Last week, we updated our income biased stock portfolio. This week, we introduce our growth biased portfolio.

Critically, the purpose of these portfolios is to demonstrate an approach and methodology to portfolio construction that SMSFs could apply.

In relation to this growth biased portfolio, we need to state some important caveats upfront. Firstly, recognizing the importance of tax effective income from dividends to the overall portfolio return, and a general aversion by many SMSFs to taking excessive risk, our sector biases are not strong. While there is an orientation to the sectors and stocks that we believe will grow over the medium term, our aim is to design a portfolio that will also track reasonably closely to the overall market, as measured by the S&P/ASX 200 Accumulation Index. It is a bias only towards growth.

Secondly, our universe of stocks to select from is, by in large, confined to the top 50 stocks. More often than not, the stocks with the best medium term growth prospects will come from outside this group, in particular, the so called ‘mid’ caps.

With these caveats decked, let’s move on to the portfolio construction.

Sector biases

Similar to our approach to the income biased portfolio, we are applying a ‘top down’ approach to the industry sectors and introducing biases that favour the sectors that have the best medium term growth prospects. These are the ‘materials’ sector (metals, but not paper & packing or building materials), ‘energy’ and ‘health care’.

Asian demand for hard commodities, through industrialisation and urbanisation, should drive continued growth in the ‘materials’ and ‘energy’ sectors. Notwithstanding that ‘healthcare’ was the best performing sector on the ASX last year, we maintain that the growth in healthcare spending by western governments, together with this being one of the few industries that Australia can claim a position of leadership, creates favourable long term growth prospects for this sector.

Conversely, the sectors where we propose to invest less than their index share are ‘financials’, ‘consumer staples’, ‘property trusts’ and ‘telecommunications’ – the so called “defensive” sectors. With the banks, revenue growth is low single digit and, arguably, they are expensive compared to their international counterparts.

On a sector basis, our portfolio compares to the market (S&P/ASX 200) as follows:

Stocks

Working on the basis that we need at least 10 stocks for diversification and that once you get over 25, it becomes pretty hard to monitor, we have selected 22 stocks. This is more than the income biased portfolio, reflecting, in part, the increased risk in stock selection.

In the ‘consumer discretionary’ sector, we have avoided the retailing industry (where challenges from online retail continue to threaten the “bricks and mortar” stores) and selected Crown Limited from the consumer services industry. With ‘consumer staples’, we marginally favour the conglomerate Wesfarmers over Woolworths.

Of the ‘financials’, we continue to avoid insurance companies, and have taken a marginally overweight position in NAB and the ANZ (the former because it is “cheap”, the latter because it provides a little more exposure to growth outside Australia), and are marginally underweight Commonwealth Bank and Westpac. We have also added a regional bank for recovery/growth – Bank of Queensland.

In ‘health care’, we have included CSL, Primary and Ramsay. Although Computershare is classified as ‘information technology’, its global registry business provides good exposure to recovering stock markets and the resultant increase in primary market issues.

With ‘materials’, we are overweight the ‘metals and mining’ sub-sector through exposure to the diversified miners BHP and RIO. We have avoided gold stocks, and included Orica. As a supplier and manufacturer of commercial explosives and mining chemicals, Orica also provides exposure to the mining industry.

Portfolio

Our growth biased portfolio per $100,000 invested (using prices as at the close of business on 31 December 2012) is as follows:

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.

Also in the Switzer Super Report:

• Peter Switzer – Stocks to beat 5000-level
• Rudi Filapek-Vandyck – The broker wrap: 32 changes in individual stocks
• Tony Negline – Clause and effect: important, but controversial parts of superannuation