2013: Income Portfolio in transition
The model Income Portfolio is designed to provide a steady income while producing enough capital growth to offset inflation. Having achieved a 13.5% annual return since inception compared to the 8.4% return of the All Ordinaries Accumulation Index, the portfolio has exceeded its aim and then some.
More recently, though, the performance has been average. In the six months to 31 December 2013, the portfolio returned 8.6% compared to the 15.4% return of the index. The performance was much better over the full year but still fell short of the index – 19.1% versus 20.6% – chiefly due to the portfolio’s cash holding (currently 11%). Given how conservatively the portfolio has been managed, this is what you’d expect. When the market is strong, like it has been in 2012 and 2013, such a conservative portfolio will struggle to keep up. But when markets turn down, the portfolio should outperform and more than make up any lost ground.
Stock (ASX code) | Buy/Sell | Shares (no.) | Price ($) | Value ($) | Date |
---|---|---|---|---|---|
STW Communications | Sell | 4,000 | 1.64 | 6,560 | 9/07/2013 |
Perpetual | Buy | 160 | 38.72 | 6,195 | 19/09/2013 |
Transpacific Step-up Preference Shares | Buy | 60 | 95.37 | 5,722 | 8/10/2013 |
M2 Telecommunications | Buy | 1,000 | 6.02 | 6,020 | 18/10/2013 |
Westfield Group | Sell | 186 | 11.14 | 2,072 | 18/10/2013 |
Since the GFC, though, the portfolio has returned 12% annually compared to the 13% return of the index. Again, this isn’t a bad outcome for such a conservative portfolio during such a strong period for share prices. But given our model Growth Portfolio returned 22% over the same period, it’s clear we haven’t made the most of our opportunities.
We erred in not including some of our best ideas, such as CSL, Macquarie Group and 21st Century Fox, which have all doubled or more, because they didn’t pay high fully franked dividends. Even a conservative income portfolio needs to make room for dirt-cheap stocks. The large potential capital gains more than make up for any small and temporary sacrifice of income.
In Australia most stocks pay fully franked dividends anyway so we’ve started transitioning the Income Portfolio to look more like the Growth Portfolio, which is designed to be a collection of our best ideas. More recent additions such as Computershare and ResMed are good examples. These wonderful businesses deserve inclusion because of their attractive valuations and because they offer international diversification, but neither pays high fully franked dividends.
There will always be major differences between the model portfolios, though. It’s highly unlikely we’ll add many Speculative Buy ideas to the Income Portfolio, for example, and the portfolio limits may be smaller to reduce risk. We’re cognisant that investors living off their portfolio can ill afford large, permanent capital losses.
In summary, we’ve been too conservative with the Income Portfolio since the GFC and we’ve been taking remedial steps throughout the year. Before we highlight the latest, let’s analyse the best and worst performers over the past six months.
Heroes and villains
Among the plethora of winners, fund managers Platinum Asset Management and Perpetual were our top performers, with their share prices increasing 26% and 25% respectively. Platinum was also the dux of the class in 2013, posting a share price increase of 74%. Both fund managers have started receiving inflows following strong returns from their portfolios, and it’s pleasing to see Platinum rediscover its magic while benefitting from the falling Aussie dollar.
Not far behind was Servcorp. Its share price increased 24%. We’ve been patient with this business, which hasn’t been a great performer so far, but despite struggling to fill some of its mature offices, spurning a potential takeover offer from larger rival Regis and receiving a ‘first strike’ against its remuneration report, an improving global economy should help the company increase occupancy levels across the board leading to higher profits and dividends.
The share price for Westpac and Commonwealth Bank both increased 12%, as (provisions for) bad debts fell and investors bid up stocks offering attractive dividends in the face of low interest rates. Dividends will likely become more important from here following the large rise in share prices and valuations across the financial sector.
