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Growth -v- income and the right kind of growth stock

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Question: We are retired and have an SMSF worth about $1 million. We have 80% in shares and 20% in income securities. We have a total of nine holdings, including banks, Telstra, BHP, Woodside etc. and are both 70.

We recently sold NAB and Wesfarmers and bought BOQ and more Telstra. We have a stockbroker for these trades and it was on his suggestion that we sold. What is your view on the number of holdings and percentage of shares versus cash?

Answer (By Paul Rickard): The ‘number of holdings’ question is a little easier. There are lots of studies on this. Basically, they show a minimum of eight, with benefits still up to around 15 to 20 individual holdings. Personally, I prefer more rather than less – so I would be more inclined to be in the high teens. Over 25 holdings, it gets too hard to manage and keep track of the individual companies.

Allocation between growth assets (like shares) and income assets – this depends on your investment objectives, timeframe and risk appetite. Prima facie, an allocation for two retirees aged 70, split 80% growth and 20% income looks to be on the high side. I can’t say that this is incorrect for you – I can just offer a generalised comment.

Question 2: I was wondering if you could please provide me with your opinion on the following stocks, and if they would be a good inclusion to a growth portfolio?

Crown Resorts, Genworth Mortgage Insurance, Domino’s Pizza Enterprises, ANZ Banking Group, Suncorp Group 
and Telstra Limited.

Answer 2 (By Paul Rickard): If you think of “growth” like I do, I wouldn’t define Genworth or Telstra in that category – they are almost utility style businesses.

That doesn’t mean that the share price won’t increase – it just means that it is very hard for management to influence the growth in business outputs. Either they are near monopolies (Telstra) or they don’t have a lot of direct leverage over the inputs to their business (e.g. Genworth, with the number of mortgages with loan-to-value ratios (LVRs) over 80%).

Crown Resorts and Domino’s Pizza would meet my test of a “growth” business, ANZ is a potential (if you believe they are serious about its Asian strategy) and Suncorp, maybe, however, I don’t like insurance businesses.

So, barring price issues – yes to Crown and ANZ. While Domino’s has a great track record, it is trading on some pretty heady multiples – 40.7 on FY 14 and 32.2 on FY15. There are a lot of growth expectations already build into the current share price.

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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