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.
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.
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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