The past nine months has been about as turbulent and tricky as it gets in the stock market. But our Short-Term Growth Portfolio is weathering the storm.
We had a short sharp 10% dip in the spring, after which the market rebounded almost to its 2000 high point. But then came the ‘credit crunch’, which sent most major stock markets down between 10% and 15%, plus a sharp drop in the UK commercial property market. And right now world markets don’t seem to know whether to go up or down.
Well, this is what investing is all about: worries and more worries. In the long run, stock markets usually rise, but they can and do have bouts of manic-depressive behaviour that it’s impossible to predict. Let’s just hope Mr Market takes some prozac.
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Property knock
The five-year portfolio has a broad spread of investments and this has prevented it from suffering too much from yo-yoing markets. But it hasn’t gone as I expected. Typically, what I thought would be a stabilising influence on the portfolio - the inclusion of 10% or £2,000 in a UK commercial property fund - has turned out to be the worst performer, down 10% over 12 months.
Before you tell me what an idiot I am, let me tell you that two other funds in the sector have done even worse. Over the five-year expected term, I think M&G Property will turn in a decent performance, and hopefully we’ve taken all the knocks on this one up front.
Standard Life Investment's Select Property has also done badly in the short term, but with its wide international spread of commercial property, I expect it to perform well over the next year or two.
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International winner
At the other extreme, M&G International Growth, an aggressively-managed, go-anywhere, buy-anything fund, has gained 16% over a year. Without that, the overall value of the portfolio would be down. Over the next year, it’ll probably be one or two of the other funds that save our bacon.
The global outlook for stock markets is pretty good. Economic growth rates will probably slow down in most areas, but the chances of a recession are remote and falling interest rates should keep the show on the road. Company analysts expect profits to grow by around 10% in Europe over the next year.
In a year’s time, I hope to be reporting on a year in which this portfolio returned more like its long-term objective of an annual 10%.
How the Short-Term Growth Portfolio has performed
| Investment | Original £ | 12-month performance | Value* £ |
| Deposit account | 2,000 | +4.8% | 2,096 |
| Aegon Global Bond | 2,000 | -2.6% | 1,948 |
| M&G Property | 2,000 | -10.1% | 1,798 |
| SLI Select Property | 2,000 | -2.7% | 1,946 |
| Investec Cautious Managed | 2,000 | -3.3% | 1,934 |
| Threadneedle Equity & Bond | 2,000 | +5.2% | 2,104 |
| Jupiter Income | 2,000 | -0.3% | 1,994 |
| SLI UK High Equity Inc | 2,000 | +4.4% | 2,088 |
| JPM Global Equity Income | 2,000 | N/A | 2,000 |
| M&G International Growth | 2,000 | +16.1% | 2,322 |
| Totals | 20,000 | +1.1% | 20,230 |
* As at 11/12/2007. Returns include reinvested net income. Source: Financial Express
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The EveryInvestor Short-Term Growth Portfolio
Our Short-Term Growth Portfolio is for people who can invest for a minimum of five years, and it’s also taken for granted that anyone planning their investments already has a separate rainy-day money stash to take care of short-term emergencies.
This Short-Term Growth Portfolio for £20,000 is designed for people who are likely to need access to their capital between five and eight years from now, and in the meantime want to earn a better return than they can get from interest on cash or fixed-rate bonds.
Safety versus growth
As with all portfolio design, you have to compromise between safety and growth. Growth comes from property and shares, safe(r) returns from cash and fixed rate investments.
The amount you put in each of these four categories is one of the factors that determines the overall return from your portfolio as well as how much its overall value will fluctuate. That does not quite mean the same as ‘how risky it is’, because risk means ‘the chance of loss or injury’, and the extent to which a fall in the value of the portfolio represents loss to you will depend partly on your behaviour.
Suppose the value of shares is low at the end of five years: do you cash in or hold on for a recovery? If you are able to wait for a year or two, you may end up with a fat profit rather than a loss. Because we know there’s a possibility that share prices will be lower than today’s in five years’ time (this has tended to happen in about one out of every five 5-year periods), this is an important issue.
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Shorter timescales call for lower volatility
With this portfolio, we have a lower proportion of the capital in shares than in the ten-year and 15-year growth portfolios. We also have more in fixed-rate investments and cash. This does not eliminate the possibility of incurring a loss on encashing the whole portfolio in five years’ time, but it reduces the probability of that happening.
Choosing less volatile funds: The second way we can lower the overall volatility of a portfolio is including less volatile investments within it. We do this with the five-year growth portfolio by reducing the amount invested in ‘aggressive’ growth funds and putting more in more cautious-style funds.
SLI UK High Equity and Jupiter Income are relatively cautious share-investing funds- they tend to buy shares in companies paying higher dividends and with more stable businesses. They are less volatile than aggressive growth funds or funds investing in smaller companies.
Investec Cautious Managed and Threadneedle Equity & Bond are more cautious still, because they combine investment in shares and fixed-rate investments. At present, the managers have about 60% of the money in shares, but they can hold up to 60% in fixed-rate investments and we are expecting them to make that strategic switch when they believe share prices are too high.
Lower percentage in shares than it appears
Including the two funds above means the actual percentage of the £20,000 capital in fixed rate is 15% rather than 10% and in shares 55% rather than 60%. But it also means the proportions could shift further to 20%/50% as and when the managers make that switch.
One of the overseas share-investing funds is quite aggressive - M&G International Growth. Manager Greg Aldridge will go anywhere, buy anything in pursuit of profit. But we have balanced that with a more cautious international fund, JPM Global Equity Income, which invests in higher-yielding shares that are usually more conservative types of business like utilities. JPM have over 50 analysts worldwide supporting manager Gerd Woort-Menker, and JPM’s disciplined team approach is ideal for this type of fund.
To these generally cautious share-investing funds we add a 20% holding in commercial property, 10% in the UK-focused M&G Property and 10% in SLI's Select Property, which has over three-quarters of its cash invested abroad. Property is a reasonably stable investment most of the time, so we end up with a portfolio with the potential to produce returns well above cash deposit rates but with far less overall volatility than a straight share-investing fund.
I think this portfolio will beat 'safer' options
My own view is that this Portfolio is likely to produce better returns than most of the ‘guaranteed equity bonds’ being sold over high street counters, provided you have some flexibility in the timing of encashment.
As with all fund investments, we recommend buying through a fund supermarket both to save on initial charges (and charges on any future switches that may be needed) and for the convenience of instant online valuations, access to managers’ reports and avoidance of tedious piles of paper.
If you are not using your ISA allowance of £7,000, buy this amount of funds within the ISA and the rest direct - then switch another £7,000 worth into the ISA in the following two tax years, so that you end up with it all inside the ISA tax shelter. This is easy to do with a fund supermarket.
Remember too that like all such portfolios it needs to be reviewed regularly, ideally every six months but at least once a year. If any funds have been removed from our Best Buy lists they may need replacing.
Important Notice and Risk Warning
The EveryInvestor Model Portfolios are for general guidance only and do not constitute a recommendation for any investor. EveryInvestor does not provide individual investment advice.
Your own personal circumstances and tax position must be taken into account in selecting investments. We recommend that you obtain advice from an independent financial adviser before making investment decisions.
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance.
