The purpose of our model portfolios (income and growth) is to demonstrate an approach to portfolio construction that SMSFs or personal investors could apply.
We’ve made some changes to our portfolios for 2025 to consider the dominant investment themes we expect to apply. We have also rebalanced the portfolios.
Recap on portfolio objectives and performance
The objective of the income portfolio is to deliver tax advantaged income whilst broadly tracking the S&P/ASX 200.
Typically, it has delivered an income return of around 4% to 4.5%, franked to around 80%, with the balance of the return comprising capital gain or loss.
The table below shows the total performance of the income portfolio and that of the benchmark S&P/ASX 200. Over the 12 years since 2013, it has delivered an annualised average return of 9% pa compared to the index return of 9.2% pa. These figures don’t include the benefits of franking credits or from participating in capital actions such as off-market share buybacks or share purchase plans.
The objective of the growth portfolio is to outperform the S&P/ASX 200 market over the medium term, whilst closely tracking the index.
The table below shows the performance of the growth portfolio and that of the benchmark S&P/ASX 200.
Over the 12 years since 2013, it has delivered an annualized average return of 10.39% pa compared to the index return of 9.2% pa, outperforming the index by 1.19% pa. These figures don’t include the benefits of franking credits or from participating in capital actions such as off-market share buybacks or share purchase plans.
Portfolio construction rules
The construction rules for the portfolios are:
- we use a ‘top down approach’ looking at the prospects for each of the industry sectors.
- for the income portfolio, we introduce biases that favour lower PE, higher yielding sectors.
- so that we are not overly exposed to a market move, in the major sectors (financials and materials), our sector biases will not be more than 33% away from index. For example, the weighting of the ‘financials’ sector on the S&P/ASX 200 is currently 33.7%, and under this rule, our possible portfolio weighting is in the range from 22.5% to 44.9% (i.e. plus or minus one third or 11.2%).
- we require 20 to 30 stocks (less than 10 is insufficient diversification, over 30 it is too hard to monitor), and have set a minimum stock investment size of $2,500.
- our direct stock universe is confined to the ASX 150. This has important implications for the growth portfolio because the stocks with the best medium term growth prospects will often come from outside this group (the so called ‘small’ caps).
- for the income portfolio, we prioritise stocks that pay fully franked dividends and have a consistent record of paying dividends; and
- within a sector, the stocks are broadly weighted to their respective index weights, although there are some biases.
Investment themes and sector outlook for 2025
In summary, we expect the following investment themes:
- A moderately positive year for equities, boosted by the falling interest rates, productivity gains from AI and an easing of fears about waning Chinese growth.
- Inflation will moderate but prove to be stickier in Australia meaning than the fall in short-term interest rates domestically will be less than 1%.
- The US share market will continue to set the tone for global markets. However, with a wary eye on President Trump, the market will be choppy; and
- Commodity prices will bottom and stabilise as growth fears about China easing and the strong US dollar falls.
And the main risks?
- China (growth, political unrest).
- President Trump and tariff wars.
- A “left field” outcome or legacy of the Australian election (due by May).
- And of course, a “black swan”.
From these themes and other data, we have determined our sector views, which are expressed as a bias relative to the sectors’ market weighting.
Overall, our sector views are not strong and so the biases will be relatively small.
Income portfolio
The objective of the income portfolio is to deliver tax advantaged income whilst broadly tracking the S&P/ASX 200.
On a sector basis, the biases for the income portfolio in 2025 are fairly minor. It is overweight consumer services and utilities (in order to find income), and marginally underweight financials (particularly the major banks), given our view that Australian banks are expensive. It is underweight information technology (where there are very few medium yielding stocks). It is marginally overweight materials and energy.
We remain concerned about the outlook for commercial property in a post Covid working environment, and hence our underweight position in real estate.
The portfolio has a defensive orientation and a bias to yield style stocks. In a bull market, we expect that the income portfolio will underperform relative to the broader market due to the underweight position in growth oriented sectors and the stock selections being more defensive, and conversely in a bear market, it should moderately outperform.
Apart from re-balancing and moderate changes to stock weights, changes to the portfolio from 2024 include a down weighting of exposure to financials and an up-weighting to materials. On a stock basis, Woolworths replaces Coles, Sonic Healthcare replaces Ramsay Healthcare, Endeavour Drinks exits, and Charter Hall Group joins the portfolio.
Using consensus analyst forecasts from FN Arena, the income portfolio has the following characteristics:
Forecast Price Earnings (PE) for 2025: 20.2 times
Forecast PE for 2025 (excluding Transurban and APA): 18.3 times
Forecast Dividend Yield for 2025: 4.3%
Franking: 71.2% (estimated)
The forecast dividend yield of 4.3% is based on stock prices as of 31 December 2024. This is lower than the 4.7% yield achieved in 2024, reflecting higher stock prices (without the commensurate increase in dividends) plus lower dividends from resource stocks. The franking percentage of 71.2% is reduced by the inclusion of Transurban, APA, Amcor, CSL, Sonic Healthcare and to a lesser extent, Macquarie, Brambles and ANZ.
For an SMSF in the accumulation phase, the forecast 4.3% dividend yield translates to an income return of 5% (after tax), and for a fund in pension phase, to 5.6%.
Our income portfolio per $100,000 invested (using prices at the close of business on 31 December 2024) is:
Growth portfolio
The objective of the growth portfolio is to outperform the S&P/ASX 200 market over the medium term, whilst closely tracking the index.
The growth portfolio in 2025 is moderately overweight communication services, health care, materials and information technology. It is underweight financials (particularly the major banks), consumer discretionary, industrials, real estate and utilities.
Apart from re-balancing and moderate changes with some stock weights, changes to the portfolio from 2024 include Woolworths replacing Coles, the departure of Qantas (too expensive) and Pilbara Minerals, and Sonic Healthcare joining the portfolio.
A major change is the inclusion of the Betashares Portfolio Diversifier, EX20, weighted at 10% ($10,000). This simple ETF invests on an index-weight basis in stocks outside the top 20, that is, in stocks ranked from 21st to 200th by size of market capitalization. Although it has a management fee of 0.25% pa, it will provide ready and diversified exposure to mid and small cap stocks. This part of the market should do relatively better as interest rates start to fall.
Using consensus broker forecasts from FN Arena, the portfolio (excluding EX20) has the following characteristics:
Forecast Price Earnings (PE) multiple for 2025: 24.1 times
Forecast PE for 2025 (excluding NextDC, Xero, WiseTech and EX20): 19.7 times
Forecast Dividend Yield for 2025 (excluding EX20): 3.5%
Franking: 77% (estimated)
Our growth portfolio per $100,000 invested (using prices as at the close of business on 31 December 2024) is:
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.
