It has been just over a month since we introduced our ‘income biased’ portfolio of stocks to the Switzer Super Report (read, Our high-income portfolio [1]) and several subscribers have requested that we provide regular updates on how it’s performing.
Before moving to the update, a quick recap on its construction:
- We started with a ‘top down approach’ looking at the sectors, and introduced biases that favour lower price to earnings (PE), higher yielding sectors;
- So that we are not overly exposed to a major market move in the major sectors (financials, materials, consumer staples and energy), we have made sure that our sector bias is not more than 33% away from index;
- We eliminated property trusts (as there is no real tax advantage to an SMSF), the IT sector is too small, and from an industry perspective, we are not real fans of the consumer discretionary sector. Consequently, we are overweight in financials, consumer staples, utilities and telecommunications; underweight in materials, energy and consumer discretionary; and broadly index-weight in healthcare and industrials;
- We are after 15 to 20 stocks (less than 10 is insufficient diversification, while over 25 is hard to monitor); and
- We confined our stock universe to the ASX 100, avoided chronically underperforming industries (in an Australian context) such as airlines or general insurance, and of course, looked for companies that pay franked dividends and have a strong record of earnings consistency.
Our income biased portfolio (per $100,000 invested) and its performance over the period is as follows:
The portfolio has the following characteristics:
- Forecast PE: 11.4
- Forecast Dividend Yield: 5.82%
- Franking: 97.2%
In accumulation, the 5.82% dividend yield will translate to 6.87% (after tax), and in pension phase, the income return will increase to 8.08%.
In a bull market, we would expect the income-biased portfolio to underperform relative to the standard S&P/ASX 200 price index due to the underweight position in so called ‘growth’ stocks. Conversely, in a bear market it should moderately outperform. However, it’s income that we’re after, so we will measure the performance against the S&P/ASX 200 Accumulation index. That said, the accumulation index doesn’t take into account the taxation benefits to an SMSF that come from selecting fully franked stocks.
So, how is it doing on a relative basis? It’s up 2.09!
So far so good – however, it is very early days. This is not dividend season (February/March), and none of our stocks have declared a dividend during the first five weeks. We will also start to see in the coming months greater divergence between the Price Index and the Accumulation Index.
Two other points to note. As can be seen from the prices of the stocks above, the first weeks of the calendar year have witnessed quite a change in market sentiment towards resource-based stocks such as BHP and RIO – this is a bullish statement. Secondly, David Jones got caught up in the JB HiFi profit downgrade, and although there has been no new news from DJs, some analysts have reduced their forecasts.
We will keep a close eye on the portfolio and report back in coming editions of the Switzer Super Report.
Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: Can stocks continue to rise? [2]
- Rudi Filapek-Vandyck: The broker wrap: Three buys amid the downgrades [3]
- George Boubouras: How global growth cuts impact your portfolio [4]
- Tony Negline: How to convert your SMSF into a corporate trustee [5]