We’ve made two changes to the EveryInvestor Short-Term Growth portfolio to lift its performance, though a return of 9% over the past 12 months is bang on target.
One of the funds we’re dumping has made us a loss of 5% over the past year - CF Ruffer Total Return. The managers have been too cautious and having lots of money in cash and in gold has cost us dear. Manager Henry Laxey has left and so are we.
The other sale is more strategic. Neptune Income has made us almost 14% over the year, but the fund has a concentrated portfolio which means higher risk. At the same time, we want to widen our international exposure. So we’re selling it.
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Two new funds to buy for the portfolio
The two funds we’ve bought are Jupiter Income, a more cautious-style UK equity income fund run by one of the sector’s long-term winners Anthony Nutt, and JPM Global Equity Income run by Gerd Woort-Menker. This is a new fund but with the backing of the vast well-organised JP Morgan worldwide investment organisation.
The result is a slight reduction in the portfolio’s risk profile, a wider exposure to international shares and a slight rise in the total income generated from the investments - all of which is being reinvested for future growth.
Over the past 12 months the portfolio’s overall return of 9% including reinvested net income is bang in line with our target. At some point, this portfolio will require more of a shift into fixed interest to give it more stability, but with interest rates rising, this is not the time to do it.
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Other potential fund switches for the brave
If you have a gung-ho disposition you could replace the M&G International Growth trust with two regional specialists, in which case I would go for AXA Framlington Biotech (mainly invested in the US) and JPM Japan.
The Chinese market is going through a dangerous speculative bubble and when it bursts the rest of the South East Asian markets are bound to experience turbulence too. So this is an area we prefer to steer clear of for the time being. Read on for full details of the revised five-year growth portfolio.
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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.
| Asset class | Investment | Amount | % of total |
| Cash | 60-day notice account | £2,000 | 10 |
| Fixed rate | | £2,000 | 10 |
| | Aegon Global Bond | £2,000 | 10 |
| Property | | £4,000 | 20 |
| Standard Life Select Property | £2,000 | 10 |
| M&G Property | £2,000 | 10 |
| Shares* | | £12,000 | 60 |
| UK | Standard Life UK Equity High Income | £2,000 | 10 |
| Jupiter Income | £2,000 | 10 |
| Investec Cautious Managed | £2,000 | 10 |
| Threadneedle Equity & Bond | £2,000 | 10 |
| M&G International Growth | £2,000 | 10 |
| Total | | £20,000 | 100 |
*Investec Cautious Managed and Threadneedle Equity & Bond both hold fixed-rate investments as well as shares, so the true asset split is approximately 15% fixed-rate and 55% shares.
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 Equity High Income 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 Graham French will go anywhere, buy anything in pursuit of profit. But we have balanced that with a more cautious international fund, JP Morgan 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 Standard Life Investments Select Property, which has over three-quarters of its cash invested abroad. Property is a reasonably stable investment, 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.
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