Turning to the biggest losers, QBE Insurance‘s share price fell 23% after announcing it was writing-off a significant chunk of its US operations. It’s been a frustrating holding for several years but we’re prepared to be patient because, as we explained in QBE upgraded to buy from 9 Dec 13 (Buy – $12.00), QBE looks cheap given many of its problems are temporary and it’s still producing $1bn of cash per year.
Westfield Group and BWP Trust produced the only other losses, with their share prices declining 12% and 8% respectively. We regret not reducing our stake in Westfield as the share price approached $13. Over time we expect to find better investments but we’re content to hold at current prices.
Key changes
In addition to Perpetual, we added fast growing internet and mobile services provider M2 Telecommunications Group. The price-to-earnings ratio of 13 and fully franked dividend yield of 3.6% compares very favourably with its larger peers, some of which are trading on extremely high multiples, and growth in its internet and mobile divisions should offset the decline of its more obsolete services.
There weren’t many transactions overall, but we slightly reduced our position in Westfield Group and we sold advertising and marketing company STW Communications after it produced a total return of 109% since The mad men of STW from 08 Dec 11 (Long Term Buy – $0.85).
While we’re more than happy to buy companies despite any macroeconomic concerns if we’re being compensated with a cheap valuation, we’re generally avoiding companies highly reliant on a strong Australian economy, as we’re still concerned about the credit boom and slowing growth in China. The market for high quality industrials also looks fairly valued, so we’d welcome any opportunity to put our cash to work and complete the final transition of the portfolio toward a more prospective balance between risk and return.
Stock (ASX code) | Price movement since 30/06/13 (%) | Most recent reco. | Shares (no.) | Price ($) | Value ($) | % of portfolio |
---|---|---|---|---|---|---|
Amalgamated (AHD) | 5% | Hold | 675 | 8.19 | 5,528 | 3% |
ALE Property Group (LEP) | 2% | Buy | 4,500 | 2.72 | 12,240 | 6% |
ASX (ASX) | 11% | Buy | 320 | 36.76 | 11,763 | 6% |
BWP Trust (BWP) | -8% | Buy | 2,600 | 2.19 | 5,694 | 3% |
Carsales (CRZ) | 10% | Buy | 600 | 10.19 | 6,114 | 3% |
Commonwealth Bank (CBA) | 12% | Hold | 60 | 77.80 | 4,668 | 2% |
Computershare (CPU) | 11% | Buy | 1,430 | 11.38 | 16,273 | 8% |
M2 Telecommunications (MTU) | 4% | Buy | 1,000 | 6.27 | 6,270 | 3% |
Origin Energy (ORG) | 12% | Buy | 450 | 14.07 | 6,332 | 3% |
Perpetual (PPT) | 25% | Buy | 160 | 48.26 | 7,722 | 4% |
Platinum Asset Mmt (PTM) | 26% | Hold | 1,500 | 6.89 | 10,335 | 5% |
QBE Insurance (QBE) | -24% | Buy | 700 | 11.51 | 8,057 | 4% |
ResMed (RMD) | 26% | Buy | 2,300 | 5.30 | 12,190 | 6% |
Servcorp (SRV) | 24% | Hold | 1,800 | 3.98 | 7,164 | 3% |
Seven Net. TELYS4 (SVWPA) | 4% | Hold | 93 | 88.20 | 8,203 | 4% |
Sydney Airport (SYD) | 12% | Buy | 3,280 | 3.80 | 12,464 | 6% |
Transpac SPS (TPAPA) | 5% | Hold | 60 | 100.00 | 6,000 | 3% |
Washington H Soul Patts. (SOL) | 11% | Buy | 700 | 14.61 | 10,227 | 5% |
Westfield Group (WDC) | -12% | Hold | 900 | 10.09 | 9,081 | 4% |
Westpac Banking Corp. (WBC) | 12% | Hold | 140 | 32.38 | 4,533 | 2% |
Woolworths (WOW) | 3% | Buy | 400 | 33.85 | 13,540 | 7% |
Cash (Lifetime dividends received) | 119,959 | |||||
Cash (Available for investments) | 23,087 | 11% | ||||
Total | 327,444 | 100% |