Yield portfolio – surviving another market correction

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Key points

  • Market falls have been steep, but not yet beyond forecasts.
  • End of year forecast of 5,900 is still possible.
  • Yield portfolio (-3.1%) has outperformed the market (-4.6%).

The last month or so has been miserable for most investors on the ASX 200. Event after event (Ukraine, ISIS, Gaza, Hong Kong, and Ebola, etc.) bombarded world order. On top of that, the effect of bilateral sanctions from the Russia-Ukraine situation have taken their toll on German economic performance with the latest stats showing falls of around 5% on the likes of exports and industrial production.

Still in the box

While the market tumble has been merciless, it hasn’t (yet) been out of ‘the box’. Each six months I push out a 12-month forecast of the ASX 200 for the calendar or fiscal year ahead. I not only try to predict the ending number for the index, I also try to pick the high or the low along the way (all using scientific methods) – and those limits define ‘the box’ in my terminology. Of course, if the low is realised, the high is now much less likely as the remaining time period is shorter and the distance further away – and vice versa. At the start, the high and the low are equally likely.

In Chart 1, I show my July 1st 2014 predicted high, low and end point for FY ’15 (e-o-y) together with the index to the close on Monday 13th October. While the financial year started well, reaching 5,659 on September 2nd, the period since has already wiped off all of the gains for calendar 2014. However, at the time of writing, the market’s last close was only six points above the low forecast (dotted line). In that sense, the end of year forecast of 5,900 is still in the gun-sights but the high is now much less likely!

Chart 1: ASX 200 and July 1st forecasts for FY 2015 – ‘the box’.

Source: Thomson Reuters Datastrean & Woodhall Investment Research

In my opinion, it is too early to worry (too much). Markets always move around and that is why my high forecast of 6,200 and my low of 5,150 are so far apart from the e o fy mark and the 1 July 2014 starting point. Interested readers might wish to check out when I presented these forecasts on Switzer TV (26 May 2014).

Importantly, the late sell off on Tuesday in Wall Street took the S&P 500 to spot on the equivalent dotted line in the corresponding Chart 1 for that index. Is it possible that the bottoms for both markets have been more or less reached?

The hot-chip yield portfolio

But what is more important to me is whether my particular portfolio is doing well. After all, it is my money! I will just focus here on my yield portfolio in my SMSF, which I started at the end of June 2014.

I designed my yield portfolio to produce a high-expected yield but also with a good chance of not falling behind the ASX 200 in capital gains. In Chart 2, I show the capital gains performance of my portfolio and the ASX 200 – both excluding dividends. Given recent events, it is unsurprising that both performances are currently under water. I note that my portfolio tracked the index quite closely until the August reporting season started. Possibly as a result of using consensus recommendations to help me chose good high yield stocks, my yield portfolio has since beaten the index by a modest amount. Of course, there is also an element of luck in any one experiment like this – or anybody else’s portfolio.

Because I sold some Telstra in the recent buyback, my actual performance is slightly better than that shown in Chart 2, in which I assumed I didn’t sell into the buyback. There are so many ways of measuring performance in such buybacks, Chart 2 shows a clear comparison. Taking the buyback into account, my actual capital loss was 3.1% compared to 3.3% without the buy-back. The ASX 200 was down 4.6% over the same period.

Chart 2: Relative capital gains performance of the yield portfolio and the ASX 200

Source: Thomson Reuters Datastrean & Woodhall Investment Research

Four of my 16 stocks are yet to have produced a dividend as they all went ex-div a day or two before I started buying my yield portfolio. Nevertheless, with franking credits, my yield to date has been 2.6% with, of course, 20 more dividend payments to come by the time that the full annual dividend cycle is complete.

When I compare my holdings to what a new portfolio would now be, using my methodology, I again conclude that my old stocks still pass the muster. From Table 1, no recommendation has slipped below a ‘3’ (for a hold and where ‘1’ is a buy and ‘5’ a sell) and no share prices (price %) have, in my opinion, fallen out of line with the ASX 200. I do not get concerned until any of my stocks have fallen at least 10% more than the index. The target prices give some of my stocks plenty of upside. No share price is above the median (consensus) target price.

So given I produce a new (dummy) portfolio each month, should I not have changed my portfolio by now? I stand firmly on this point. To me, it’s like Windows updates. They keep coming round and the improvements are either marginal or negative. I am still on Windows 7 and I still largely write in FORTRAN 66 (i.e. the 1966 scientific programming language) because the messing around in changing stops me performing! But when I really have to, or the perceived benefits are so great, I change (like leaving Windows Vista behind as quickly as possible). So it is with my portfolios.

If I were to want to put a serious amount of money in a new yield portfolio, I would choose the next generation. With a few dividend dollars to invest, I pump them back into this one or take a new stock from a more recent portfolio while I await the new portfolio. But, although all sectors are cheap – the fear index is too high to warrant a buy.

Table 1: Statistics on the yield portfolio

Source: Thomson Reuters Datastream & Woodhall Investment Research
Note: Data are to the close on 13 October 2014

Ron Bewley updates his views weekly on a Saturday morning.

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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