PORTFOLIO TRACKER: Added diversification sustains portfolio

By John O’Donoghue, Consultant Adviser, Caratfin Ltd.

 

This has been a tough month. The one month charts for the markets we frequently refer to in this column look very much like particularly nasty roller coaster rides, though –thankfully – the end points are reasonably close to the start points, as is the case with a roller coaster! The FTSE is -1.35% for the month, the Dow -1.46%, and the S&P 500

 -1.61%. Our medium risk portfolio has fared well enough in the circumstances, and has a small fraction of a loss to show for itself – it is down $208.00, -0.1% on the last total, and is +102.5% overall. With two months to go before the end of Year 4 we have shown a 24.4% growth for the year to date, which is very satisfactory.

The markets became very negative at the end of the first week of June, and a correction looks more and more likely, which is why the period saw some major changes in allocation. These focused on the Property sector, where we cashed out the Aberdeen Property Share (a very badly timed selection, sorry!) and Henderson’s Global Property Equity. The Aberdeen fund had lost 15% of value since it was purchased in April, and the Henderson fund, while up just over 2% in 2007 to date, dropped 7.5% in price through the month. These performances are reflective of the general situation with Property, a sector which has done very well in the last two years but is having a very difficult time of it this year. Three property funds remain in the portfolio for the time being: the Armstrong Residential High Yield, which is based primarily on rents rather than property values or development, sails on untroubled delivering in the region of 9 – 10% per annum in Sterling, and considerably more than that to the Dollar portfolio; the Morgan Stanley Asian Property fund, which marches to a different drum beat from the European, US and global funds; and the Insinger European Real Estate fund. European funds have been hardest hit in all this, but the damage to the Insinger asset has been moderated by the fund’s ability to take short positions, which is a considerable help in determinedly negative markets. This exodus from property, I would add, mirrors what is going on in my real life client portfolios, as does what I’m doing with the proceeds of encashment.

In dollar terms we have raised just over $68,500 from the three sales, and we’ve spent it on six funds, four of which are new to the portfolio, and two top-ups (surely “tops-up”!). The latter are $5,000 equivalent in Euro to build the share of the SAM Smart Energy fund, which now reaches 3.5% (and note that the first tranche of this beauty, bought a month ago, has produced +8.9%), and $20,000 into the FMG Rising 3 fund, a hybrid half long-only and half  hedge, dealing in Russia, India and China with great success. If there is to be a correction I want to beef up our Derivative holdings, and with the Man fund this sector now makes up 15% of the portfolio. For the first time for quite a while I have found a bond fund worth holding and $10,000 has been used to buy units of JP Morgan’s Global Convertible Bond A $ Accumulation. The fund produced 12% last year, and is on just over 6% year to date – long may this last! My conviction that we should hold good levels of ‘Resource’ type securities grows stronger as the threat of a correction increases, and I couldn’t resist using $10,000 to cover off a niche area as yet uncovered in this investment: we add the ING Invest European Materials Capitalisation € fund. More on this in the future, I’m running out of space here! The remaining two purchases add diversity to the range of equities we hold, and while a small number of what I call ‘exotic’ holdings will ratchet up the overall risk profile of the portfolio, they tend to increase the level of non-correlation to the point where a bit more risk is well worth it! We have added the Nordic region ($13,365), and Central Asia ($10,000), and consider this: had the portfolio remained as it was, no changes, it would have stood at +99.4% total growth. With changes, and some exotica, a fortnight ago, we’ve added over $10,000 and stand at +102.5%. That’s what diversification can do.

OK, times up, the Editor’s yelling at me! The low –risk portfolio wasn’t immune to the markets, and with minor price improvements in the Ashmore and Premier Property funds the performance was disappointing, with the increasing weakness of the Dollar not helping at all. This continuing $ weakness has turned Ashmore’s role in the portfolio into a hindrance, and it’s time for a change in the one fund in the portfolio designed to add some sparkle. Perhaps, something ‘exotic’…Baltic Opportunities, anyone?

 

* Caratfin Ltd. is authorised by the Central Bank of Cyprus and is a member of CIFSA. Tel: 22 464190, e-mail: [email protected] and [email protected]. Website: www.caratfin.com