Model portfolios take their lumps

It's been a busy six months for our Model Growth and Model Income portfolios. Following the separation of our funds from our research publication, they initially went with the funds. But it soon became clear that members preferred them to remain as an integral part of our research service, demonstrating how you might use it to manage portfolios in the real world. So we made the decision to move them back.

And it all happened while markets were tumbling. The net effect has been more trading than we'd normally expect, but the portfolios have ended the period in line with our published research and in reasonable shape.

Performance has been disappointing - due to a few poor selections rather than anything else. Overall, our Model Growth Portfolio lost 8.8% in the six months to 31 December, while our Model Income Portfolio lost 10.5%, compared to the fall of 7.3% for the All Ordinaries Accumulation Index.

It's all the more galling because we were cautious of the high valuations in the early part of 2018. So when the market peaked at the end of August, the cash weighting in each portfolio was around 16% and they remained at or above 10% throughout the half. The Model Growth Portfolio ended the half with cash back at 16%, although the Model Income Portfolio had fallen to 12%.

Losers

Chief among the losers has been IOOF, which began the half at $9 - before Chris Kelaher made his disastrous appearance at the Royal Commission and APRA commenced proceedings to disqualify him and others.

To make matters worse, we topped up our holdings in both portfolios before eventually selling out at $4.43*. That turned out to be pretty much the bottom (so far), further exacerbating what has been an unhappy episode. Of course that's why we diversify and have portfolio limits, but even so, it ended up costing each portfolio around 3%.

Another big loser in the half was Carsales, which fell 27% from $15.12 to $11.00 in the Model Growth Portfolio due to the general malaise among technology stocks and, more specifically, weakness in its display advertising and car finance businesses. The core business remains high quality, however, and its valuation (a forward price-earnings ratio of around 21) is as attractive as it's been for a while. We upgraded the stock to Buy in November and have topped it up in the Model Growth Portfolio and introduced it into the Model Income Portfolio with a 3% weighting.

Also among the online classifieds, News Corp (most of whose value is now in REA Group at home and Move.com in the US) fell 23% in the half in both portfolios, while Seek fell 22%. We remain confident in both companies, though, with News Corp earning an upgrade to Buy and Seek within 10% of its $16 Buy price.

Winners

There weren't too many bright spots, but one of them was Trade Me, which rose 40% in the half after attracting a bid from private equity and paying dividends (including a special) worth a further 7% in September. Given the stock's 7% weighting in both portfolios, that roughly offset the loss in IOOF on its own.

We took some profit after the initial bid was received to keep the weighting in both portfolios at around 7%. That's just above our recommended maximum of 6%, but we're content with that given that it's likely to turn into cash within a few months (and that it's a high-quality business in case for some reason it doesn't).

TPG Telecom has also been in the mergers and acquisition spotlight, for the Model Growth Portfolio, announcing a proposed deal to get together with Vodafone. That led to its disposal - while the portfolio was being separately managed - at over $8. We haven't yet decided to buy it back, but with the ACCC questioning the deal and the price falling back below $7, it's getting back towards our $6 Buy price.

Other changes

Other disposals in the half included Fleetwood (Growth only), Monash IVF, Navitas and PMP (Income only), following downgrades to Sell, as well as Ansell, ASX and Perpetual (which was switched for Platinum Asset Management).

Other purchases included Coles Group, Domain Holdings (Growth only), Fortescue Metals Group (Growth only), Platinum Asset Management, Ramsay Health Care (Growth only), Sonic Healthcare and Unibail-Rodamco-Westfield, each of which were upgraded to Buy during the half, as well as Reece.

With cash levels still healthy and the market offering better value - at least since six months ago - we're on the look-out for further opportunities.

* Note that IOOF was sold at around $6.80 while the portfolios were being separately managed, but was bought back at about the same level when they were brought back into line with our published research.

Disclosure: The author owns shares in Audinate, Carsales, iCar Asia, Ramsay Health Care and Seek.