Growth portfolio: Persistence pays
‘Nothing in the world can take the place of persistence ... The slogan ‘press on’ has solved, and always will solve, the problems of the human race’.
US President ‘Silent Cal’ Coolidge’s words were, of course, intended for a wider audience, but if we’ve learnt anything over the past 14 years it’s that the ability to stay the course is crucial.
Since 2001 we’ve run the model Growth and Income portfolios to provide you with a live ‘how to’ guide for managing money.
Key Points
- Growth portfolio returned 6.8% in the six months to 30 June 2012
- Persistence combined with a sound strategy typically leads to outperformance
- We’re here to partner with you over the long term
The Growth portfolio is designed for investors wishing to build wealth, but who don’t yet need to generate regular income from their investments. It aims to beat the All Ordinaries Accumulation Index.
For a number of years the portfolio lagged that index. However, by turning the global financial crisis into an opportunity, it has since overtaken it (see The five secrets of though-times investing). Since inception, in 2001, the portfolio has return 8.1% a year, 1.8% ahead of the index’s 6.3%—a margin we aim to increase. In that regard, we've been on the right track in the six months to 30 June 2012, with the portfolio returning 6.8% compared to the index’s 2.9%.
Our steady, risk-averse approach has been paying off.
Overseas exposure drives performance
Whilst we’re hesitant to focus on short-term performance, there are a number of share price movements worth highlighting.
As we’ve explained in several articles (see Ripe for the picking: Eight overseas stocks to buy now or Why now is a great time to invest abroad), we think that buying into overseas earnings streams now is a sensible way of taking advantage of the high Aussie dollar and diversifying away from Australia’s banking and resources-dependant economy.
If it seems like we’ve laboured the point, the portfolio’s recent performance demonstrates why we’ve been so insistent. While fears about the local economy have been driving share prices lower, companies with overseas earnings have outperformed.
Indeed, most of the Growth portfolio’s performance in the six months to 30 June 2012 was driven by News Corp, CSL, Westfield Group, Cochlear, Sonic Healthcare and Aristocrat Leisure which rose by 24.6%, 23.2%, 21.6%, 6.2%, 12.6% and 25.5% respectively. The latter as signs of a nascent turnaround emerge (see 02 Jul 12 (Long Term Buy – $2.45)).
In the words of Mae West, ‘too much of a good thing can be wonderful’ and, with this in mind, we’ve increased our overseas exposure over the past year. Over 40% of the portfolio’s earnings are now derived offshore (see Chart 2), and we’ve further diversified our currency exposure by placing a portion of the portfolio’s cash in a US dollar exchange traded fund (see Topping up model portfolios from 29 Jun 12).
Other notable performers include 4WD accessories company ARB Corporation, whose share price jumped 17.7%, and Challenger Infrastructure Fund whose security price rose 17.0% following the sale of its two assets, effectively placing the company in wind-up mode (see CIF: Risk reduced, upside improved from 06 Jun 12 (Long Term Buy – $1.18) and CIF: Inexus sale boost from 26 Jun 12 (Hold – $1.29)).
Meanwhile, grocery wholesaler Metcash’s share price fell 16.6% following hard evidence that its business has weakened. Since 30 June we have downgraded the stock and disposed of our holding (see Red flags waving for Metcash from 10 Jul 12 (Hold – $3.25).
Even so, the impact on the portfolio’s total return has been minimal, highlighting the importance of sensible diversification.
The share prices of Tap Oil and Infigen Energy swung wildly over the period, rising 16.0% and falling 16.7% respectively. This kind of price volatility reflects the risk of each investment, which is why they are relatively small positions.
Buying and selling further boosts offshore earnings
As already noted, we have increased the Growth portfolio's overseas exposure in the past year, and that's been a feature of the buy and sell decisions over the past six months.
On the sell side, we have disposed of holdings in the locally exposed Perpetual and Spark Infrastructure.
In the case of Perpetual, this reflected concerns about fund outflows and management turmoil. This led to a downgrade (see Doors close on Perpetual from 24 Feb 12 (Sell – $24.43)) and the sale of our holding at a small loss.
With Spark, we took a profit of 32.5% in just over a year after management indicated it is fishing for acquisitions. This could trigger a capital raising and increase debt, while diluting our exposure to the reliable and growing revenue stream from its prized electricity infrastructure assets.
Other disposals included the reduction of our stake in 4WD accessories maker ARB Corp following its price rise, and the sale of a small position in gold explorer Integra Mining (see Topping up model portfolios from 29 Jun 12).
Additions of QBE Insurance, Infigen Energy and Computershare have increased the portfolio's overseas exposure.
