Defensive sectors led the way again in April, as the cyclical and currency-exposed sectors continued to disappoint. Overall, the share market rose by 1.8% in April to be up 2.6% so far this calendar year, or 3.9% when dividends are included.
Reflecting these broader sector movements, our high-income portfolio has outperformed the market by 1.9% this year, while our growth-oriented portfolio has underperformed by 1.6%. In this our fourth review for the year, we look at their performance in April.
Portfolio recap
In January, we made some adjustments to our Australian share ‘income portfolio’ [1] and ‘growth-oriented portfolio’ [2].
The purpose of these portfolios is to demonstrate an approach to portfolio construction. As the rule sets are of critical importance, we always commence a review by briefly recapping the key portfolio construction processes applied.
The income portfolio is forecast to generate a yield of 5.01%, franked to 90.4%. The construction rules applied include:
- 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 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 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
- Of course, we look 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 is up by 5.81% and the growth-oriented portfolio is up by 2.31% (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 1.91% and the growth-oriented portfolio has underperformed by 1.59%.
Property trusts lead the way in April
Property trusts roared back to form to put on a gain of 5.7% for the month, and are now the best performing sector for calendar year 2014. Other defensive or yield sensitive sectors also put on strong gains, with utilities adding 4.1%, consumer staples 3.1% and telecommunications (which is largely Telstra) 2.2%. Despite some of the negative market banter, the largest sector by market capitalisation, financials, continued to make headway and is up 4.2% this calendar year.
Health care stocks fell 0.7% in the month, due in part to the continuing strength of the Australian dollar, and the sector is now in the red for 2014. A small rise in the price of BHP helped the materials sector move higher, although lower commodity prices continue to impact on this sector and it is down 0.5% for the year. With the Australian dollar failing to move lower and talk of a “budget emergency”, the industrial and consumer discretionary sectors continued to lag.
The table below show the sector weights (as a proportion of the S&P/ASX 200), and performances for the month of April and for the 2014 calendar year.
Income portfolio
The income portfolio is overweight financials, consumer staples, utilities and telecommunications; underweight materials and consumer discretionary; and broadly index-weight the other sectors. It also includes an allocation to property trusts (REIT), and somewhat more exposure to the “cyclicals” through the selection of stocks from the industrial sector.
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.
For the first four months of the year, it is outperforming the index. An overweight exposure to the four major banks, in particular CBA and Westpac, together with the inclusion of stocks such as Leighton and Orora, is compensating for the poor performance of the materials sector and stocks such as Toll and Primary.
With the partial offer for Leighton’s due to close, we have accepted the $22.50 offer for 37.5% of our shares, and decided to maintain our exposure by repurchasing the same number of shares at the closing price on 30 April. This has resulted in booking a profit of $212.
The income portfolio is forecast to generate a yield of 5.01% in 2014, franked to 90.4%. While we will get further confirmation when NAB and Westpac report over the next week, indications from the dividends declared in the February reporting season suggest that the portfolio should marginally exceed this target.
Our income-biased portfolio per $100,000 invested (using prices as at the close of business on 30 April 2014) is as follows:
* Income includes dividends declared payable. Assumes 37.5% Leighton shares sold in partial offer at $22.50, repurchased on 30/4 at $19.08.
Growth portfolio
Similar to our approach to the income portfolio, we applied a ‘top down’ approach to the industry sectors and introduced biases that favour the sectors that we feel have the best medium term growth prospects. The growth-oriented portfolio is overweight health care, consumer discretionary and industrials; underweight financials and property trusts; and largely index weight the other sectors.
Critically, we have biased the stock selection 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 – such as CSL, Amcor, Brambles, Computershare, BHP and Rio. With the currency instead stabilizing around 0.93 USD, this has impacted the performances of these stocks.
Other biases include Woolworths over Wesfarmers; CBA and Westpac over ANZ and to a lesser extent NAB; and the selection of Crown and JB Hi-Fi.
The portfolio is lagging the index by almost 1.6%. Clearly, our sector biases are out of step with the market, although the differences are relatively small. Some stocks are also being impacted by short sellers, most notably JB-Hi-Fi and Toll Holdings. Primary also hasn’t fared that well. As there is no material news to cause a reassessment of a position or sector bias, and because it is a portfolio for the medium term, we feel it is a little premature to make any changes at this early stage.
Our growth-oriented portfolio per $100,000 invested (using prices as at the close of business on 31 March 2014) is as follows:
* Income includes dividends declared and payable.
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.