I’m 62 and operate an SMSF in pension mode. My fund is more than 99% in Australian equities and last financial year I used the bring forward rule to add close to 3 x $150,000 to my fund. As a result, I can’t make anymore non-concessional contributions this or next financial year.
I expect to add $50,000 in concessional contributions later in the year. I have a defined benefits pension from university (I was Professor of Econometrics at UNSW), but that pension was substantially reduced because I retired early at 55. My partner and I could just about survive on this pension, but it would mean a big change in lifestyle. However, the guaranteed reversionary, index-linked nature of this pension means I can take on more risk in my SMSF than I otherwise would.
I consider myself highly skilled in managing equities. I use the quantitative skills I developed during my 35 years as an academic and consultant to major companies and government departments (I spent eight years at the CBA as General Manager, Quantitative Research & Investment Strategy and Chief Investment Officer). One of my major jobs was to design equity portfolios for high net worth and ultra high net worth clients.
I plan to try and achieve a number of outcomes in this column. I will write a series of consecutive columns, available every fortnight, to outline a particular investment strategy in the hope that it helps readers to think more clearly about their own strategies. I will also provide some of my rules on managing portfolios. And I will comment on my ‘current’ feelings about the market – including some of my actual behaviours in trading.
A few words of warning before we begin. The general advice warning is important – not just because it is a legal statement – but different people do need different sorts of advice. I strongly suggest anyone interested in my ideas use these columns as a platform to develop thoughts and questions for your adviser who understands your needs. I must stress that past performance is not a reliable indicator of future performance. Equity markets are risky and the GFC should have taught us all that equity portfolios can destroy wealth quicker than they create it. That being said, let’s look at what I’ve been buying lately to add some colour to my philosophy.
On Monday I bought some Commonwealth Bank (ASX:CBA ) to add to my holding. My expectations from my modelling are that I will not make much of a capital gain over the coming year from CBA but I do expect to make around 10% yield including franking credits. At 62 in pension mode, dividends are tax free and franking credits are repatriated to me. I calculated how much I needed to withdraw from my pension (3% of my SMSF this year) and topped up my bank stocks accordingly. I also hold Westpac (ASX:WBC) but no other finance stocks. These two stocks help get my dividends over the 3% line. If the market turns badly this year – which I do not expect, but I always allow for – I do not want to have to sell stocks at a low point to generate my income stream.
Last week I bought some Cochlear (the hearing aid manufacturer, ASX:COH) and some Boart Longyear (the international drilling company, ASX:BLY). Cochlear has traded in a wide range for some time so I’m often tempted to ‘top up’ when I think it’s cheap.
I’m most keen on the mining services sector for capital growth, but I naturally have a cap on how much I’ll hold in that sector for diversification reasons. I built up a position in Emeco Holding (the mining services company, ASX:EHL) over the last few months in about six different parcels – to try and reduce the risk of buying at too high a price in a sideways market. My last purchase of BLY will probably be my last for some time. That completes my preferred allocation to the mining services sector.
I have a well-defined plan that I built up over the years. I started watching EHL about a year before I actually started buying. I started buying BLY before the GFC. Only a small parcel at first – which was good because it fell by over 90% in the GFC. As it re-engineered its debt problems, I started buying more.
I try and follow my stocks very closely – I hold 17 at the moment and I’m watching about half a dozen. I can’t follow too many stocks so I keep my attention focused on less than 25. I don’t mind if I miss an opportunity. However, I do try to avoid – or at least minimise – losses by updating my homework on my stock list every day. Excluding profit taking, I only sold one stock last year – Harvey Norman (ASX:HVN) – but more on that next time.
In the next few columns, I plan to write about what I don’t want to buy – sectors and stocks within ‘good’ sectors. Exclusions are so important as they limit the universe of stocks you have to pay attention to. Then I will turn my focus on my stock selection methods.
Woodhall Investment Research Pty Ltd
ABN 17 141 486 160
General Advice Warning: This note has been prepared without taking account of the objectives, financial situation or needs of any particular individual. Any individual should, before acting on the information in this note, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
