Despite gains of 5.8%. 5.6% and 7.4% in January for the Dow, S&P 500 and NASDAQ respectively, the Australian sharemarket ended marginally down. The S&P/ASX 200 lost 0.45% in the month.
Our model portfolios both finished marginally in the black, and outperformed the benchmark index.
In our first review for the year, we look at how our income and growth portfolios performed in January.
The purpose of these portfolios is to demonstrate an approach to portfolio construction. As the rule sets applied are of critical importance, we provide a quick recap on these.
Portfolio recap
In January, we made some adjustments to our Australian share ‘Income Portfolio’ and ‘Growth Portfolio’ (see https://switzersuperreport.com.au/our-portfolios-for-2018/ [1]).
The construction rules applied were:
- a ‘top down approach’ that looks at the prospects for each of the industry sectors;
- for the income portfolio, we introduced 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 ‘materials’ sector on the S&P/ASX 200 is currently 18.0%, and under this rule, our possible portfolio weighting is in the range from 12.0% to 24.0% (ie plus or minus one third or 6.0%);
- we require 15 to 20 stocks (less than 10 is insufficient diversification, over 25 it is too hard to monitor), and have set a minimum stock investment size of $3,000;
- our stock universe is confined to the ASX 100. 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);
- we avoid stocks from industries where there is a high level of exogenous risk, such as airlines;
- 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.
Overlaying these processes are our predominant investment themes for 2018, which we expect to be:
- Synchronised growth in the USA, Europe, China and Japan;
- The US Fed likely to increase US interest rates by 0.75%,
- Interest rates in Australia to remain at historically low levels, with the RBA unlikely to move rates higher until the final quarter of 2018. Some upward movement in bond rates;
- Aussie dollar around 0.75 US cents, but with risk of breaking down if the US dollar firms;
- Commodity and energy prices remaining reasonably well supported;
- A positive lead from the US markets;
- A moderate pick-up in growth in Australia, back towards trend levels; and
- No material pick-up in domestic inflation.
Performance
The income portfolio to 31 January is up by 0.23% 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 0.68% and the growth-oriented portfolio by 1.26%.
Healthcare and IT lead the market in January
While the overall market, as measured by the S&P/ASX 200 index, finished with a small loss of 0.45% and most sectors were in the red, the healthcare and information technology sectors posted gains in January.
Although down from its best levels, the materials sector also posted a small gain as metal prices remained well supported. The largest sector by market weight, financials, which makes up 35.5% of the index, lost 0.5% as ongoing concerns about the potential impact of the Royal Commission weighed on sentiment.
Higher bond rates had a negative impact on the “interest rate defensive” sectors, with real estate shedding 3.3% and utilities 4.5%. The industrial sector was also impacted, with both Transurban and Sydney Airport coming under some selling pressure.
Income portfolio
On a sector basis, the income portfolio is moderately overweight financials and index-weight materials. Exposure is being taken through the major banks (to the former), and the major miners (to the latter).
It is underweight health care, consumer staples and real estate.
* Closing price 29/12/17
Growth portfolio
The growth portfolio is moderately overweight materials, financials and consumer discretionary. It is underweight consumer staples, industrials and real estate. Overall, the sector biases are not strong.
The stock selection is marginally biased to companies that will 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. While we expect that the Aussie dollar will remain well supported and trade in a fairly narrow range in the short term, the risk is that a strengthening US dollar causes it to break down.
In January, the portfolio returned 0.81% for a relative outperformance of 1.26%. The strong performances of JB Hi-Fi and Link offset losses on the major banks, Orora and TPG.
No changes to the portfolio are contemplated at this point in time, although if JB Hi -Fi was to rise into the thirties, we might look to take profits and replace with another stock.
Our growth oriented portfolio per $100,000 invested (using prices as at the close of business on 31 January 2018) is as follows:
* Closing price 29/12/17
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.