Thinking inside the box

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Key points

  • Conviction means putting money where your mouth is. Consider borrowing to invest outside of superannuation and investing the profits back into your SMSF.
  • A consistent approach has resulted in performance of 5.16% against 2.90% for the ASX 200.
  • Flexibility around the filters allowed for the purchase of Woodside Petroleum.

 

Last month (16 October), I made my usual strong statements (with my usual high degree of conviction) about the market. I was so convinced by my argument that, a couple of days later, I borrowed a material amount of money against my home equity and invested it in a 50:50 portfolio of ETFs representing the ASX 200 and S&P 500 (IOZ and IVV in my case).

In less than a month, I am up about 9% on that geared (outside of super) portfolio. My notion was (and is) that I forecast a ‘box’ each six months as I discussed last month. The box gives not only my 12-month-ahead forecast but also the high and low that might occur during that 12-month period. It so happened that the ASX 200 and the S&P 500 both just touched my predicted lows when I wrote last month. As soon as my Fear Index gave the signal to buy (two days later), I bought (and discussed it on Switzer TV on the 21st October).

I am 65 and strongly believe that I should make money wherever I think I can. I cannot gear within super, so I did it legitimately outside. If I make enough money outside of super, I can put any significant profits into my SMSF as non-concessional contributions (up to the prescribed limits). If I am an average person, I should live about another 20 years. With my family history, I could well live another 30 years or more before I hang up my spurs. In my mind, my financial situation is no different from a 35-year-old thinking about what life might be like at 65!

The SMSF portfolio

I wrote during the first half of 2014 about how I was building a special SMSF portfolio (for myself) and detailed the actual portfolio I invested in.

Each month I create new portfolios but I do not expect anyone would or should chop and change each month. Rather, I think of it as in terms of owning my car. If the manufacturer brings out a new model with a better styling of the dash or nicer headlights, etc, I don’t trade up. If it, or some other company, brings in a significant new feature (or my car starts to fade in performance), I might trade up. It’s the same with portfolios. I ‘bought’ my portfolio at the end of June and the only change I have since made was to get involved in the Telstra buy-back.

I show the capital gains for each of my Hybrid portfolios (and the ASX 200 index) in Chart 1. I show the outperformance in Chart 2. Since each month from February 2014 a new portfolio is born, each portfolio should be viewed differently. The February portfolio has been alive for about nine months. The November portfolio has only had a couple of weeks to make gains.

I note that the ASX 200 made losses for the periods starting in August and September but all of the Hybrid portfolios made gains and outperformed the index. It is important to note that the stocks and the weights attached to them in the Hybrid portfolios evolve over time and yet there seems to have been some consistency in the realised returns.

The consistency of the approach is more apparent in Chart 2, which shows the outperformance. Of course, as we go from left to right in that chart there has been less time to outperform. However, there is a degree of smoothness in this natural decline. The particular portfolio I invested in near the end of June has returned 5.16% against 2.90% for the ASX 200. The dividend yield is also ahead of that for the ASX 200 but, until there is a full cycle of dividend payments, such a comparison is not a full representation of the differences in yield. Selected statistics for the component stocks are presented in Table 1.

Chart 1: Cumulative capital gains for the Hybrid portfolio and the ASX 200

Source: Thomson Reuters Datastream & Woodhall Investment Research

Chart 2: Outperformance for the Hybrid portfolio over the ASX 200

Source: Thomson Reuters Datastream & Woodhall Investment Research

Table 1: Statistical analysis of the late June Hybrid Portfolio

Click to view larger image

Source: Thomson Reuters Datastrean & Woodhall Investment Research

Note: data are to the close on 10 November 2014

It can be noted from Table 1 that the median capital gain for the stocks was 6.4% which is a little above that for the portfolio at 5.2%. Only two stocks posted losses to date – Cardno and Bank of Queensland. Since Cardno’s price fall is well out of line with all of the other stocks, it is worth considering cutting my losses and selling it. Cardno’s target price has also been cut – but by only 2.8% – and the latest target price of $6.75 is well above the current share price of $5.27, giving it plenty of upside. Moreover, the consensus recommendation has actually improved from 2.70 to 2.60.

A favourite stock

This behaviour reminds me of that for Macquarie Group which I set out in Chart 3. Its share price tumbled shortly after I got my portfolio set, but the target price and recommendation held. Very recently, the share price bounced back and the target price lifted $2.26. I am glad that I held MQG.

Chart 3: Macquarie Group statistics since June 2014

Source: Thomson Reuters Datastream & Woodhall Investment Research

Since these portfolios were designed for yield, capital gains are of less importance. However, if Cardno’s target price or recommendations are significantly cut, I will bail out. For now I am holding.

I used my dividend cheques to buy Woodside Petroleum. When I set my portfolio in June, the system wanted to choose an exposure to energy but no stocks then passed my filters. Woodside is now only a little outside one of the filters – but it was so close I ignored it. Sometimes I am human!

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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