It is pleasing to report good performances over the past year. The Growth portfolio was up 13.87 per cent compared with its WMA Growth benchmark return of 2.97 per cent, while the Income portfolio was up 7.88 per cent compared with its WMA Income benchmark return of 2.19 per cent. Meanwhile, the FTSE All-Share index was up 0.97 per cent. All figures are total return.
Short-term outperformance over another year is again welcome. However, when measuring performance, it is important to maintain a longer-term perspective in part because, in order to outperform, investors should always be seeking value in unpopular sectors and regions, which can take time to come right - but then more than make up for lost time when they do.
While never complacent, last year's outperformance by both these 'live' portfolios has further contributed to their good long-term record. Since their inception in January 2009, the portfolio returns are 181.6 per cent and 138.4 per cent compared with benchmark figures of 87.2 per cent and 71.3 per cent respectively - again, all figures being total return.
2016 strategy
As regular readers will know, I tend not to try to time short-term market movements - I leave that to wiser investors. Instead, I stay invested but seek to add value over time by investing in regions and themes that look attractive relative to the alternatives. And as we enter 2016, most of the broad strategies that guided both portfolios during 2015 remain in place.
So, as for both portfolios' bond exposure, I continue to disagree with the Armageddon scenario espoused by some about the market outlook. With government debt levels being where they are and recoveries fragile, interest rates will continue to be kept low by historical standards while inflation remains the lesser concern.
Accordingly, while wary of government debt, I remain reasonably sanguine about the outlook for better-yielding quality corporate bonds. The economic recovery, no matter how patchy, will modestly assist company default rates while the higher end of the yield curve will be less affected by any gradual interest rate rises.
Furthermore, the portfolios' bond managers have a good track record of navigating such waters. We should also not forget that decent quality bonds continue to have a role to play in helping diversify a portfolio, while providing a useful income in a world still hungry for yield.
As for equity exposure, again I disagree with the consensus which appears to hold that, in this world of slow growth, large blue-chips are the place to be. Many are going to struggle by past standards as increasingly intense competition erodes margins. A few genuine growth stories will command lofty ratings, but many will suffer and some will wither on the vine faster than first imagined.
By contrast, smaller companies will continue to prove increasingly lean and nimble in meeting the challenges of the 'globalised' market place - helped by their better harnessing of technology. As such, their 'cyclicality' will decline and their relative rating will gradually improve. The future is small. Both portfolios will therefore retain a bias towards small and mid-cap companies - both home and abroad.
As for individual markets overseas, I retain a preference for Europe, Japan and the Far East at the expense of the US and elsewhere - essentially, but not exclusively, on valuation grounds relative to respective growth rates. I also retain a preference for China because of the long-term structural and economic changes under way, while remaining wary of emerging markets in general - at least for the present - despite their valuations.
Certain portfolio themes compensate for there being no direct US exposure, including technology and especially biotechnology. where the rating compares favourably with the broader market given the growth rates on offer. Other themes presently include utilities, commodities, and commercial property for reasons highlighted in previous columns.
Looking ahead, I will continue to ensure that the income stream generated by both portfolios builds over time - the yield, of course, being a function of portfolio values. I will continue in my endeavour to identify situations where sentiment has decoupled from the fundamentals both with regard to trust discounts and underlying assets - in order to outperform, the consensus must always be questioned.
In last month's column, I suggested we had reached this point in Japan with both international and domestic investors underweight the market, and explained why I had added to existing holdings within both portfolios during November. During December, I further increased the Growth portfolio's exposure to Japan via a new holding focused on smaller companies.
JPMorgan Japan Smaller Companies
JPMorgan Japan Smaller Companies Trust (JPS) aims to produce capital growth through investment in small and medium sized companies outside the largest 200 Japanese companies. As such, it is more focused on the domestic economy.
Speaking again last month with Nicholas Weindling, one of the co-managers, this time in London, JPS's focus is on structural growth. The themes pursued include factory automation, the commercialisation of the internet and online content, the ageing population, brands that have global reach, and the increase in domestic infrastructure investments.
There is not much difference in the ratings between larger and smaller companies in Japan. But JPS is prepared to pay up for what it deems to be quality and sustainable growth. So the portfolio averages a 15-20 per cent premium rating to that of its universe, but promises 25-30 per cent faster earnings growth over the next three to five years.
Nicholas also highlights another important factor in JPS's favour - the lack of investment coverage. The majority of JPS's universe of around 2,000 companies is under-researched. Coverage collapsed halfway through the last decade for a variety of reasons including a broking scandal. This presents a huge advantage to those fund management teams which have invested in a local team - JPMorgan have a team of around 10 based in Tokyo.
Nicholas has been helping to run JPS for three years now, and performance has picked up markedly since the current team was constituted. As visitors to my website knew at the time, I bought JPS at the beginning of December when it was standing on a 12 per cent discount to NAV and priced at £2.58. Since then, the price has moved up but JPS remains good value.
Other portfolio changes
In order to pay for JPS, during December I sold the Growth portfolio's holding of Utilico Emerging Markets (UEM). This remains an excellent trust with a proud track record relative to its peer group while offering a useful yield - as such, I retain UEM within the Income portfolio.
Otherwise, there were no changes to the Income Portfolio during December.
May I wish all readers a peaceful and prosperous New Year.
