Well, that’s another year in the bag, and not a particularly good one either. The FTSE All-Share produced a total return of about 2.7% while total earnings and dividends from FTSE 100 companies barely changed at all from 2013.
So that’s the context within which my own modest investment efforts have been applied, and as a primarily large-cap investor, you probably won’t be surprised to see that my results, or more specifically those of the UKVI model portfolio, were not much different from either the FTSE 100 or All-Share.
Rather than just trying to wow you right off the bat with some sort of total return chart, I’m going to structure this review around the model portfolio’s three investment goals.
They’re the core around which everything else is built, so for me, it makes more sense to do it that way.
Goals: More income, more growth, less risk
The portfolio has three simple goals which are:
- To have a higher yield than the FTSE All-Share
- To produce a higher total return than the FTSE All-Share over any 5-year period
- To be less risky than the FTSE All-Share (measured by both Beta and maximum drawdown)
Goal #1 – Has the portfolio had a market-beating dividend yield?
YES – In terms of dividend yield, 2014 has been a slightly strange year because of the record-breaking payout from Vodafone, which is in both the model portfolio and its benchmark, a FTSE All-Share tracking investment trust (both with dividends reinvested).
The payout was so large that it skewed the annual dividends of both portfolios upwards by a considerable amount.
I measure dividend yield as the rolling 12-month dividend total divided by the current total value of either portfolio, and I also include things like special dividends and cash from the sale of spin-off companies, such as Reckitt Benckiser’s Indivior PLC (RB is currently in the portfolio).
The dividend yield for the model portfolio and its benchmark were as follows:
- Model portfolio – The dividend yield ranged from 3.8% before the Vodafone payout to 6.2% afterwards
- FTSE All-Share tracker – Its yield went from 2.9% at the start of the year to more than 4.2% in the second half after the Vodafone payout
The model portfolio had a higher yield than its benchmark at all points during the year, as it has at all points since inception in 2011, and so the high yield goal has comfortably been met for another year.
You can see the annual dividend totals for each year below:

The very satisfying dividend growth from 2013 to 2014 (68% for the model portfolio and 43% for the All-Share tracker) is very unlikely to be replicated in 2015.
A more likely outcome is that total dividends in 2015 will look more like those of 2013, although hopefully at least 10% better.
Goal #2 – Has the portfolio had market-beating total returns over 5 years?
YES (or at least it has in the almost 4 years that it’s been running) – Beating the market is an important goal for most active investors because if you’re not trying to beat the market, what’s the point in being active?
Given that beating the market is a reasonable goal, exactly how much outperformance can be expected? It’s an impossible question to answer, but I’ll have a go anyway.
My ballpark guess is that it should be possible to beat the market by something like 3% a year whilst maintaining the portfolio’s third goal, which is to be less risky than the market.
That would mean an increase in total real returns from a historically average 5% for UK equities up to 8% (or in nominal terms from 7% up to 10% if inflation stays at 2%).
I would expect the additional 3% to come from a combination of higher dividends from buying high-yield shares, faster dividend growth from buying faster-growing companies and finally a slight boost from actively buying low and selling high instead of buying and holding.
I think a 10% annual return with less risk than the market is an achievable goal to aim for over the long-term and, although the portfolio doesn’t have a 5-year history yet, you can see how it has performed so far in the chart below.

Note: In the chart above the average investor underperforms by up to 3% a year according to research cited by Barclays Wealth, and by up to 6% (labelled here as bad investors) in Pete Comley’s book Monkey with a Pin.
The story so far is of performance that closely tracks the UK market, with slight outperformance to date, although over a time period that is too short to draw any solid conclusions from.
Overall I would describe that as “so far so good”, especially when you consider the model portfolio’s aim of being less risky than the market. Here are those results again if you like hard numbers:
Annualised returns to date are 9.7% a year, almost bang on the 10% target, although of course that could change massively if we have either a large bull or bear market in the next few years.
Goal #3 – Has the portfolio been less risky than the market?
YES – The portfolio is what I call a “defensive value” portfolio which, as the name implies, should be less risky than the market as a whole. Exactly how much less risky can be difficult to control given that it has a mandate of being effectively 100% invested in equities.
