Killik's Growth Portfolio romps ahead

Money Observer's hypothetical growth portfolio had a stonking first quarter, outshining the FTSE All-Share index. Its manager, Mick Gilligan, head of research at stockbroker Killik & Co, tells Helen Pridham that the weaker pound was a contributory factor.

The UK stockmarket has continued to surge ahead since the last review. Even though the outlook for the UK economy remained moribund and the Budget brought little cheer, investors flocked to shares. The UK FTSE All-Share index rose by over 10% during the quarter.

Mick Gilligan puts much of the support for equities down to the continuing impact of Mario Draghi's statement last year that the European Central Bank was ready "to do whatever it takes" to preserve the euro. His words emphasised that central banks are determined to do all in their power to get their economies back on track. But the other reason says Gilligan is that, compared to other types of investments, "shares are currently regarded as the least-worst place to put your money".

The top performer was Findlay Park American, the portfolio's second-largest holding. Its value rose nearly 20% measured in sterling terms. It is a Dublin-based fund with a dollar share class and in dollar terms it gained a respectable 12%. It managed this increase despite an 11% exposure to Mexico and Brazil which, along with other emerging markets, underperformed the developed markets.

Gilligan says that the fund's focus on small and medium-sized companies, and its weighting towards the consumer discretionary sector, helped it to do well.

The pound's weakness was also helpful for the City of London Emerging World fund. It rose 7% in sterling terms, even though its dollar price showed a slight fall. It invests in the emerging markets through investment trusts and other closed-end funds.

The second-best performance overall was produced by another overseas-invested fund, but it is the portfolio's smallest holding so its impact was more limited. HSBC MSCI Japan ETF rose by over 18%, although in its case currency played less of a role as the yen was also weak.

Like Mario Draghi, the Bank of Japan's new governor has promised "to do what it takes" to end deflation and markets are now waiting to see the effects of an increase in quantitative easing. In the meantime, overseas investors who have been underweight Japan in recent years are increasing their exposure.

Another good performer for the second consecutive quarter was Odey Opus. Its price rose nearly 15% mainly due to its holdings in the financial sector and the US housing market. Gilligan points out that financials have recovered particularly strongly recently thanks to the Draghi effect and the de-risking of the financial sector generally as banks have cleaned up their balance sheets.

The positive rebound in financials also boosted the performance of Invesco Perpetual Corporate Bond fund. Its modest 1.6% return was considerably better than its peer group. The reason is that around half the fund is invested in financial sector bonds including those of banks, insurers and other firms. Its managers have regarded these bonds as offering the best relative value for some time.

Another Invesco Perpetual fund that had a good quarter was Neil Woodford's Income fund. After some indifferent performance during 2012, it notched up a 14% return in the first quarter. Gilligan says the strong demand for yield helped to boost the fund's holdings and the results from some individual holdings such as BT Group were particularly good.

Gilligan was also pleased with his holding in BH Macro, a hedge fund trust, which gained nearly 6%. This was partly due to a narrowing in its discount to net asset value (NAV) but also to an increase in the NAV itself. Gilligan explains: "The managers rethought their strategy last year and this is now paying dividends."

The main detractor from the portfolio's performance was BlackRock Gold & General which lost 10% of its value. The fund has suffered as the gold price weakened and investors became less risk averse.

The other weak performer in the portfolio was M&G Strategic Corporate Bond which gained only 0.3%. Manager Richard Woolnough acknowledged that the fund's underweight position in financial sector bonds held back returns on a relative basis.

At present, Gilligan believes the equity market continues to look very robust. He points out: "The fact that it didn't react much to events in Cyprus was evidence of this. I think the main reason is a lack of attractive alternative to equities. Although I do expect a small correction in the market this year, I don't believe it will drop more than 5-10% unless something dramatic happens and when it does pull back I think it will probably be met with buying. My main concern - on a three to five-year view - is inflation."