Diversified Portfolios - Intelligent Investor Growth - 31 March 2016

COMMENTARY

PORTFOLIO COMMENTARY

After the market’s January wobbles, things settled down in February and March and our Growth Portfolio actually managed to scrape a profit for the quarter, returning a not very grand total of 0.2%. Still, it compares with the All Ordinaries’ loss for the period of 2.4%, so we’re reasonably satisfied.

Since 1 July 2015, when we opened it up for direct investment, it has returned 9.2%, which is just over 11% ahead of the All Ords’ 1.9% loss. Since inception in 2001, the portfolio has returned 10.2% a year compared to 7.4% a year for the All Ords.

As has been the case for most of the past year, we were helped by our limited exposure to the banking sector, with the big four banks – which account for about a quarter of the All Ords – each losing around 10% (and ANZ dropping 16%). We’re not averse to investing in the big banks but, with bad debt provisions currently at historically low levels, we’re minded to exercise caution.

Macquarie Group hasn’t been spared and we took the opportunity to buy a 3% stake in the company in February, at $60.28, down 27% since the start of the year. The negativity surrounding global markets had pushed the stock down to just ten times forecast earnings per share for the year to March, which we feel undervalues the company given its shift towards more stable streams of earnings.

Our other purchase for the quarter was Ansell, in which we invested about 3% at$15.05 also in February, after its share price tumbled as much as 20% after management warned that earnings per share would fall by around 17% in 2016, in US dollar terms, compared to previous guidance of a 9% fall.

Making way for these purchases were the redoubtable Washington H Soul Pattinson and Servcorp. We’re great fans of both these companies and would gladly have continued to hold them, but neither is particularly cheap after returning 24% and 20%respectively this financial year.

So far, Macquarie and Ansell have rewarded us with returns of 10% and 13%. The standout performer of the quarter, though, was South32, which leapt 38% from what we considered to be very oversold levels, as commodity prices recovered. Origin Energy also benefitted, with an 11% gain, while, elsewhere, Hansen Technologies and Monash IVF also enjoyed returns of around 11%.

At the other end of the scale, OzForex lost 39% after it announced a profit warning alongside news that Western Union had failed to come up with an offer for the company following its due diligence. The company said the lower expected profits were due to a reduction in marketing expenditure while the group switches over to its new global logo: OFX. At current prices the stock looks cheap, but we’re reluctant to add our 3% holding due to the increased risks.

Computershare was the other notable faller, losing 16% after a disappointing interim result compounded concerns over potential disruption to its business from distributed ledger (aka ‘block chain’) technology. One way or another, it’s becoming clear that Computershare isn’t as good a business as we once thought, but that is already more than reflected in its share price, which represents a multiple of just over 13 times this year’s expected earnings per share.

PORTFOLIO OBJECTIVE

The investment objective is to achieve a return of 1% above the All Ordinaries Accumulation Index per annum over three year rolling periods by investing in a diverse mix of Australian equities and cash.

PERFORMANCE SUMMARY

The InvestSMART Diversified Growth portfolio returned 2.09% over the month of March, outperforming the benchmark by 0.49% and the RBA Cash Rate 3% objective by 1.67%. Since inception the InvestSMART Diversified Growth portfolio is behind its benchmark by 0.82% but ahead of its cash-plus objective by 0.43%.

GROWTH OF $10,000

Income Reinvested

PEFORMANCE SUMMARY TO 31 MARCH 2016

Source: Praemium, RBA. Returns are before expenses and fees. Returns are shown as annualised if the period is over 1 year. * Since Inception (SI) date is 1 July 2015.

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