As BHP and RIO bounce back, SSR portfolios outperform

Co-founder of the Switzer Report
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A great start to the financial year saw the Australian share market put on 5.2% in July. This was led by a healthy 9.3% gain for the ‘materials’ sector (dominated by stocks such as BHP and RIO), followed by ‘financials’ with a rise of 6.4%. In this environment, our portfolios continued to perform well, largely maintaining their relative outperformance.

Portfolio recap

In January, we made some adjustments to our Australian share ‘Income Portfolio’, and introduced a ‘Growth Oriented Portfolio’.

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

To construct the income portfolio, the processes we applied included:

  • Using a ‘top down approach’ and introducing biases that favour lower PE, higher yielding industry 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 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 that 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 income-oriented portfolio to 31 July is up by 13.81% and the growth-oriented portfolio is up by 13.38% (see tables below). Compared to the benchmark S&P/ASX 200 Accumulation Index (which adds back income from dividends), the income portfolio has outperformed by 2.9% and the growth-oriented portfolio has outperformed by 2.4%.

Most sectors up in July

Only the IT and property trust sectors finished in the red in July. Surprisingly, one of the sectors that you might expect to benefit from a weaker Aussie dollar, the industrials sector, made heavy weather of it, and is the second weakest sector on a year-to-date basis with a gain of only 2.4%.

Income portfolio

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

With the relative outperformance of financials in July, the portfolio’s weighting (by market value) to this sector is now 48.8%. This is still within one of our major portfolio construction rules, that states that our biases in the major sectors will not be more than 33% away from index. As there is no immediate need to rebalance the portfolio, we have deferred this again. On the stock selection side, while we obviously got the call wrong to include UGL, at around $7.28, we feel it is too cheap to sell.

For income, the portfolio has returned 2.68%, 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. Orica, in particular has disappointed, with a shock profit downgrade in July. Current sector weights are within the parameters of the portfolio construction rules. 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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