Page 8 - DIY Investor Magazine - Issue 23

BUILDING RESILIENCE INTO A PORTFOLIO
By Iain Pyle
Investment Director, Shires Income PLC
• The outcome for the UK economy is uncertain and resilience is likely to prove important
• Keeping a balance between high growth and higher yield, and between domestic and international builds resilience
• Income is likely to be a driver of returns in a low-growth environment
Uncertain times can leave investors exposed; particularly those who have neglected to build resilience into their portfolio.
As the economic cycle matures and the outcome for the UK economy appears more uncertain, what strategies can help shore up a portfolio?
It is easy to paint conflicting scenarios for the UK today.
‘THE ECONOMY HAS REMAINED RESILIENT AND WERE THERE TO BE SOME RESOLUTION TO BREXIT, IT IS EASY TO SEE HOW IT COULD START TO IMPROVE’
There is plenty of economic uncertainty, as GDP and consumer spending figures deteriorate.
On the other hand, the economy has remained resilient and were there to be some resolution to Brexit, it is easy to see how it could start to improve.
With this in mind, it seems like a foolhardy moment to take binary bets on the domestic economy, assuming that one or other scenario will come to pass. It is a moment to ensure that a portfolio is resilient in either outcome, rather than having to worry which way the wind is blowing.
How can you build this resilience into a portfolio? Certainly, income is important. Even if the stock market has further to run, and the economic cycle can continue a little longer, this particular expansion is closer to the end than the beginning.
There is less growth on offer and income is likely to become a more important part of an investor’s potential return.
At Shires Income Trust, we shore up our income stream with the use of preference shares. While the capital performance is unlikely to deliver significant returns, they aim to pay a steady 6-8% income. Companies generally don’t issue them anymore, which helps sustain demand.
Having a high income from the preference shares gives us freedom in the remainder of the portfolio.
This has proved important in recent years as investors have favoured high growth equities, at the expense of higher yielding equities. Historically we have been able to hold some successful higher-growth, lower yielding companies, which have supported capital performance.
Today, we believe holding a balance between these two types of company is vital: while valuations for high growth stocks look high, if interest rates stay low it is not clear that this situation will change.
Higher yielding and ‘value’ stocks look cheaper, but are likely to provide less capital growth over the long term. As such, being able to hold a balance is a way of building resilience into portfolios. We don’t want to
‘LESS GROWTH ON OFFER AND INCOME IS LIKELY TO BECOME A MORE IMPORTANT PART OF AN INVESTOR’S POTENTIAL RETURN’
DIY Investor Magazine | Oct 2019 8