Time to start rebalancing club’s portfolio by selling off and investing the proceeds in equities

Generally, if the Budget took money out of the economy by partly removing child benefit for example, or freezing over 65s’ income allowance (the “Granny tax”) or even making an unwavering commitment to deal with Britain’s record debts, this is beneficial to the club’s unit price.

Conversely, if the Chancellor injects money into the economy by raising personal tax allowance to £8,105 from April 2012, or cutting corporation tax from 26 to 24 per cent, then this adversely affects our unit price.

But these alterations are really at the margin in the overall scheme of European sovereign debt. If, Greece leaves the euro, for example, gilts would shoot up regardless of the Budget tinkering. However, this has not happened and the club’s unit price slumped to £3.20 at the end of March.

While the club’s paper and pencil analysis still feels the European debt crisis is not over, we have to contend with the economic realities of a rising stock market. In recognition, we are starting to rebalance the portfolio towards equities and away from bonds.

With the spare cash available to the club we bought 2,224 Meggitt shares at £4.07 on 9 March 2012, with a price expectation of around £5.15 before year end. Not heard of it? Neither had we until our analysis highlighted its price action.

Meggitt supplies the aircraft industry with components such as sensors and braking systems.

Last year its underlying revenues increased by 25 per cent and profit before tax by 26 per cent and it forecasts revenue growth of 6 to 7 per cent over the next five years. This isn’t altogether unrealistic as Airbus alone has an eight-year order book.

Any cyclical aspects of the aero industry can be ironed out with strong aftermarket supply and energy sector expansion. But the main engine of growth will be on the civil aviation side with sales to Airbus, which is increasing production by about 10 per cent this year, and Boeing, which is ramping up production by 32 per cent this year.

The rebalancing of the club’s portfolio is proving quite problematic, thanks to the undated gilts we hold.

What has happened is that over the years the government has slowly depleted the value of stock in issue. Subsequently, the market has become less liquid and the spread has opened out to about 10 per cent.

This means the club’s unit price is more distorted the larger the percentage of the club’s assets that stock represents. Over the years there has been an insidious erosion of transparency, in particular for the 4 per cent consolidated stock we hold.

One way to lessen this distortion is to sell the other holdings of gilts we have and buy equity with the money released.

If these shares then grow in value, eventually the consolidated stock constitutes such a minimal percentage of the club’s overall value that the unit price reflects more accurately the club’s real worth.

So this is the direction in which the club is going.

We will start the rebalancing process by making sales of stock other than consolidated and investing the proceeds in equities.