Switzer Super Report portfolios slightly outperform index in January

Co-founder of the Switzer Report
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The purpose of these portfolios is to demonstrate an approach to portfolio construction. As the rule sets applied are of critical importance, we have also provided a quick recap on these.

Portfolio recap

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

To construct the income portfolio, the processes we applied included:

  • 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 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 income-oriented portfolio to 31 January is down by 2.69% and the growth oriented portfolio is down by 2.96% (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 0.3% and the growth oriented portfolio has outperformed by 0.1%.

Banks drag the market down in January

Banks continued to lose favour in January, with the financials sector down 4.7% during the month. With a weighting in the index of 37.3%, this sector accounted for more than half of the S&P/ASX 200’s fall of 3.0%. Consumer discretionary, the market darling in 2013, also suffered as concerns emerged about the strength of the retailing sector following a couple of profit downgrades.

On the positive side, health, property trust and utilities sectors rose in January. The laggards in 2013, the small rise in property trusts and utilities, reflects a market re-assessment that these sectors are relatively cheap.

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 includes an allocation to property trusts (REITs), which although not particularly tax effective as an investment to SMSFs, underperformed in 2013 and now look reasonable value. We have also taken a little 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.

The income portfolio is forecast to generate a yield of 5.01% in 2014, franked to 90.4%.

Our income-biased portfolio per $100,000 invested (using prices as at the close of business on 31 January 2014) is as follows:

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; and largely indexweight the other sectors.

Critically, we have biased the stock selection to companies which 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.

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. Although it was our worst performing stock in January, we still feel that JB Hi-Fi is the pick of the specialty retailers and over the course of 2014, improving domestic economic conditions and consumer sentiment should assist this sector.

Our growth-oriented portfolio per $100,000 invested (using prices as at the close of business on 31 January 2014) is as follows:

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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