Outside the
portfolios' 'Themes' and 'Commercial property' sectors, regular readers will
know that the strategy guiding both portfolios since their inception five years
ago has been to 'Go high, go deep and go east'. The emphasis has been on higher-yielding blue-chips and bonds, smaller companies and the Far East
(including Japan from the end of 2012).
This has
served both portfolios well. However, the time has come to modestly refine the
strategy for the Growth portfolio given market conditions and its freedom from
an income constraint.
Go high, go deep
Governments'
vested interest in stoking a modest rise in inflation to help erode high debt
piles has resulted in interest rates remaining low for an extended period of
time. The post-war period saw a similar exercise and reminds us of both the
benefits and potential drawbacks of such a policy. The job is not yet done.
Debt remains stubbornly high. Despite all the talk of austerity and deficit
reduction, this government has only managed to reduce the rate at which we are
adding to our National Debt by one third. Other governments are in a similar,
if not worse, position.
One strand
of the investment
strategy guiding
both portfolios has therefore been to focus on higher yielding corporate bonds
and blue-chip equities. The bonds because they are better insulated from modest
rises in inflation, and because their risk profile will gradually improve as
the economy moves forward and solvency concerns recede. The equities because
their yield is attractive relative to other asset classes and because strong
corporate balance sheets have been able to sustain dividend increases. Both
strands of the strategy remain valid for investors seeking income.
Another
catalyst for the market’s continued rerating is the government’s launch of
Isa-style accounts aimed at encouraging households out of some of their $15tr
of savings and into the stock market – a process which should be made easier as
inflation takes hold. Given the market is under-owned, with only around 5 per
cent of households’ assets invested, a modest shift could have huge
ramifications. The market capitalization of the 50 largest companies is worth
just 12 per cent of total household savings.
The fact
that many investors still dislike Japan further adds to the market’s
attraction. But, again, the focus on Japan within the 'Go east' element of the
Growth portfolio's strategy will not be replicated to the same extent within
the Income portfolio because of yield constraints - Asia outside Japan is still
where the better yields are to be found. Browse
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Portfolio changes
Accordingly,
a number of changes were made to the Growth portfolio in January. Perpetual
Income and Growth Investment Trust (PLI), Schroder Oriental Income Fund (SOI)
and Aberdeen Asian Smaller Companies Investment Trust (AAS) were sold whilst
standing at a small premium, at par and at a 5 per cent discount respectively.
All are excellent trusts – indeed, PLI remains in the Income portfolio.
In their
place, I have introduced JPMorgan Japanese Investment Trust (JFJ) while
standing at a 10 per cent discount. The performance has picked up significantly
since Nicholas Weindling took over in the autumn of 2010. Speaking with
Nicholas, I suggest this pick-up has perhaps been helped by him and his team
being based in Tokyo, which is not as common as you may think.
To
compensate for the loss of SOI and AAS, I have bought Scottish Oriental Smaller
Companies Trust (SST) while also standing on a 10 per cent discount – the new
weighting being a tad higher than the 2.5 per cent which AAS had dropped to.
Outside the
Far East, I have added to both Henderson Smaller Companies Investment Trust
(HSL) and International Biotechnology Trust (IBT) while standing at discounts
of 12 and 15 per cent, respectively. A conversation with Neil Hermon, HSL's
manager, confirmed that around three quarters of the portfolio is in mid-cap
stocks - a reminder that trust names can sometimes inadvertently be opaque.
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