With our weightings largely unchanged, scales have yet to tip in favour of rebalancing

Income portfolio should easily meet its 5pc target, and year two should offer further rewards

SEVERAL readers of Questor’s Friday Income Portfolio column have written to ask about “rebalancing”.

In other words, as our portfolio of 24 holdings now nears its first year-end (our debut investment was made in mid-october 2016), has it become out of kilter? What has happened to those holdings that were at the outset our bigger weightings? In what has been an extremely interesting time for income investors – we went from post-referendum angst with a halving of Bank Rate to a posttrump certainty that growth and inflation were imminent – there have been some great successes and some disappointments. In general, our biggest capital losers have been those larger-cap stocks most associated with dependable income. As markets anticipated a return to higher rates these have fallen from favour. (They have done their job of paying dividends, however.) And our biggest capital gainers have been smaller businesses operating in niche areas and which are, in some cases at least, not great dividend payers.

The latter tended to be smaller positions at the outset.

The question now though is what adjustments, if any, to make. Rebalancing is usually undertaken – where possible – to manage risk. A holding that rockets in value can skew the whole. We saw last week in the publication of Woodford Patient Capital’s (WPCT) interim results that Purplebricks, the newmodel estate agency, now makes up 11pc of WPCT’S £853m portfolio (Purplebricks’s shares are up 230pc this year to date). The board of WPCT is happy with this and with the fact that just three holdings account for

34pc of the portfolio: shareholders are clearly warned that the portfolio “may become more concentrated as value emerges, resulting in some holdings becoming very significant as a

proportion of the Company’s portfolio.” But in other cases, portfolio managers are less content with dominant positions. A fascinating case is the £172m Lindsell Train Investment Trust (LTI) where, astonishingly, the trust’s stake in the unquoted fund management firm that oversees its own assets is now valued at 37pc of the trust’s total worth (March 2017). The holding contributes more than 70pc of the trust’s entire revenues and so there is dividend risk here, too. The trust’s board thus finds itself in the peculiar position of warning new investors away, saying that the trust’s current valuation is “probably unjustified” and “unlikely to be sustainable”.

Do readers know of other cases where a board has warned shareholders in such emphatic terms that their company is overvalued?

Questor’s income portfolio needs to be wary of concentration risk but also of the security of future income. Our aim was to generate a sustainable 5pc income stream and so far we are on track: in percentage terms a total return to date of 10.5pc comprises roughly 4pc distributed income and 6pc capital growth.

A number of interest and dividend payments will be made in the next few months. The portfolio has been more or less fully-invested only for seven months, and so looking ahead to year two – assuming that distributions remain at current levels – income should be higher.

As the table shows, none of the best or worst-performing holdings has significantly departed from its original weighting.

But there could be cause, at the end of the first year, to sell some of the better-performing, lower-yielding holdings either to pocket the gains as an income top-up (if required) or reinvest in other holdings where yields have improved.