Switzer portfolios outshine in June

Co-founder of the Switzer Report
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Before returning to the portfolios, here are a couple of facts about the financial year just gone. The S&P/ASX 200 increased by 17.3% over the year – and with dividends included, the return was 22.7%. Perhaps more remarkably (and very unlikely to be repeated in 2013/14), the financial sector (with dividends included, but before the impact of imputation credits) returned just shy of 40%!

Portfolio recap

Earlier this year, we rebalanced our Income Portfolio and introduced our 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%. 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;
  • Identifying 15 to 20 stocks (less than 10 is insufficient diversification, over 25 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
  • 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 growth-oriented portfolio is up by 8.36% and the income-oriented portfolio is up by 8.34% (see tables at the end) over the past six months. Compared to the benchmark S&P/ASX 200 Accumulation Index (which adds back income from dividends), both portfolios (co-incidentally) have outperformed by 2.9%.

Most sectors finish June in the red

Only the financial, health care and telecommunication sectors made gains in June. The S&P/ASX 200 fell 2.5%, to finish 3.3% higher than the start of calendar year 2013.

The materials sector (in particular, the mining stocks) continued its awful run, with the sector down 10.3% in the month. It is the only sector down on a year to date basis. The performances of three smaller sectors – consumer discretionary, IT and telecommunications – are being heavily influenced by the main stocks in each sector – namely, News Corporation, Computershare and Telstra respectively.

Income portfolio

The income portfolio is overweight financials, consumer staples and telcos, and underweight materials. It also has some stock biases – in particular, underweight CBA and overweight NAB.

With the relative outperformance of financials in June, the portfolio’s weighting (by market value) to this sector is now 48.5%. This is still within one of our major portfolio construction rules that states that our biases in the major sectors will not be more than 33% away from index. As there is no immediate need to rebalance the portfolio, we have deferred this again. On the stock selection side, while we obviously got the call wrong to include UGL, at around $7.00, we feel it is too cheap to sell.

For income, the portfolio has returned 2.69%, franked to 96.6%. As dividends are traditionally a little higher in the second half, the portfolio should exceed the forecast 5.23% per annum. 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. Stock selection in the financials (strong bias towards NAB and the selection of a regional in BOQ), as well as in the health care and industrials sectors, is offsetting the significant underperformance of the material stocks. Current sector weights are within the parameters of the portfolio construction rules.

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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