Model portfolio update: 2014 Q2

We’re halfway through the year so it’s time to take another look at how the UKVI model portfolio is getting along. The first thing to do as always is reiterate the goals of the portfolio to put its performance in context.

The goals of the portfolio are:

  • High yield – To always have a higher yield than the FTSE All-Share
  • High growth – To generate higher capital returns (and therefore total returns) than the All-Share
  • Low risk – To be less risky than the All-Share, either measured using Beta or maximum peak-to-trough decline
  • Low effort – To take no more than a few hours each month to manage

The portfolio currently holds 30 companies, of which 52% are large-caps, 36% mid-caps and 12% small-caps.

I’ll get straight to the bit that everyone wants to see, which is of course the performance chart.

UKVI Model Portfolio Total Return - 2014 07

Please note that the average and bad investors in the chart underperform by 3% and 6% a year respectively to indicate the sort of typical returns that private, active investors achieve.

In terms of numbers, the results are:

  • Dividend yield: 3.8%, 0.7% better than the All-Share
  • 1-year total return: 18.1%, 4.4% better than the All-Share
  • 3-year total return: 42.3%, 10.4% better than the All-Share
  • Total return from launch: 44%, 8.6% better than the All-Share
  • Annualised return from launch: 11.6%, 2% better than the All-Share
  • Total value (having started at £50,000): £72,001, £4,290 more than an All-Share tracking alternative
  • Risk (2-year Beta): 0.5 (All-Share Beta is 1)
  • Risk (maximum peak-to-trough decline): 8%, 5.5% less than the All-Share

These results include all trading costs such as commissions and stamp duty, and buy and sell trades are entered using the actual bid and ask prices available at the time, so it’s effectively identical to a real portfolio.

Whether through luck, skill or a sound plan, the portfolio has met all of its goals so far, which is good because I have most of my pension pot invested in the same shares.

Recent buy and sell decisions

There have been a few changes to the portfolio since the last quarterly update.

These trades are carried out as part of my slightly unusual but deeply comforting and systematic approach to improving the portfolio. It consists of making just one trade each month to buy or sell a company, ejecting shares that look least attractive and replacing them with something better from the market.

Buying or selling one company each month means that six holdings are replaced each year and with a portfolio of 30 holdings that means an average holding period of 5 years.

That’s important because a holding period measured in years rather than months gives the underlying company time to grow its revenues, earnings and dividends, which in turn will eventually drive up the share price. That’s a much more sensible way to invest than simply hoping that the share price goes up in the next month or two based on nothing more than news or hot air.

The trades for the last quarter were as follows:

Both the holding periods above are less than my expected average holding period because the portfolio has only existed for slightly more than 3 years. However, over the next few years, I fully expect them to lengthen to the point where they’re anything up to 10 years or more (although still 5 on average).

Expectations for the rest of 2014

As usual, I have no expectations over such a short time period. Sadly the stock market really is very efficient which means it’s impossible to know whether it’s going to go up or down over time periods of less than 10 years (over 10 years it’s usually a good bet to say it’s going to go up).

However, I will say that the FTSE 100 CAPE valuation is currently very reasonable so there’s no obvious reason, from a valuation point of view, to expect a sudden decline. Currently, I’d say the odds are about 50/50 as to whether the FTSE 100 breaks through 7,000 this year or not.

If it does then we could see big gains before the year is out, but if not then I expect the UK market (and therefore this model portfolio) to end up roughly where it is now.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

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