Model portfolios: New Year changes

With the holiday season fading from memory, Super Advisor’s investment committee knuckled to their task, meeting this week to review the three model portfolios and make a few changes.

Target asset allocations

Table 1 shows the portfolios as they stood on 15 January before any changes.

Despite the decline of the Australian dollar against its American counterpart and plummeting oil and iron ore prices, all three portfolios remain more or less in line with their target asset allocations. We’re conscious that the weightings of international shares in the Conservative and Moderate portfolios are slightly above their targets, while their allocations to international cash and debt securities is slightly below.

Ideally, for these less aggressive portfolios, the opposite would be the case. That is, if we had to be slightly weighted to one of those asset classes at the expense of the other, we’d rather it be cash and debt securities.

Overall, the current situation gives us the same total international currency exposure but does so via a riskier mix of assets. That said, the allocations are not so out of line that we believe changes are required. But should they drift much further away from their targets, we’ll look to make some changes.

The same logic applies to the Aggressive portfolio’s allocation to international shares. It’s currently higher than its target, too. And it has correspondingly lower than target allocations to international cash and debt securities and ‘other’ (ie our portfolio of junior gold companies).

Cash and fixed interest

With Australian interest rates at historical lows – the Reserve Bank of Australia has kept its target cash rate at 2.50% for more than a year now – term deposit rates have been steadily falling. Our view is that term deposit rates are more likely to decline than increase over the coming 6-12 months, so we want to keep adding longer dates to our term deposit ‘ladder’ at regular intervals.

The cash in the ING Direct and UBank bank accounts currently earns 2.75% and 3.51% p.a. respectively but is subject to lower returns should interest rates decline further. To insulate a little against the potential for a prolonged period of microscopic rates, new five-year term deposits have been established in all three portfolios as follows: Conservative - $20,000, Moderate - $15,000 and Aggressive - $10,000.

While higher rates are available (eg ME Bank – 4.15% p.a.), we have again gone with Rabobank which is paying 3.9% (interest paid annually) to reduce the amount of paperwork required. We manage the model portfolios taking into account such real-world practicalities as the administrative burden. But if you’re happy to fill out forms to eke out the extra returns, then you should do so.

By locking up cash for five years, we are taking the risk that interest rates in fact rise, meaning the money invested in these term deposits will be earning inferior returns. We also reduce our flexibility to dramatically change our asset allocations should market valuations swing strongly in favour of other asset classes.

In making the decision, we considered the fact that the three portfolios still have a decent amount of cash available, as well as investments in the Shroders Fixed Income fund, which should prove rather liquid if the funds were better deployed elsewhere.  

Australian shares

There weren’t any further changes to the Conservative portfolio.

Added to the Moderate and Aggressive portfolios in January last year, Echo Entertainment Group has returned 58% including dividends in a year, proving to be a prescient pick by our colleagues at Intelligent Investor Share Advisor. Now that investors are less concerned about the impact of the new Packer-backed casino in Sydney, Echo is now more fairly valued.  

As such, we have decided to take our profits and sell Echo in both portfolios. We have split the proceeds roughly in half and purchased 1,100 shares of Ainsworth Game Technology and an additional 470 shares of The Reject Shop in the Moderate portfolio. Similarly, we have purchased 1,460 shares of Ainsworth and 380 shares of Austbrokers Holdings in the Aggressive portfolio.

Ainsworth Game Technology (ASX Code: AGI)

This pokie machine manufacturer founded by Len Ainsworth – who also founded Aristocrat Leisure – has fallen sharply in the past year after five years of phenomenal growth. A profit warning at its recent AGM didn’t help matters. Yet as the analysts at Share Advisor have discussed in Ainsworth spins the reels in Vegas and Ainsworth Game Technology: AGM 2014, the share price decline appears overdone given the reasonable valuation, strong management and growth opportunities still available to the company.

The Reject Shop (ASX Code: TRS)

We added The Reject Shop to the Moderate and Aggressive portfolios in April 2014. Since then, concerns about the strength of Australia’s economy and management upheaval have pushed the stock down around 40%. The analysts at Share Advisor have been following events closely in The Reject Shop: The good, the bad and the catalyst and The Reject Shop takes a dive and believe it is still a Buy. We agree with them.

Austbrokers (ASX Code: AUB)

This insurance broker won’t be immune if Australia enters recession yet should still perform well as businesses are unlikely to operate without insurance that protects them and their customers. Members of Share Advisor can read the analysts’ research in articles such as Austbrokers upgraded to Buy and Insurers facing lower premiums.

That’s a summary of recent changes. Keep an eye out for the latest quarterly report, which will be published before the Australia Day long weekend.