Portfolios hold ground in November

Co-founder of the Switzer Report
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In the first down month for the share market since May, our income and growth-oriented portfolios largely held their ground in November. Both portfolios increased their relative outperformance to the benchmark indices.

Portfolio recap

In January, we made some adjustments to our Australian share ‘Income Portfolio’, and introduced a ‘Growth-Oriented Portfolio’ (see here and here)

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

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, 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 becomes 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 to 29 November is up by 23.11% and the growth-oriented portfolio is up by 25.57% (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 by 3.8% and the growth-oriented portfolio has outperformed by 6.3%.

All sectors down in November

All sectors went backwards in November, with Energy the standout at -6.3%. With three of the major banks going ‘ex-dividend’ during the month, the Financials sector arguably performed the strongest. Although its price index lost 1.3%, the accumulation index for financials finished mildly positive — adding 0.2%.

On a calendar year-to-date basis, the major yield sectors continue to lead the way – with Financials up 29.3%, Telecommunications up 16.8% and Consumer Staples up 11.4%. Consumer Discretionary, which includes companies as diverse at 21st Century Fox, Crown and JB Hi-Fi, leads the way at 34.1%. The materials sector is the only sector in the red at -5.9%.

Income Portfolio

The income portfolio is overweight financials, consumer staples and telco, and underweight materials. It remains within the portfolio sector rules (see above), with Financials representing 49.5% of the portfolio by market value on 29 November (effectively overweight with 1.28 times the sector weigh), and Materials 14.5% of the portfolio (effectively underweight at 0.84 times the sector weight).

With all companies having declared their final dividends for the year, the portfolio has exceeded its income objective, returning 5.55% compared to a forecast yield of 5.23%. This is largely due to the higher than expected dividends paid by the major banks. The franking percentage is marginally below forecast at 96.3%.

Details of the portfolio and its performance are listed below.

Income Portfolio

Growth-oriented portfolio

The growth-oriented portfolio is overweight stocks in the materials, energy and healthcare sectors, underweight financials and consumer staples, and broadly index weight the other sectors. It has benefitted from some stock biases, particularly an overweight position in NAB, and the selection of Crown, Brambles and Toll.

At the end of October (see here), we reduced some of these stock biases by:

  • Selling the BOQ holding (up 64% this calendar year), and re-invested these funds into Commonwealth Bank;
  • Selling 25% of the NAB holding – and reinvesting these funds into Westpac shares.

The portfolio at 29 November is:

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.

Also in the Switzer Super Report:

Also from this edition