- Healthcare was the star performer in November. Year to date, this sector is up 17.8% – second only to the property trust (A-REIT) sector which is up 21.6%.
- The income portfolio continues to outperform the index. While sector selection is helping through the moderately overweight positions in financials and telecommunications, stock selection is playing a key role.
- Our stock selections that favour a lower Aussie dollar in our growth portfolio – CSL, Brambles, Resmed, Amcor and Computershare – continued to perform relatively strongly – and have started to reduce the underperformance margin.
Plunging oil and iron ore prices caused the Australian share market to lose ground in November. The Australian market lost 3.3% during the month, with the energy sector down 13.3% and the materials sector shedding 5.5%. Year to date, the market (when dividends are included) has returned 3.5%.
Our portfolios largely maintained pace with the market, with the high-income portfolio continuing to perform strongly. In this our eleventh review for the year, we look at the composition and performances of the portfolios. Our high-income portfolio is up by 5.3% and has outperformed the S&P/ASX 200 this calendar year by 1.8%, while our growth-oriented portfolio is up by 0.8%.
Portfolio recap
In January, we made some adjustments to our Australian share ‘Income portfolio’ [1]and ‘Growth-oriented portfolio’. [2]
The purpose of these portfolios is to demonstrate an approach to portfolio construction. As the rule sets are of critical importance, we always commence a review by briefly recapping the key portfolio construction processes applied.
The income portfolio is forecast to generate a yield of 5.01%, franked to 90.4%. The construction rules applied include:
- 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 it 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 is up by 5.31% and the growth-oriented portfolio by 0.81% (see tables at the end). Compared to the benchmark S&P/ASX 200 Accumulation Index (which adds back income from dividends), the income portfolio has outperformed the index by 1.83% and the growth oriented portfolio has underperformed by 2.67%.
Healthcare stars in a pretty bleak month
Whether it was the follow on impact from the Medibank IPO, a softening Aussie dollar or just switching out of the beleaguered energy and material sectors, the heathcare sector was one of only two sectors to generate a positive return during the month. Year to date, this sector is up 17.8% – second only to the property trust (A-REIT) sector which has returned an astonishing 21.6%.
At the other end of the market, plunging oil and commodity prices impacted Australian resource stocks hard. The energy sector, which includes companies such as Woodside, Santos, Origin and Oil Search fell 13.2% during the month. The materials sector, which includes the iron ore majors such as BHP, RIO and Fortescue, shed 5.5% to be down 11.4% for the year.
Continuing a major investment theme of both 2013 and 2014, the yield sectors, in the main, continued to be among the better performers. While the dominant financial sector, which makes up 40% of the index, lost 2.1% for the month, it is still up 7.2% for the year. Property trusts, utilities and telecommunications (which is mainly Telstra) all enjoy double-digit returns. The one exception is consumer staples, which was dragged down by a 13.6% fall in the share price of Woolworths during the month.
The table below shows the sector weights (as a proportion of the S&P/ASX 200), and performances (total return) for the month of November and for the 2014 calendar year.
Income portfolio
The income portfolio is overweight ‘financials’, ‘consumer staples’, ‘utilities’ and ‘telecommunications’; underweight ‘materials’ and ‘consumer discretionary’; and broadly index-weight the other sectors. It also includes an allocation to ‘property trusts’ (formally called the A-REIT sector), and somewhat more exposure to the “cyclicals” through the selection of stocks from the ‘industrial’ sector.
With these sector allocations, we would expect this portfolio to moderately underperform relative to the benchmark price index in a strong bull market, and moderately outperform in a bear market.
For the first 11 months of the year, the portfolio is outperforming the index. While sector selection is helping through the moderately overweight positions in financials and telecommunications, stock selection is playing a key role. The inclusion of stocks such as Leighton, Orora and Dexus is compensating for the poor performance of stocks such as AGL, Primary and more recently, BHP. A slight bias to stocks that will benefit from a weaker Aussie dollar, such as Brambles, is also assisting.
The income portfolio is forecast to generate a yield of 5.01% in 2014, franked to 90.4%. With all companies except Dexus having declared their final dividend for the year, we can now confidently predict that the realised yield on the portfolio should marginally exceed the original target.
Our income biased portfolio per $100,000 invested (using prices as at the close of business on 28 November) is as follows:
Click here to view larger image [3]
Income includes dividends declared and payable.
*Wesfarmers includes $0.75 return of capital, $0.25 special dividend and 1:0.9827 share consolidation. **AGL rights following 1:5 renounceable issue at $11.00, assumed sold on last day of rights trading at $2.62. ***Assumes 37.5% Leighton shares sold in partial offer at $22.50, repurchased on 30/4 at $19.08.
Growth portfolio
Similar to our approach to the income portfolio, we applied a ‘top down’ approach to the industry sectors and introduced biases that favour the sectors that we feel have the best medium term growth prospects. The growth-oriented portfolio is overweight ‘healthcare’, ‘consumer discretionary’ and ‘industrials’; underweight ‘financials’ and ‘property trusts’; and largely index weight the other sectors including ‘materials’.
Critically, we have biased the stock selection to companies that should benefit from a falling Australian dollar – either because they earn a major share of their revenue offshore, or report their earnings in US dollars – such as CSL, Amcor, Brambles and Computershare. Other biases include Woolworths over Wesfarmers (which has suffered over the last couple of months), CBA and Westpac over ANZ and to a lesser extent NAB; and the selection of Crown and JB Hi-Fi.
At the end of May [4] we decided to make some changes to the portfolio. We reduced our exposure to the ‘materials’ sector by selling our holding in Rio for a loss of $391, exited our holding in Primary Health Care for a loss of $291 and replaced this with Resmed, and increased our exposure to the ‘consumer discretionary’ sector through additional holdings in Crown and JB Hi-Fi.
The portfolio is lagging the index by 2.7%. Our bias away from the yield sectors (for example, no property trusts) is hurting, and the performance of our stock selections in the consumer discretionary sector (Crown and JB Hi Fi) has been very disappointing. While the market doesn’t presently agree with our selections, we remain confident that both these companies have sound medium-term growth prospects and are reasonably priced
Our stock selections that favour a lower Aussie dollar – CSL, Brambles, Resmed, Amcor and Computershare – continued to perform relatively strongly – and have started to reduce the underperformance margin.
Our growth-oriented portfolio per $100,000 invested (using prices as at the close of business on 28 November 2014) is as follows:
Click here to view larger image [5]
Income includes dividends declared and payable.
*Prices of Crown (new), JB Hi-Fi (new) and Resmed (new) as at 30 May. ** Wesfarmers includes $0.75 return of capital, $0.25 special dividend and 1:0.9827 share consolidation. *** AGL rights following 1:5 renounceable issue at $11.00, assumed sold on last day of rights trading at $2.62.
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.