Last Updated September 5, 2013
After a record breaking start to the year, the FTSE 100 index tracking unit trust which is the benchmark for the UK Value Investor model portfolio, was up 6.3% in January alone. The model portfolio managed a very similar 6.5%.
Over the past year the results are equally similar, with the index tracker up 20.2% and the model portfolio up 20.7%. Finally, from inception in March 2011, the index tracker is up 16.9% with the model portfolio ahead once again at 19.4%.
The portfolio is focused on high quality companies, and buys them when they are attractively priced. These companies tend to be large, and currently 54% of the portfolio’s holdings are in the FTSE 100. So to some extent it shouldn’t come as a surprise that the two are so closely correlated, as you can see in the chart below.
These results include trading commissions and stamp duty.
The portfolio currently has 24 holdings, and is gradually expanding to 30. While this is somewhat more concentrated than the FTSE 100, it’s a reasonable trade-off between reducing risk while still being manageable.
In some ways the model portfolio is more diverse than the FTSE 100, as no more than two holdings are allowed from any one FTSE 350 sector.
In January N Brown (figleaves.com, SimplyBe, High & Mighty) left the portfolio and returned 52.4% in eight months, giving an annualised return of 91%. These results are way above what should reasonably be expected, but sometimes it’s nice to be lucky.
One advantage of holding individual shares over funds is the continual flow of dividends into your cash account. While the index tracking unit trust pays out only twice a year, the model portfolio pays dividends in every single month.
In January the payments received were just £69 (on a portfolio valued at just under £60,000 virtual pounds), but over the past 12 months the total income has been £2,644, which gives a historic yield of 4.4%. That’s over 40% better than the 3% historic yield of the index tracker.
Another good use of dividends is as a more robust measure of underlying value than the capital value of a fund. As we know from the late 90s boom and the 2003 and 2009 busts, the capital value of an index or portfolio can swing wildly up and down. However, dividend income is typically far more stable. The progress of the income paying ability of a portfolio is a good way to measure progress in your investments.
For example, the index tracker unit trust benchmark paid an income of £1,531 in 2011, and followed that up in 2012 with £1,742. That’s an increase of 13.8% as dividends recovered from cuts implemented after the banking crisis. For the model portfolio, the 12 month rolling dividend payments have gone from £2,267 six months ago to £2,644 today. That’s an increase of 16.6% in a relatively short period of time.
These dividend increases give me confidence that the portfolio hasn’t just gone up in terms of capital value, but has also increased its intrinsic value.
Winners and losers
The portfolio’s biggest gainer in the last month was Interserve, which was up 17.3%, while Aviva dropped 7.6%. These short-term movements are almost always irrelevant, but they do show just how volatile the stock market can be, even over very short time periods.
It’s this volatility that smart investors will seek to take advantage of, and rather than being afraid of volatility, they welcome it as an opportunity to buy low and sell high.
Disclosure: I own shares in Interserve and Aviva.