Our income and growth oriented stock portfolios have outperformed the market over the first four months of the year. Given that the market has been so focussed on yield (see Ron Bewley’s article here), this is not a surprising outcome for an income-biased portfolio. The performance of the growth oriented portfolio is more surprising, given we have been overweight the market laggard – the materials sector – so some of our other sector and stock biases are clearly working.

Portfolio recap

Earlier this year, we rebalanced our Income Portfolio and introduced our Growth Oriented Portfolio.

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 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 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 (although there are many great growth companies outside the top 100).

Performance

The growth-oriented portfolio is up by 14.6% and the income-oriented portfolio is up by 17.7% (see tables at the end). Compared to the benchmark S&P/ASX 200 Accumulation Index (which adds back income from dividends), the growth oriented portfolio has outperformed by 1.5% and the income portfolio by 4.6%.

A yield market

The thirst for yield continues to drive the market higher, supported by expectations that interest rates might come down a notch further. Telecommunication (Telstra), financials (the major banks), property trusts and consumer staples (largely Wesfarmers and Woolworths) were the star sectors in April. This calendar year, financials are up 25.2% (and that is before dividends)!

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. Whilst it is a little early to re-balance, the sector that is most “overweight” in a relative sense is consumer staples, and given the low yields now available, reducing exposure to stocks like Woolworths is certainly on the cards.

The portfolio income is tracking to plan. Although three of the major banks are yet to go ex-dividend for their interim dividend, all of the other companies (with the exception of UGL) have met or exceeded the forecast dividend.  Details of the portfolio and its performance are listed on the following page.

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 underperformance of the material stocks. The portfolio is listed on the following page.

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

• James Dunn: Small agricultural stocks WBA, TAN worthy of support
• Ron Bewley: Sector review part one – yield
• Gavin Madson: S&P defaults provide guidance
• Kim Tracey: Fundie’s favourite – Sirona Dental Systems 
• Tony Winterbottom: Defence Force Housing – a hands-off investment
• Tony Negline: Question of the week – borrowing to buy shares