SSR portfolio review for March

Co-founder of the Switzer Report
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A return to the 2013 “norm” (banks heading higher, resources stocks under pressure) disguised an otherwise flat market in March. Overall, the share market fell by 0.2% in March to be up 0.8% so far this calendar year, or 2.1% when dividends are included.

Reflecting these broader sector movements, our high-income portfolio has outperformed the market by almost 1.3% this year, while our growth-oriented portfolio has underperformed by 1.2%.

Portfolio recap

In January, we made some adjustments to our Australian share ‘Income Portfolio’ and ‘Growth-Oriented Portfolio.’

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 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 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 3.38% for the year to date and the growth-oriented portfolio is up by 0.87% (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 1.29% and the growth-oriented portfolio has underperformed by 1.22%.

Banks lead the way in March

It was a mixed month in March, with bank stocks leading the way and the financials sector up 2.9%. Continuing their lacklustre performance, stocks in the materials sector (in particular the resource stocks) came under pressure as commodity prices fell, with the sector down 4.2% in the month and 1.2% on a year-to-date basis.

Another factor weighing on the market was the Aussie dollar, which rose to almost 93 US cents by the end of the month. This impacted sectors such as healthcare and consumer discretionary, and tempered any rise in the industrials sector.

The smallest sector with a weight of only 0.8% in the S&P/ASX 200, information technology, is the leading sector this year, with a return of 5.3%. Stocks such as Computershare (CPU) and CarSales.com (CRZ) are leading the way.

The table below show the sector weights (as a proportion of the S&P/ASX 200), and performances for the month of March 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 three 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 Telstra.

In relation to Leighton’s, we plan to “accept” the proportional offer at $22.50, keep the remaining 62.5% of shares not subject to the offer, and probably reinvest the cash into Telstra shares. We will confirm these changes at the end of April.

The income portfolio is forecast to generate a yield of 5.01% in 2014, franked to 90.4%. Early 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 31 March 2014) is as follows:

* Income includes dividends declared payable.

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 healthcare, consumer discretionary and industrials; underweight financials and property; 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 USD – such as CSL, Amcor, Brambles, Computershare, BHP and Rio. With the currency increasing towards 0.93 USD during the month, this impacted the performances of those 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 1.3%. Short sellers are active in JB-Hi-Fi and now Toll Holdings, so it may be some time before these stocks recover. Primary also hasn’t fared that well. While we will keep all stocks under active consideration, 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.

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