So unlike total returns, where I’m targeting a 5-year annualised rate of outperformance of 3%, with risk I just want the portfolio to be “less risky”, as measured by Beta and maximum drawdown (peak-to-trough decline).
Beta is a measure of how a portfolio’s volatility changes as the market’s volatility changes. A Beta of more than 1 means that the portfolio’s volatility increases faster than the market, while a score of less than 1 means that its volatility increases more slowly.
Over the last three years (Beta is usually measured over a multi-year period), as the table above shows, the model portfolio has a Beta value of 0.56. This means its volatility increases significantly more slowly than the market, which you can see in its smoother line in the “Total Return from Inception” chart.
Beta is a very common measure of risk because a more changeable portfolio has a more uncertain value, and uncertainty and risk are often thought of as the same thing. But Beta isn’t the only measure of risk and personally, I prefer to use maximum drawdown or maximum peak-to-trough decline.
Maximum drawdown shows you the maximum percentage value a portfolio has lost at any point in its history. If you have enough historic data it can be a reasonable guide to how much it could decline in a future bear market, relative to the market as a whole.
So how much has the portfolio “lost” at any point in time?
Since the portfolio began in March 2011 we haven’t seen a bear market; instead, the UK stock market has been recovering from the financial crisis so drawdowns, while frequent, have been relatively small.
Under those conditions the portfolio’s month-end value (I only measure the value of the portfolio once a month) has declined by a maximum of 8% compared with a maximum decline in the All-Share of 13.5%, so by that measure as well, the portfolio has been less risky than an index tracker.
Looking just at 2014, and again measuring value at the end of each month, the model portfolio had a maximum drawdown in 2014 of 3.5% (falling from £73.3k to £70.7k) while the All-Share had a maximum drawdown of 4.5% (falling from £68.9k to £65.8k).
So again, even when measured over a single year, the All-Share was more volatile and “risky” than my model portfolio.
Best and worst holdings in 2014
While the overall portfolio is quite docile the underlying shares can be anything but.
I’ve written a lot about some of the portfolio’s holdings that have struggled this year, such as Tesco (down 43% in 2014) and Serco (down 55% since it was added in May), but it’s important to realise that many holdings have also done very well.
Two examples of stocks that did well in 2014 were JD Sport, up 39% during the year, and HomeServe, up 26%.
The fact that some holdings were up by around 40% while others were down by around 40% shows just how uncertain the stock market can be at the company level.
On the other hand, the portfolio increased in value by just 1.2% during the year and was up a maximum of 4% and down a maximum of 0.2% relative to its value in January.
So as I’ve said many times:
Focusing on the share price of individual companies is a recipe for disaster because the volatility can be terrifying, and being terrified is not conducive to good decision-making.
What matters, at least in a sensibly diversified portfolio, is the growth of the portfolio’s total income and capital value and not the dividends or share price of any one company.
Six winners were sold and six replacements were bought
I’ll draw this review to a close by highlighting the six companies that were sold and replaced during the year, out of a total of 30 in the portfolio.
As you may know, the portfolio follows a tortoise-like investment strategy of buying one company in January, selling one in February, and so on, in order to avoid knee-jerk and fear-based decisions.
So far I think that approach has worked well. The feedback I’ve had has been positive, with many investors liking the fact that it enables them to plan their trading and research activities in a more systematic manner.
Each company below was replaced with a new one which appeared to offer a better mix of income, growth, quality and value. I expect to hold each of those new companies for something like 5 years, although it may be much longer or shorter than that, depending on how the future unfolds:
Companies sold in 2014
- Aviva – Sold in January 2014 for a 32% return in 1 year and 9 months
- Mears – Sold in April 2014 for a 91% return in 3 years
- AstraZeneca – Sold in June 2014 for a 55% return in 3 years
- Royal Dutch Shell – Sold in August 2014 for an 18% return in 8 months
- Greggs – Sold in October 2014 for a 30% return in 2 years
- Imperial Tobacco – Sold in December 2014 for a 28% gain in 1 year 9 months