Hold fire on gold - for now
This portfolio review covers the final quarter of 2010 and Mick Gilligan's immediate outlook for 2011. The portfolio performed strongly as 2010 came to a close, thanks to the market surge in December after the Irish debt crisis ended with a EU bail-out and the US announced more quantitative easing.
Investors started to pile into risky, cyclical stocks again, while defensive sectors such as pharmaceuticals lagged. Government bonds also rallied at the year end.
Overall, the FTSE All-Share index rose by 8.5% during the quarter, while Killik's portfolio repeated the 7.6% gain it had achieved in the previous quarter.
It is now up nearly 50% since inception and the portfolio's performance remains pretty much neck and neck with that of the FTSE APCIMS (Association of Private Client Investment Managers and Stockbrokers) Growth Portfolio index.
With Gilligan's more balanced approach, the portfolio will not match the performance of the FTSE All-Share index when equities are motoring ahead. Also, funds in the IMA's active managed sector can have up to 100% in equities. Gilligan does not expect all his holdings to move in the same direction at once.
Commodities on the rise
The best performance over the quarter was produced by the BlackRock Gold & General fund, which rose 13%. Investors' concerns about currencies and sovereign debt, plus worries about inflationary pressures, resulted in increased interest in commodities, and gold in particular.
Gold bullion prices reached record highs during the quarter. The prices of other precious metals, such as silver, also rose. Evy Hambro, manager of the fund, expects the gold price to continue to be affected by central bank decisions on further quantitative easing in the short term.
But he also expects the metal to retain its attraction as a safe haven in uncertain times and will be a useful portfolio diversifier. He points out that limited supply will also underpin gold's price.
Unfortunately, the BlackRock fund constitutes less than 5% of the portfolio, so its good performance had a limited impact on the portfolio's overall return. However, Gilligan is not inclined to increase his holding. "As fast as the price of gold can rise, it can also rattle back down again," he says.
"Also, there is exposure through funds such as First State Asia Pacific Leaders, which has a gold mining stock as its largest holding."
However, two of the largest holdings also had a good quarter. Findlay Park American Smaller Companies, which constitutes 18% of the portfolio, was up 12.5% in dollar terms and 14.2% in sterling.
Gilligan points out that the fund rose broadly in line with the market. "The US was the best-performing developed market over the quarter, partly due to US economic data proving better than expected.
"With valuations looking reasonable, asset allocators may have decided that they should be a bit less underweight the US than previously. The Republicans' success in recent elections means legislation is likely to be blocked. There will be less legislation and fewer surprises, which should be good for the stockmarket."
The portfolio's largest holding, AXA Framlington UK Select Opportunities, was another good performer, up 11%. Its overweight exposure to industrial companies and its underweight to financials have continued to be of benefit. Its largest holding, Weir Group, was the best-performing FTSE 100 share last year. Another industrial firm, Rotork, has also done well.
Gilligan points out that companies such as Weir Group, that have conservative managements and are not indebted, have been selling into the emerging markets and gaining new customers in China and Latin America, and are seeing good earnings growth.
Nigel Thomas, the fund's manager, believes plenty of opportunities are available for growth among companies with good management who can deal with change. And he points out that, even if the UK economy doesn't do well, many companies listed on the London Stock Exchange derive significant earnings from overseas.
Offsetting the positive trends was the negative performance of four portfolio holdings. The largest faller was hedge fund BH Macro, which invests in global fixed income and foreign currency markets. Its price fell by 4%, even though its net asset value performance was broadly flat.
A widening in its discount over the quarter to 7% caused the dip, as investors sold out fearing a repeat of its dull 2010 performance this year.
Two bond funds fell in value. Invesco Perpetual Corporate Bond lost 2.4%, while Thames River High Income went down 1%. Gilligan says the Invesco Perpetual fund suffered in the last month of the quarter following a rally in long-dated bonds, since its portfolio was shorter in duration. Exposure to financials didn't help. However, fund managers believe there is value there, particularly in the banking sector.
The final fund to lose money was Cazenove UK Absolute Target, which was down 2%, primarily due to the fact that it has remained short on the mining sector. Gilligan admits he is now seriously looking at selling this fund to enable him to gain greater exposure to more promising areas of the market.
Gilligan believes conditions will be much the same in 2011 as they have been in recent months. "There are likely to be a couple of shocks this year in Europe, probably in Spain, Portugal or Italy.
"Investors will continue to put money into risky cyclical sectors, the emerging markets will continue to do well and corporate earnings will continue to improve.
"However, as the market has run up so strongly, we could see a short-term sell-off, when I may make use of the portfolio's cash holding."
This article was originally published in Money Observer - Moneywise's sister publication - in February 2011.
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.