The yield portfolio’s first risk assessment

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It is far too early for me to want to rebalance – or ‘tweak’ – my SMSF Yield-Conviction portfolio (bought over the 25 to the 27 June). I designed it to be relevant for at least three months and possibly 12 months. However, many stocks on the ASX 200 have just been through the August reporting season and so it is time for me to do a risk assessment of my portfolio.

The checklist

In this (my first) full review of my portfolio and its methodology, I am looking for four things:

  1. Is the process I use on track?
  2. Have there been any deleterious changes in broker estimates and forecasts that warrant a stopgap fix until I choose to do a full rebalance?
  3. Have there been implicit changes to the ‘optimal’ model portfolio that might guide my thinking?
  4. What shall I do with my dividends’ payments, which have started to arrive?

Following my return from a month long holiday visiting my brother in England (where I still did my risk assessments at the breakfast table each morning!) I performed a review on data up to Friday September 5th. Of course, things change each day and subsequent changes must be added to any prior assessment.

Since I have been keeping detailed records while I developed my software, I can track how each vintage of my portfolios has fared. At the earliest practical business day in each month, I create three portfolios. The main one is my Hybrid Yield-Conviction portfolio (Yield for short) but I also produce a High Conviction and a High Octane portfolio. High Conviction is designed to focus on the big boys and not outperform by much in good times but be more robust in poor times. High Octane goes after high risk plays on top 200 stocks that might produce good outperformance. All three portfolios (Yield, Conviction, and Octane) use the same process but different sector ‘tilts’ and criteria for stock inclusion.

Table 1: Performance statistics for portfolios of different vintages

What I take away from this analysis is that the methodology has stacked up so far and I have no reason (yet?) to tweak it.

The stocks

But what about the component stocks in my portfolio? How did they perform and what are their prospects? I show certain relevant statistics in Table 2.

Table 2: Stock analysis

Source: Woodhall Investment Research

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Only two stocks have so far gone backwards. Macquarie Group (MQG) was quite disappointing at 5.1%. Duet Group (DUE) at 0.2% is a result I can live with, as I got the dividend before it went ex-div.

In the next three columns I show the broker consensus recommendations (1 is a buy, 2 is an outperform, 3 is a hold, 4 is an underperform and 5 is a sell). I take 3.5 and bigger as a bad sign.

Most recommendations have not changed much. IOOF Holdings (IFL) did have a material improvement from 2.77 to 2.46 so that one is certainly a keeper. Suncorp Group (SUN), Bendigo & Adelaide Bank (BEN), Federation Centres (FDC) and Dexus Property Group (DXS) have deteriorated in their recommendations by about the same amount. None has slipped above a 3 and so I am comfortable at this point especially as I am after yield. If Suncorp, Federation and Dexus do not gain any more in the rest of the financial year, I would be happy to come away with those gains listed in Table 2 that have already been achieved.

If I take all of these stats together, Macquarie looks fine for the future and so I am not itching to jettison it. While several stocks seem a little bland, the mix gives me confidence that my yield and growth expectations may both be met.

Comparison notes

As a final diagnostic, I compare my June 25th portfolio to the one I would have rebalanced into at the start of September, had I been so inclined. The sector weights did not turn out to be that much different from those at the end of June. However, my algorithm struggled to find sufficient stocks that meet my criteria.

Table 3: Rebalancing diagnostic

Source: Woodhall Investment Research

Note: Allocation is a dollar value for a nominal $100,000 portfolio for the ‘start’ portfolio but ‘now’ and ‘new’ also include the unrealised +4.8% capital gains.

As a result, it can be seen from Table 3 that the total number of stocks has fallen from 16 to 13. Cardno (CDD), Tatts Group (TTS), Bendigo & Adelaide Bank, Federation, Stockland (SGP) and Dexus would have been sold off in a rebalance. Tabcorp (TAH), Perpetual (PPT) and Scentre Group (SCG) would have entered.

Scentre is an obvious candidate for inclusion. Westfield was going through its restructure at the end of June and Scentre was not then available to buy. Tabcorp is a straight substitute for Tatts Group. I see no great difference between them and so I wouldn’t swap but I might now have bought Tabcorp instead of Tatts. Similarly, changing Bendigo for Perpetual doesn’t interest me (yet!).

Of course, some of the dollar values for sells and buys in the last column are too small to be efficient. In particular, for a $100,000 portfolio, the transactions for Primary Healthcare, IOOF, Bank of Queensland, Duet and Spark Infrastructure are too small to justify the brokerage, paperwork and effort.

To conclude, I am about to sell Telstra in the buy-back and probably I will buy it back collecting franking credits along the way. Spare dividends after paying my pension might get parked in Scentre while I wait for a rebalance. Since Scentre’s share price has climbed nicely since listing, a purchase now might turn out to be a good deal when I do get around to rebalancing. Of course such a move means that I am temporarily unbalanced – but this is how I operate. Since I have to wait about 12 months to collect my franking credits from my dividends, I am not in a position to reinvest much at this point.

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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