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Investment trust portfolio: Rebalancing defensively

John Baron highlights the reasoning behind some recent changes to his portfolios that give them a more defensive bent
Investment trust portfolio: Rebalancing defensively

Recent columns have emphasised the importance of maintaining portfolio balance both by way of reducing the extent of their overweight exposure to ‘growth’ companies after a strong period of outperformance, and by ensuring an adequate balance within their now larger ‘value’ component by reducing exposure to commodities after a strong run and adding to unloved assets in the UK. The importance of increasing exposure to investments that should benefit from a rise in inflation has also been highlighted.

But tweaks to investment style, value exposure and inflation preparedness apart, portfolio balance also crucially involves ensuring the right mix between equities in general and more defensive ‘alternative’ assets. Such assets include bonds, infrastructure, renewable energy and specialist debt – some of which have been out of favour recently. This important investment principle is particularly appropriate after a strong performance from equities and best not left until it is too late.

A more defensive stance

Regular readers will be aware the portfolios in this column are two of nine real investment trust portfolios managed in real time on the website The nine portfolios achieve a range of investment remits and income objectives with yields of up to 5 per cent. While never complacent, the website’s open Performance page highlights their long-term track record, and last year the nine portfolios produced on average a total return of +10.6 per cent compared with -9.8 per cent for the FTSE All-Share index.

Therefore, as summer has come into view, a common theme to changes in many of the portfolios, including the two covered in this column, has been to rebalance somewhat by reducing their exposure to equities, which have performed well, in favour of more defensive assets. These assets also tend to offer higher income levels, which is helping the portfolios achieve attractive yields relative to both their benchmarks and remits.

As such, the Growth portfolio top-sliced its holding in Oryx International Growth Fund (OIG) and added to its position in HICL Infrastructure Company (HICL) and TR Property (TRY). Meanwhile, the Income portfolio sold its holding in International Biotechnology Trust (IBT), introduced GCP Asset Backed Income Fund (GABI) and added to its position in JLEN Environmental Assets Group (JLEN).

HICL provides a high level of inflation-linked returns courtesy of infrastructure investments which are at the lower end of the risk spectrum. These include public-private partnership (PPP) projects, water utilities, toll road concessions and student accommodation – primarily in the UK, but also in Europe, North America and Australia. The underlying investments retain an average life of around 30 years, which provides predictability regarding income streams. Meanwhile, the dividend of 8.25p equated to a yield of 4.9 per cent at time of purchase.

TR Property should benefit as the commercial property sector sees an uplift from the economic recovery. Despite a torrid time courtesy of the pandemic, fund managers’ caution and lack of development exposure, their focus on income and diversification and shortage of supply bode well for the sector. Investing mostly in the shares of companies, performance has been impressive. The company believes the outlook is promising as evidenced by its increased dividend (representing a 3.1 per cent yield when bought) and higher gearing.

GABI invests in asset-backed loans across the social infrastructure, property, energy, infrastructure and asset finance sectors. A disciplined approach to portfolio construction and focus on defensive assets meant all interest due was received in 2020 – a commendable achievement. The economic environment can now only improve. A yield of 6.2 per cent also supports the investment case.

JLEN provides a diversified portfolio of assets comprising, in descending order of exposure, anaerobic digestion, onshore wind, solar power, waste/wastewater processing and hydropower. The extent of this diversification is welcome – it is one reason the company has one of the lowest sensitivities to power prices in the sector, at a time forecasts have been falling. Despite terminating the link with inflation, a progressive dividend policy is promised with 6.8p targeted for this year – which would represent a 6.8 per cent yield.

Other changes

Some of the website’s other portfolios have also seen this more defensive rebalancing, away from equities which have performed well. The ‘alternative’ investments chosen include Standard Life Property Income (SLI) in the Thematic and Overseas portfolios (for reasons covered in last month’s column) and, more recently, Sequoia Economic Infrastructure Income (SEQI), International Public Partnerships (INPP) and CQS New City High Yield (NCYF) in the Winter and Dividend portfolios.

SEQI focuses on infrastructure debt investments, which tend to be defensive given their low default rates and volatility, together with low correlations to other asset classes. Exposure is diversified both by sector and geography with almost all assets either consisting of sterling assets or hedged into sterling. The company continued to pay a 6.25p dividend last year despite the economic backdrop. This remains the board’s target, which it expects again to be fully covered by earnings, and equates to a yield of 5.7 per cent at time of purchase.

INPP seeks to invest responsibly in public and social infrastructure projects while providing inflation-linked returns by way of dividend growth and modest capital returns. Last reported dividend coverage was 1.2x and the company has reaffirmed a dividend of 7.55p for 2021 and 7.74p for 2022 – which maintains the historic growth levels of c.2.5 per cent a year. Most of the portfolio’s assets are linked to inflation. A yield of 4.4 per cent when bought is supported by long-term, inflation-linked cash flow which serves to reinforce the investment case.

NCYF invests predominantly in fixed-interest securities at the upper end of the yield curve, but also has exposure to high-yielding equities. This helps to account for the company’s sound record of increased dividends under its respected manager, while it possesses substantial revenue reserves equating to 80 per cent of the current dividend. Its universe of fixed-interest stocks should perform better than most during the early stage of any inflationary pick-up and its 4.46p dividend represented a yield of 8.1 per cent when bought.

Finally, the Growth portfolio has recently supported an open offer from Augmentum Fintech (AUGM) and is about to acquire additional shares at £1.35½. Speaking with Tim Levene, the lead manager, we remain positive about prospects. AUGM invests in fast growing fintech businesses that are disrupting the banking, insurance, asset management and wider financial services sectors.

The potential market it addresses is worth over $4tn and one where the penetration by the sort of digital disruptors in which it invests remains small. Many of the core financial systems remain essentially the same as they did a decade ago, and yet the advance of technology suggests the scale of change will be significant in the years to come. The company’s excellent stewardship is a further positive.

Portfolio performance

Growth              Income

1 Jan 2009 – 30 June 2021

Portfolio (%)                                 428.9                  289.6

Benchmark (%)*                          209.9                  155.3

Year to 30 June 2021

Portfolio (%)                                 7.2                       5.8

Benchmark (%)*                          9.1                       6.0

Yield (%)                                         2.6                       3.3

*The MSCI PIMFA Growth and Income benchmarks are cited (total return)