Six portfolios for growth investors
20th January 2014 09:56
by Andrew Pitts from interactive investor
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Money Observer's growth portfolios are divided into three categories to reflect investors' different time horizons as well as attitudes to risk.
There are portfolios for 5-9 years (short term), 10-14 years (medium term) and 15 years-plus (longer-term), and there is a medium- and higher-risk version of each.All of our growth portfolios have picked up steam over the past year as stockmarkets have become more confident, thanks to the improving economic outlook.
However, investing for growth is often trickier than investing for income and to date the returns on our growth portfolios have lagged behind those achieved by the income portfolios. Share price movements are more difficult to predict than company dividends.
To find out more about our portfolios, read: Top model portfolio boasts 54.3% gains and Six portfolios for income investors.
Why we are selling M&G Global Basics
was one of the original constituents of our higher risk 10-14 years and 15-years-plus growth portfolios.
However, following the announcement that its manager Graham French is planning to retire and hand over the running of the fund to his co-manager of five years, Randeep Somel, we have decided to replace this fund with investment trust instead.
The performance of the M&G fund has been disappointing for some time, and we feel Somels skills are untested.
BlackRock World Mining, on the other hand, benefits from a highly regarded, experienced and well-resourced management team led by Evy Hambro.
Top holdings include and . Although the resources sector has been through a difficult period in recent years, we think it could be due for a turnaround, which will result in a narrowing in the price discount to net asset value on this investment trust.
Indeed, some growth investors choose to invest in income-oriented investments and reinvest dividends to get the compounding effect of both the income and any increase in share prices.
Although growth investments can be subject to high volatility,they can deliver greater gains in the long run because they generally provide exposure to companies and markets in a more dynamic development stage.
Nevertheless, because they can be volatile, time horizons are a particularly important consideration for investors pondering how to invest for growth.
The more time you have on your side, the longer you have to ride out stockmarket fluctuations. If you may need your money within five years, we would strongly advise against investing in stockmarket-linked investments.
After five years there is a 74% probability that equities will outperform cash and a 73% probability that equities will outperform government securities, according to the long-running Barclays Capital Equity Gilt Study.
However, after 10 years, the probability that equities will outperform cash rises to 90% and the likelihood they will outperform gilts rises to 79%.
With our growth portfolios for a shorter time scale we have taken a relatively cautious approach, although the bond content has been reduced over the past year in favour of greater equity exposure.
Given the current market conditions, we believe the risk of share prices falling over the next five years is limited. Otherwise we have made relatively few changes to these portfolios.
Short term (5-9 years)
Alpha portfolio
Performance one year: 11.1%
Performance two years: 17.1%
When this portfolio was first set up it was mainly invested in bond funds and mixed-asset funds in order to limit risk.
However, as the economic outlook has improved, we have begun to feel there would be greater growth potential if more equity-oriented holdings were included. The fixed-interest content has therefore been reduced to around 12%.
Three of the original holdings have been replaced, and it is the most recent of the additions to the portfolio that has given it the greatest boost. was brought into the portfolio in October to replace the .
Fundsmith Equity has a global remit and is managed by Terry Smith, who aims to invest only in high-quality businesses; we think this will make it a relatively resilient holding even in times of market volatility.
Previously and had been replaced by and HSBC FTSE All-Share Index (a tracker fund). The latter will naturally go down, as well as up, with the market.
However, so far it has made a good contribution to the portfolio's performance and we believe the outlook for the UK market is good for the time being. This tracker fund is also offset by some more cautious elements in the portfolio, including the backmarker, , which aims to provide returns ahead of cash but without the volatility of equity markets by investing in a combination of high-quality shares and bonds.
Delta portfolio
Performance one year: 13.1%
Performance two years: 25.4%
Even when investors are prepared to take more risk, investing for capital growth over a period of less than 10 years is a challenge. Our emphasis with this portfolio has therefore been to hold funds that are well diversified and quite conservatively managed.
We have only changed one of the holdings since inception. was replaced in October by Fundsmith Equity.
The Troy fund was a mixed-asset fund of funds. However, we had been somewhat disappointed with its over-cautious approach and felt that, with market conditions improving, a more equity-oriented fund would be appropriate. Fundsmith Equity is a global fund managed by Terry Smith. He aims to invest only in high-quality businesses, so it should benefit when markets are rising but be relatively resilient in times of market volatility.
However, our best performer over the past year has been . This global growth investment trust is different from many of its peers in that it takes a multi-manager approach. Its performance has improved significantly since Andrew Bell was appointed chief executive in February 2010.
Bell plays an active role in asset allocation and has replaced index trackers with active managers. He is prepared to switch managers when he feels a change of direction is required. Over the past year, for example, he took the decision to increase the trust's exposure to Japan from 1% to 7%, based on his view that the new government's policies would provide a boost to the stockmarket.
