A wild ride in May, but portfolios continue to outperform

Co-founder of the Switzer Report
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The wild ride of the market in May showed that even for an income-oriented portfolio, sector diversification has a place to play. Financial and consumer staples stocks got smashed – material and energy stocks put on gains (see below).

So, even though our Switzer portfolios have sector biases, we still retain some exposure to the major sectors. Despite the movement in May, our portfolios continue to outperform the market over the first five months of the year.

Portfolio recap

Earlier this year, we rebalanced our Income Portfolio and introduced our Growth-Oriented Portfolio.

The income portfolio is forecast to generate a yield of 5.23% in 2013, franked to 98.3%. The construction process included:

  • Using a ‘top down approach’ and introducing biases that favour lower PE, higher yielding sectors;
  • To minimise the market tracking risk, adopting a rule that says our sector biases in the major sectors (financials, materials and consumer staples), will not be more than 33% away from index;
  • Identifying 15 to 20 stocks (less than 10 is insufficient diversification, over 25 it is too hard to monitor), with a stock universe confined to the ASX 100;
  • Within a sector, weighting the stocks broadly to their respective index weights, although there are some biases; and
  • Of course, we looked for companies that pay franked dividends and have a consistent earnings record.

The growth-oriented portfolio takes a very different approach to the sectors in that it introduces biases that favour the sectors we judge to have the best medium term growth prospects. Critically, it also confines the stock universe to the ASX 100 (there are many great growth companies outside the top 100).

Performance

The growth oriented portfolio is up by 9.93% and the income oriented portfolio is up by 8.65% (see tables at the end) for the five months to the end May. Compared to the benchmark S&P/ASX 200 Accumulation Index (which adds back income from dividends), the growth oriented portfolio has outperformed by 2.0% and the income portfolio by 0.7%.

Profit takers hit the yield stocks in May

Profit takers, particularly from offshore, crunched the financial, consumer staples and telco sectors during May. While still doing well on a year-to-date basis, gains have been materially cut back.

Energy and materials stocks in aggregate actually put on value in May – although gains tended to be confined to the core producing stocks such as BHP, Santos and Origin. Information Technology (IT), the smallest sector with a weighting of only 0.7% in the S&P/ASX 200 index, is the “star” on a year-to-date basis – up 21.3%. This is largely due to the performance of the largest stock in this sector, Computershare.

Income portfolio

The income portfolio is overweight financials, consumer staples and telcos, and underweight materials. It also has some stock biases – in particular, underweight CBA and overweight NAB.

During May, profit downgrades hit Coca Cola, AGL and (for a second time), UGL. While it is probably unlikely that UGL will recover in the short term, we feel that at around $7.00 it is too cheap to sell. On a sector basis, we are within our sector parameters and will review these again at the end of June and re-balance the portfolio.

On the income side, special dividends from Westpac and Woodside assisted. With the dividend season for the first half out of the way, the portfolio has returned a gross 2.64%, franked to 96.6%. As dividends are traditionally a little higher in the second half, the portfolio should exceed the forecast 5.23% per annum. Details of the portfolio and its performance are listed below.

Growth-oriented portfolio

The growth-oriented portfolio is overweight stocks in the materials, energy and healthcare sectors, underweight financials and consumer staples, and broadly index weight the other sectors. Stock selection in the financials (strong bias towards NAB and the selection of a regional in BOQ), as well as in the health care and industrials sectors, is offsetting the underperformance of the material stocks. The portfolio is:

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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