Fund Portfolio enters new realm

In the past few weeks, the Portfolio has continued to outperform the market, although the numbers are somewhat more modest than was the case last time round.
 
Last time, the Portfolio was up 66% since inception. This time round it is up 67.8% up. The FTSE 100 index (UKX) is now up 26.5% since inception versus a gain of 26.2% last time. That's a 0.3 percentage point rise in the index versus a 1.8 percentage point rise in the Portfolio.
 
As was the case last time, BlackRock Gold & General has been one of the best performers, helped by the continuing strength in the bullion price. Marginally the better performer was Fidelity Global Special Situations, which rose by some 8.4% over the period in question.
 
I mentioned last time round that I was considering how and when to get some exposure to emerging markets, a problem that I think I have now resolved - thanks to a bit of lateral thinking. It does, however, involve something of a new departure for the Portfolio in several ways.
 
All our holdings to date have been in unit trusts or OEICs. But there is no reason why a fund portfolio cannot invest in passively managed exchange traded funds. These are, as many readers will know, mutual funds that trade like shares with a constant two-way market, a bid-offer spread, and where dealing takes place through a normal broker rather than a fund supermarket or fund group.

There are modest charges by fund standards (typically around 0.5% a year, paid out of income) and no stamp duty. While the focus of the Portfolio to date has been actively managed funds, there is a role for passively managed ones, if they can get the Portfolio into areas that might otherwise difficult to access.
 
The fund I am planning to buy, which falls into this category, is the iShares JP Morgan $ Emerging Markets Bond Fund. The JP Morgan Emerging Market Bond Index (EMBI) is a well known and widely used benchmark. The fund has 40 holdings, most of which are sovereign (i.e. government-issued) dollar denominated bonds from a wide range of emerging markets. I highlighted this fund briefly in an article recently on high yield exchange traded funds.
 
While bonds like this are not ranked as highly by rating agencies as those of developed country issuers, the compensation is an appreciably higher yield, currently around 7% on the fund. While the base currency for the fund is dollars, we can buy the shares in sterling denominated form. The fund also pays dividends monthly, towards the end of the month.
 
The biggest single country exposure (about 12%) is to Russia, followed by Brazil, Turkey, Malaysia, Philippines, Mexico and Venezuela, but bonds from around 23 countries in all make up the Portfolio. Maturity dates for the bonds held cluster in the five to 10-year and 15 years plus mark.
 
The real rationale for getting involved with this fund, and for making the departure from equities into bonds, is that while emerging market equities have been the best performers of all world markets since the start of the years, this enthusiasm has not carried over into emerging market bonds to anywhere near the same extent.

Given that bonds in general and sovereign bonds in particular, have much greater security than equities, this seems a glaring anomaly, which I think should be corrected in due course.
 
While the fund's dollar exposure might be a worry in the current climate, there is something of a natural hedge in the Portfolio in the shape of Gold & General. This fund's performance is very evidently helped by a strong gold price, which tends to happen when the dollar is soft. So any undue dollar weakness and a related impact on the fund might well be offset by benefits to Gold & General.
 
I am buying 50 shares in the fund at the current price of £64.35 which, after dealing costs, leaves us with just short of £1,500 in cash.