figures have shown house prices are falling again, the unemployment rate has risen to 9.9 per cent, and credit remains a problem with bank lending down around 20 per cent during the last 15 months. Meanwhile, there is growing evidence to suggest that China's attempts to cool the housing market by clamping down on credit-fuelled growth may lead to a hard landing.
Then there's Europe. After Greece, the difficulties of some of Spain's savings banks show the banking system still has problems, whilst the International Monetary Fund has pointed out that the eurozone is well behind the US in writing off bad debts.
All this makes me cautious in the short term. Accordingly, after a strong period of outperformance from both portfolios, I’ve raised cash across both portfolios by top-slicing holdings in Scottish Mortgage (SMT), Templeton Emerging Markets (TEM) and Perpetual Corporate Bond Fund after strong runs. I've also reduced British Empire Securities (BTEM) and Sarasin Agriculture Fund in the Growth portfolio and M&G Optimal Income Bond Fund and Temple Bar (TMPL) in the Income portfolio.
Gartmore Global Trust (GGL) has also been sold in its entirety in both portfolios. This has been an excellent performer, but trading level with net asset value (NAV), there was little room left for error.
Going for gold
I’ve invested nearly half of the cash raised in physical Gold, via an ETF (PHAU). I already had some exposure to the metal via City Natural Resources (CYN) which has an overweight position in gold-mining companies, believing them to be undervalued relative to the commodity price. I buy the argument but, with the Credit Suisse High Yield Bond Index (sterling adjusted) making up a third of its composite benchmark, I wanted more exposure.
Some of the gold bulls cite growing jewellery demand. Jewellery accounts for about 75 per cent of all gold demand in China. According to a World Gold Council Report, consumption has matched growth in the country’s GDP and, as its consumers grow richer, if gold is bought at the same per capita rate as it currently is in India and Saudi Arabia then demand could increase by nearly 4,000 tons in this one country alone.
But the main reason I’ve introduced physical gold into both portfolios is the prospect of inflation. It is difficult to predict the results of the massive stimulus packages started last year to fend off recession. Given that western economies are mired in debt, the temptation to keep the printing presses churning must be strong, and as inflation takes hold paper money is usually devalued. Given that gold cannot be produced at the flick of a switch, it is the ultimate store of value and therefore one of the best hedges against inflation.
Gold is also a safe haven in the even that deflation takes hold. This is maybe more likely in the short term, given that the increased money supply is not yet feeding through to the economy. It is presently difficult to find many currencies that have merit, and gold will benefit if the soundness of money itself is called into question.
Add in the fact that central banks are buying gold again in order to diversify their exposure to the dollar and US Treasuries, and that gold production peaked a decade ago, and one can see the price continue to make good ground. Adjust for US inflation, and the price is still below its high of $2,350 per ounce achieved back in 1980.
Income portfolio
| Instrument | Allocation |
|---|---|
| Fixed interest | |
| M&G Optimal Income Bond Fund UT | 8.5% |
| New City High Yield IT | 8.5% |
| Perpetual Corp Bond Fund UT | 7.0% |
| Ishares Corp Bond Fund ex-Fin[£] ETF | 5.0% |
| UK Income/Growth | |
| Temple Bar IT | 5.5% |
| Artemis Alpha IT | 4.0% |
| Standard Life UK Small Companies IT | 4.0% |
| Global Growth | |
| Scottish Mortgage IT | 8.0% |
| Templeton Emerging Markets IT | 8.0% |
| Witan Pacific IT | 5.0% |
| Scottish Oriental Smaller Companies IT | 4.5% |
| Themes | |
| Gold ETF | 6.0% |
| City Natural Resources IT | 6.0% |
| Polar Capital Technology IT | 5.0% |
| Finsbury Worldwide Pharmaceutical IT | 4.0% |
| Impax Environmental Markets IT | 3.5% |
| Cash | 7.5% |
Growth portfolio
| Instrument | Allocation |
|---|---|
| Fixed interest | |
| Perpetual Corp Bond Fund UT | 5.0% |
| UK Income/Growth | |
| Artemis Alpha IT | 5.0% |
| Standard Life UK Small Companies IT | 5.0% |
| Global Growth | |
| Scottish Mortgage IT | 9.0% |
| Templeton Emerging Markets IT | 8.5% |
| British Empire Secs IT | 6.5% |
| Witan Pacific IT | 6.5% |
| Scottish Oriental Smaller Companies IT | 5.5% |
| Jupiter European Opportunities IT | 5.0% |
| Edinburgh Worldwide IT | 4.5% |
| Themes | |
| Gold ETF | 6.5% |
| City Natural Resources IT | 6.5% |
| Polar Capital Technology IT | 6.0% |
| Sarasin Agriculture UT | 4.5% |
| Finsbury Worldwide Pharmaceutical IT | 4.5% |
| Impax Environmental Markets IT | 4.0% |
| Cash | 7.5% |
