Our portfolios march ahead nicely

Co-founder of the Switzer Report
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Our income and growth oriented stock portfolios have both outperformed the market over the first two months. With the S&P/ASX 200 up almost 10% this calendar year, the performance of our income portfolio is surprising, as we would have expected it to lag the broader market in a rising environment.

Portfolio recap

Earlier this year, we rebalanced our Income Portfolio and introduced our Growth Oriented Portfolio.

The income portfolio is forecast to generate a yield of 5.23% in 2013, franked to 98.3%. The construction process included:

  • using a ‘top down approach’ and introducing biases that favour lower PE, higher yielding sectors;
  • to minimise the market tracking risk, adopting a rule that says that our sector biases in the major sectors (financials, materials and consumer staples), will not be more than 33% away from index;
  • determining sector weightings;
  • 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 small biases; and
  • of course, we looked for companies that pay franked dividends and have a consistent earnings record.

The growth-oriented portfolio uses a similar construction process, however it 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.

Performance

The growth oriented portfolio is up by 12.42% and the income oriented portfolio is up by 12.40% (see tables at the end) for the two months to end Feb. Compared to the benchmark S&P/ASX 200 Accumulation Index (which adds back income from dividends), they have both outperformed by around 1.8% over the first two months of the year.

Market outlook

Despite quite different sector biases, the closeness of the performance of the two portfolios does highlight what is happening in the market overall. All sectors are up year to date, with the gap in relative performance between the best sector (financials) and the worst sector (materials) not that marked.

Moreover, the traditional growth sectors (materials, energy, and health care) aren’t leading the charge up, and while some of the income/yield sectors are performing really strongly, not all are.  In the December quarter, when this yield driven rally got some momentum, financials, consumer staples, property trusts, telecommunications and utilities all performed strongly. As the following table shows, what is noticeable this calendar year is the performance of the financials and consumer staples (mainly Wesfarmers and Woolworths), and the relative underperformance of property trusts, telecommunications and utilities. Food for thought!

Our Portfolios

The following tables show the composition of the portfolios, and individual stock performance.

Income Portfolio

Growth Oriented Portfolio

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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