Analysis & Comment:
Previous 'Model Portfolio'
Model Portfolio : 28 December 2011
The Fixed Income Investor Model Portfolio* is now slightly short of its fourth birthday, and what a four years those have been. We kicked off about eight months in front of the credit crunch and have experienced the greatest volatility that I have ever seen in my 25 years in and around the fixed income markets. Such volatility is not a normal characteristics of the bond markets and it has brought with it both opportunity and risk. By-and-large, the best tactic has been to weather the storms, picking up bargains as they appear.
What is encouraging is that although the volatility of the individual bonds has been high, portfolio volatility has been lower - generally around 1% a month. That shows that my basic approach, namely a "ladder" structure of short-to-long bonds plus a diversification overlay is working. I certainly intend to keep plugging away with this approach.
This month, we have added a holding in the new Intermediate Capital Group bond. The 7% coupon and medium-dated maturity looks to be a good fit. This purchase drops our univested cash down to six thousand pounds and I will continue to look for a home for the money. The problem with cash positions in a low interest rate environment is that they are a drag on performance. The flip side is the marvelous optionalty such cash creates. Itís a hard call to make.
Overall, we finish the month just £200 up from our last valuation at £125,627 on a total return basis. That put the portfolio up £8,222 from this time last year, a percentage increase of 7%. Itís a fairly satisfactory result, beating cash and equities without too many heart-stopping moments en-route, although it is notable that the gains were all made in the first half of the year. The chart shows the portfolioís performance overlaid against the IBOXX5-10yr Non-Gilt Total Return index.
To compare, the FTSE is has returned about -3.8% for 2011 on a total return basis (although we still have two trading days to go).
Of course, we could have done better. Had I shifted the whole portfolio into to gilts at the beginning of the year, the gains would be in double digits. Ten-year gilt benchmarks are up 12 points in price terms on the year; the five-year is up seven points. However, I will not spend too much time looking over my shoulder. The Model Portfolio is doing what it should, namely providing reasonable returns at reasonable levels of risk.
I look forward to the challenges of next year.
* The Model Portfolio was started in Feb 2007 with £100,000