Keeping up appearances in a tough quarter - Model Portfolio July 15 update

It was a challenging quarter to the end of June for the model portfolios. Although the UK stock market reacted well to the election of a Conservative government, the uncertainty surrounding events in Greece knocked share prices back again.

Many stock markets globally lost ground due to these concerns, but also to worries about the state of the Chinese economy and, latterly, the volatile mainland stock market.

This meant that all but two of our portfolios declined over the quarter, with losses ranging from under 1% to over 3%. The two portfolios that bucked the trend, Echo and Foxtrot, were both higher-risk growth portfolios, but their returns were modest at less than 1%.

Find out which holdings were the best and worst performers over the quarter and which got the chop in the latest leaders, laggards and switches update.

Even so, half of the portfolios did better than the FTSE All-Share index. We were also pleased to see that the portfolios' returns compared well with the FTSE Wealth Management Association indices, which are designed as benchmarks for assessing and comparing the performance of discretionary fund managers.

Over the past quarter four of our six income portfolios were ahead of the FTSE WMA Stockmarket Income index, and five of our growth portfolios performed better than the FTSE WMA Stockmarket Growth index.

Measured since inception, none of the income portfolios has lagged the WMA index and only two of the growth portfolios are behind. They are ones designed for the short and medium terms, whereas the WMA index does not take account of any particular timescale.

The income portfolios

The best-performing income portfolio over the quarter was Kilo, the higher-risk version of the balanced income portfolio. It suffered the smallest decline of all the income portfolios, losing just 0.76%.

It was buoyed up by three of its holdings, which achieved a positive return during the quarter - PFS Chelverton UK Equity Income, Temple Bar and Troy Income & Growth - three UK-focused funds but with very different approaches.

PFS Chelverton UK Equity Income fund focuses on the shares of UK small and medium-sized companies; investment trust Temple Bar takes a contrarian approach which means that it invests in out-of-favour companies; while the core philosophy of Troy Income & Growth trust's managers is to protect capital by investing mainly in blue-chip UK companies.

We are particularly pleased to see that Temple Bar managed to hold its own during this quarter - especially as it features in three other income portfolios - as its recent performance has not been as strong as we would have hoped.

Our weakest income portfolio, both over the past quarter and longer term, was the medium risk, balanced portfolio, Hotel. Six of its seven holdings lost ground over the quarter, with Temple Bar its only positive contributor.

The two holdings that detracted most from Hotel's recent performance were Artemis Global Income and Newton Global Income, which were among the heaviest losers of all holdings during the quarter.

They have been affected by the fact that global markets generally have not performed well recently. However, we still strongly believe that income investors should have international exposure and that these funds will bounce back.

Hotel's portfolio also contains two bond funds, Baillie Gifford Corporate Bond and Fidelity Strategic Bond, which replaced two more narrowly focused fixed income funds in the last quarterly review.

However, even with their broader remits the fund managers were unable to avoid sustaining losses in the current market environment for bonds. Nevertheless, we continue to believe it is important to have exposure to this asset class in these medium-risk portfolios, to give balance.

The growth portfolios

Two of our six growth portfolios made positive gains during the quarter. These were the higher risk versions of our medium- and longer-term growth portfolios, Foxtrot and Echo. At the last review Foxtrot, the longer-term version, was one of our backmarkers. It benefited from the fact that four of its seven holdings made positive progress.

Although the Echo portfolio only had two holdings that produced a positive return, they were also enough to stop it slipping into the red. These portfolios each contained one of our two highest-flying funds. Echo holds Miton UK Value Opportunities, while Foxtrot includes Marlborough UK Micro Cap Growth.

Smaller companies have enjoyed a revival recently and, although the Miton fund can invest in companies of any size, it currently has over 40% of its portfolio invested in smaller companies and stocks quoted on the Alternative Investment Market.

The other holding that Echo and Foxtrot have in common is Caledonia Investments, which saw its price rise following the announcement of a good set of annual results at the end of May. The trust is around a third invested in unquoted companies and is still 48.5% owned by the Cayzer family. The share price also responded well to an announcement in June that the trust had acquired a majority stake in Seven Investment Management (7IM).

The slide in BlackRock World Mining shares, which is included in both portfolios and had previously been a significant drag on their performance, also slowed during the quarter. The trust's share price discount to net asset value narrowed.

Its investment managers recently reported that they expect further reductions in mining capacity this year, which they believe "bodes well for the longer term and limits the industry's ability to respond to the next upturn in demand, which will ultimately see prices go higher".

The weakest-performing growth portfolios were the two short-term versions, Alpha and Delta. This is especially disappointing as we aim to maintain these short-term portfolios on an even keel as investors have less time to recover from any losses.

However, it was the higher risk Delta which lost most. This portfolio was the top performer at our last review and it has not lost all of these earlier gains, so its performance is still positive over the year to date.