- The ASX/S&P 200 returned 3.28% for January as the SSR income portfolio returned 4% and the growth-oriented portfolio returned 3.87%.
- Yield was an ongoing theme in January driving the dividend play as the bond market fell.
- In the growth-oriented portfolio, our overweight position in NAB relative to ANZ was rewarded.
January’s buoyant share market saw our portfolios put on gains of almost 4%. While very early days, both portfolios outperformed the index – with the income portfolio benefitting from the ongoing demand for yield stocks and outperforming by 0.72%.
The purpose of the income and growth-oriented portfolios is to demonstrate an approach to portfolio construction. As the rule sets applied are of critical importance, we have provided a quick recap on these.
Portfolio recap
In January, we made some adjustments to our Australian share ‘Income Portfolio’ and ‘Growth-oriented Portfolio’ – see here and here.
To construct the income portfolio, the processes we applied included:
- 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 that our sector biases in the major sectors (financials and materials) 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
- Looked for companies that pay franked dividends and have a consistent earnings record.
The growth-oriented portfolio takes a 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 portfolio to 31 January is up by 4.00% and the growth-oriented portfolio is up by 3.87% (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 0.72% and the growth-oriented portfolio has outperformed by 0.59%.
Yield, yield, yield!
January 2015 was a dead-ringer for 2013 and 2014 – the yield-based sectors led the market as bond yields fell. As the table below shows, financials, A-REITs, telecommunications (which is mainly Telstra) and utilities outperformed the overall S&P/ASX 200 gain of 3.28%. Even consumer staples, a laggard in 2014 with heavyweights Woolworths and Wesfarmers, returned to form.
Falling oil prices impacted the energy sector, which fell by 6.46%. Information technology, which is the smallest sector and represents only 0.8% of the S&P/ASX 200 by market weight, fell by 1.34%. All other sectors put on small gains.
Income portfolio
The income portfolio is overweight consumer staples, utilities and telecommunications; underweight materials and energy, and broadly index-weight the other sectors. Reflecting an expectation that the banks will, over time, have to raise more capital, we have neutralized our exposure to financials. Further, following a stellar performance in 2014, our exposure to property trusts (the A-REIT sector) is also neutral.
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.
The income portfolio is forecast to generate a yield of 5.14% in 2015, franked to 88.7%.
In January, most of our stock selections added to the portfolio. In financials, our overweight position in NAB relative to ANZ was rewarded, as was the selection of Boral in the materials sector. Despite the abandonment by the Government of proposed changes to the GP Medicare rebate, Primary Healthcare disappointed.
Our income-biased portfolio per $100,000 invested (using prices as at the close of business on 30 January 2015) is as follows:
Growth portfolio
With our growth-oriented portfolio, we have based our sector exposure on what we expect to be the predominant investment themes in 2015, which are:
- Continued low interest rates (the yield sectors will continue to perform);
- Lower Aussie dollar – moving down towards 75 US cents;
- Positive lead from the US markets;
- No pick up in commodity prices;
- Growth running slightly below trend in Australia; and
- Low oil prices will lead to a rise in consumer spending in Australia.
This leads to a portfolio with only small biases. We are marginally overweight the sectors that will benefit from increased consumer consumption, a lower Australian dollar or lower oil prices – mainly the so called “cyclicals” (consumer discretionary and industrials); marginally underweight or index-weight the yield sectors (financials, utilities, telecommunications and consumer staples); and underweight the commodity exposed sectors (materials and energy).
Despite healthcare being the second best performing sector last year, we have maintained an overweight position as the demographic factors are so strong.
With stock selection, we have biased the portfolio to companies who should benefit from a falling Australian dollar – either because they earn a major share of their revenue offshore, and/or report their earnings in US dollars, such as CSL, Resmed, Brambles and Computershare. In the financials, we have pared back our exposure to the major banks, biased NAB, and included for growth Macquarie and Challenger. We have also added online employment and education group Seek, and stuck with two of the laggards in 2014 from the consumer discretionary sector in Crown and JB Hi-Fi.
In January, most stocks added to the performance of the portfolio. Apart from Woodside, which suffered due to lower oil prices, the other disappointment was Challenger, which appears to be out of favour with the market. Resmed jumped by more than 16%, while the overweight position in NAB (underweight Westpac and ANZ) was beneficial.
Our growth-oriented portfolio per $100,000 invested (using prices as at the close of business on 30 January 2015) is as follows:
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.
