A balanced and well-diversified portfolio

Chris Kapoor's portfolio

Source: Investors Chronicle

Price and value as at 27 March 2013

LAST THREE TRADES:

■ Ladbrokes (Sell), iShares Markit iBoxx Corp Bonds 1-5 years (Buy), F&C Commercial Property Trust (Buy).

WATCHLIST:

■ Murray International

■ 3i Infrastructure

■ HICL Infrastructure

■ BP

■ Taylor Wimpey

Chris Dillow, the Investors Chronicle's economist says:

I agree with you that this is a well-diversified portfolio. Yes, it has some speculative, volatile and higher-beta elements such as your emerging market funds, Lloyds Banking and Polo, but the risks of these are mitigated by more defensive holdings such as corporate bond and property funds.

One question to ask of any portfolio is: in what states of the world would this do badly? To your credit, it’s difficult to see an answer here. Yes, when the Bank of England or Federal Reserve start to reverse their policies of quantitative easing, corporate bond prices could fall to the extent that they are correlated with gilts. And tighter monetary conditions in the US would be bad for your emerging market shares; these have traditionally done well when US monetary policy has loosened, and worse when it has tightened. But the central banks are only likely to tighten policy once the economic recovery is more assured than it is now - in which case most share prices are likely to be higher.

Another danger is that the global savings glut that has driven bond prices up in recent years could go into reverse - say as the Chinese economy rebalances away from net exports towards consumer spending. While this might hurt your corporate bonds holdings - and possibly some equities - this is likely to be a slow process however.

A third possible risk is of higher inflation.

The danger here is not so much that central banks are printing money. We’ve learned by now that quantitative easing isn’t terribly inflationary, and any pick-up in inflation caused by looser monetary policy should be accompanied by at least some economic growth, which should help your equity holdings even if it reduces bond prices.

Instead, the bigger threat to your portfolio is of supply-shock inflation - a surge in commodity prices or, less dramatically, the effect of continued stagnation in productivity. Such inflation would give you the triple blow of falling bond prices, lower real income from your Sipp thanks to rising consumer prices generally, and falling share prices. In holding no index-linked bonds or commodities, this portfolio doesn’t protect you from this.

However, with commodity prices and index-linked gilts at very high prices, it is expensive to buy insurance against inflation. You might reasonably feel, therefore, that this is a risk worth taking.

In many ways, therefore, this is a fine portfolio - though some might complain that in holding half a dozen actively managed unit trusts, you are perhaps incurring slightly more management fees than you need.

In another sense, however, you are a warning to younger investors. Your high Sipp income, plus the wealth in this portfolio and your Isa suggest that you might have made some sub-optimal choices in the past. The choices we face are not merely between shares or asset classes. The bigger decisions we make are between how much to work and how much leisure to take, and how much to spend and how much to save. In the long-run, it is these choices more than asset allocation which determine our wealth. And the very fact that you are so well off suggests you might have worked and saved too much. Now, I'm not saying you actually did this. Maybe you really enjoyed working, or perhaps you got lucky in other ways. But your portfolio sends a message to younger investors - that it is possible to save too much, as well as too little.

Lee Robertson, chief executive officer and chartered wealth manager at Investment Quorum, says:

You are in a fortunate position through prudent long-term planning to have accrued substantial assets within the tax efficient environments of Isas and your Sipp. This means that you are able to take a more adventurous approach than many investors of your age with this portfolio to meet your stated aim of generating a return of at least twice the best available rate on a one-year fixed deposit bond.

I say this because even with the current low rates of interest available you are attempting to generate a return of around 5 per cent to meet this objective. This is an ambitious objective, particularly after fees and charges but you are willing to take the medium to long-term view that this can be achieved by the use of equity and fund investments.

You have built a portfolio comprising growth and income stocks which is diversified globally and across different sectors. Your use of shares, investment trusts, open-ended investment companies (oeics) and exchange traded funds (ETFs) demonstrates an excellent understanding of the range of investments available to you and is to be commended. Indeed, many of the funds you have chosen figure in our own clients’ portfolios.

The use of ETFs and investment trusts will also impact positively on the overall costs of your portfolio and is to be commended.

Your portfolio shows very good diversification via the use of these funds so there is little to comment upon with this approach as it is very prudent and shows your understanding of the benefit of spreading your investments across sectors and geographical areas. Your use of both growth and income producing elements within the portfolio point to a sensible strategy of investing for a real return by mixing both growth and income to achieve your longer-term growth and income objectives.

Momentum appears to have swung back behind equities generally and investors appear to have now seen that fixed interest has come under real pressure with government debt delivering very little in the way of yield and corporate debt being heavily bought for income purposes and showing both falling yield and potentially falling capital values.

Your last purchase of a Corporate Bond fund via the relatively new iShares Corporate Bond 1-5 Fund is interesting as it is in a sector which is under pressure and is seeing falling yields but this fund has to date managed to hold up well with a flat yield of 5.26 per cent and a yield to maturity of 2.66 per cent. We also like your interest in infrastructure and building firms as we feel that they will benefit over the medium to long term from a general recovery as they have often been heavily marked down but management have put a huge amount of effort into efficiencies during the last few years.

To summarise, while the objective is ambitious I feel that this portfolio is well balanced in its constituent elements and has a very real chance of meeting its stated aim and being able to largely withstand shocks by its broad diversification.