Medium term (10-14 years)
Bravo portfolio
Performance one year: 18.6%
Performance two years: 28%
Over 10 years there is a high probability that an investment in equities will outperform cash and government bonds. For this reason we have chosen to invest our medium risk 10-14 year growth portfolio mainly in equities.
However, to protect against losses we have included two funds with absolute return objectives - Newton Real Return and - and they have the scope to invest in other assets. They aim to preserve capital and produce positive returns under most market conditions. But these types of funds will clearly not do as well as equity-only funds when stockmarkets are rising.
Our best returns over the past year have therefore come from equity holdings, in particular the two investment trusts - Witan and - which have seen their performance improve considerably over the past year.
Witan has also benefited from a significant narrowing in its price discount to net asset value, while Monks has seen its performance pick up as investors have become prepared to take on more risk and invest in the type of growth stocks that it holds, rather than in purely defensive, high-yield stocks.
There has been only one change to this portfolio since its inception. Troy Spectrum was replaced in October with Fundsmith Equity. The Troy fund was a cautious mixed-asset fund of funds, and we decided that Fundsmith Equity, managed by Terry Smith, would provide more growth potential through its investment in high-quality global businesses.
Echo portfolio
Performance one year: 16.3%
Performance two years: 27.9%
The higher-risk version of the 10-14 year growth portfolio has remained unchanged since inception. Like the medium-risk portfolio, it is overseas oriented. Just a third of the portfolio is invested in the UK, but it has a greater exposure to Asia Pacific and emerging markets and to smaller companies.
Its two best-performing holdings over the past year have been funds that focus on smaller companies. invests mainly in UK small and micro-cap companies, including firms listed on AIM.
Manager Richard Penny looks for companies whose share prices he believes will double over three years, and he often finds them among AIM-listed stocks, which tend to be less well-researched than those on the main market and can be bought more cheaply.
The second-best performing holding was . Its portfolio is divided into five elements, three of which are directly invested in small companies in the UK, the US and Europe. Exposure to smaller companies in Japan and the rest of the world is through other collective funds.
To date there have been no changes in the portfolio, but following the announcement that Graham French is to step down as manager of M&G Global Basics, we have decided to substitute that holding with BlackRock World Mining Trust, as explained above.
Longer term (15 years plus)
Charlie portfolio
Performance one year: 21.5%
Performance two years: 32.7%
In theory, the longer your investment horizon the more risk you should be prepared to take, as there is more time for your investments to recover from market falls.
In practice, however, many investors find it nerve-racking to see their investment decline in value for any length of time.
Therefore with our medium-risk portfolio we have tried to strike a balance by maximising investors' equity exposure but including funds that are sufficiently resilient to withstand market shocks.
No changes have been made to this portfolio, even though relative returns have varied considerably. , for example, was the best-performing holding in 2012, but the weakest in 2013. Asia Pacific markets were very popular until growth in China started to falter and investors decided to pull back to the developed markets instead.
One of the main reasons we chose the First State fund to gain exposure to these markets is that the management team focuses on capital preservation and growth, so before investing in companies, they consider how they will perform in bad times as well as good.
The best-performing fund over the past year was Legal & General UK Alpha, although in 2012 its performance was less impressive. It has a relatively concentrated portfolio of 53 holdings. The majority are small and micro-cap companies, including firms listed on AIM, so they tend to be more volatile than larger, more-established companies.
Foxtrot portfolio
Performance one year: 20.7%
Performance two years: 40%
The higher-risk, 15-year-plus growth portfolio consists of a number of more specialist funds, plus the HSBC FTSE 250 Index fund, which tracks the performance of medium-sized UK companies.
Historically, the long-term performance of these middle-ranking businesses has tended to be better than that of the largest companies. Medium-sized companies often have more scope to grow their businesses than their larger counterparts, and are also likely to be the subject of merger and acquisition activity.
However, smaller companies tend to be even more dynamic and the best-performing holding over the past year has been .
It has changed its parameters slightly since it was first chosen for inclusion in the portfolio: it now invests in companies with market capitalisations of £250 million or less at the time of purchase, rather than £100 million as previously.
However, a considerable part of the portfolio is still invested in smaller companies of less than £150 million.
Although companies at this end of the size spectrum are traditionally thought to be at higher risk of failure than more-established firms, fund manager Giles Hargreave offsets this risk by holding a diversified portfolio that contains more than 220 holdings. Sector-wise, technology companies currently make up around 30% of the fund's portfolio.
To date there have been no changes in the portfolio, but following the announcement that Graham French is to step down as manager of M&G Global Basics, we have decided to substitute that holding with BlackRock World Mining Trust as explained above.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.