Stock (ASX code) | Buy/Sell | Shares (no.) | Price ($) | Value ($) | Date |
---|---|---|---|---|---|
QBE Insurance (QBE) | Buy | 293 | 11.10 | (3,252) | 13/01/12 |
Perpetual (PPT) | Sell | 331 | 24.43 | 8,086 | 24/02/12 |
ARB (ARP) | Sell | 700 | 9.32 | 6,521 | 03/04/12 |
Infigen Energy (IFN) | Buy | 18,500 | 0.25 | (4,533) | 03/04/12 |
Metcash (MTS) | Buy | 1,100 | 4.15 | (4,560) | 03/04/12 |
Spark Infrastucture (SKI) | Sell | 6,493 | 1.42 | 9,220 | 20/04/12 |
Integra Mining (IGN) | Sell | 4,100 | 0.375 | 1,538 | 29/06/12 |
Computershare (CPU) | Buy | 300 | 7.38 | (2,213) | 29/06/12 |
BetaShares US Dollar ETF (USD) | Buy | 1,100 | 9.90 | (10,890) | 29/06/12 |
QBE Insurance and Computershare look like they are suffering from market myopia, with too much focus being placed on short-term earnings and risks. This is often a fertile ground for value investors. Our own successes in this area in the past include Flight Centre, Sydney Airport and Goodman PLUS. QBE and Computershare should both be earning appreciably more in five years' time than they are today.
Infigen, on the other hand, is a case where complexity and debt are masking an attractive situation (see Infigen an energetic spec buy on 19 Sep 11 (Speculative Buy – $0.24)).
We've weighted each investment according to the risks and rewards on offer. The more speculative nature of Infigen means we’ve only invested 1.8% of the portfolio in the stock, whereas we are comfortable placing around 6% in both Computershare and QBE.
With the benefit of hindsight, our investment in Metcash was a mistake as we were overly optimistic about the company's future prospects, including the recent Franklins acquisition. Metcash won the battle with regulators, but the cost of the war means the acquisition won't produce high returns on capital as we initially expected. We've bitten the bullet since the half-year ended, escaping with a total loss on the holding of 17.7%. Although, as we've already noted, the overall effect on the portfolio was small due to the large dividends that the portfolio has received from Metcash.
Persistence, resistance and support
Managing money isn’t easy. But it is nowhere near as hard as many financial pundits would have you believe. Our model portfolios, in combination with our stock research, aim to make the task far less burdensome.
Recently we’ve made enhancements to our website to make it even easier, such as adding detailed financial data and the My Stockwatch feature. We have also just published a special report on how your brain undermines your performance and what you can do to keep it in check, as experience suggests that being prepared and doing the right thing at the right time has a larger impact on your wealth than anything else.
The next few years are likely to be tough, but we’re here to help. It’ll require fortitude and persistence but, combined with a sound process, beating the market remains distinctly achievable.
Note: For more on portfolio management check out Building and managing your portfolio or dive into our back catalogue of portfolio reviews. For the latest on the Income portfolio check out Income portfolio delivers steady returns.
Stock (ASX code) | Price movement since 31/12/11* (%) | Most recent reco. | Shares (no.) | Price^ ($) | Value ($) | % of portfolio |
---|---|---|---|---|---|---|
Abacus Property Group (ABP) | 7.4 | Hold – $1.90 (13 Jun 12) | 3,060 | 2.04 | 6,242 | 2.7 |
ARB Corporation (ARP) | 17.7 | Hold – $8.75 (01 Mar 12) | 1,300 | 9.1 | 11,830 | 5.0 |
Aristocrat Leisure (ALL) | 25.5 | Long Term Buy – $2.45 (02 Jul 12) | 3,000 | 2.76 | 8,280 | 3.5 |
Australand (ALZ) | 2.9 | Hold – $2.74 (07 May 12) | 2,180 | 2.47 | 5,385 | 2.3 |
AWE (AWE) | 2.7 | Speculative Buy – $1.78 (06 mar 12) | 4,175 | 1.34 | 5,595 | 2.4 |
Brickworks (BKW) | -6.9 | Long Term Buy – $10.16 (13 Jul 12) | 600 | 10.1 | 6,060 | 2.6 |
Challenger Infrastructure (CIF) | 17.0 | Hold – $1.29 (26 Jun 12) | 9,000 | 1.31 | 11,790 | 5.0 |
Cochlear (COH) | 6.2 | Hold – $57.95 (20 Mar 12) | 200 | 65.84 | 13,168 | 5.6 |
Computershare (CPU) | -7.7 | Long Term Buy – $7.82 (14 Jun 12) | 1,815 | 7.58 | 13,766 | 5.9 |
CSL (CSL) | 23.2 | Hold – $35.62 (10 Apr 12) | 150 | 39.42 | 5,913 | 2.5 |
Elders Pref. Shares (ELDPA) | 6.6 | Hold – $34.00 (22 May 12) | 70 | 34.10 | 2,387 | 1.0 |
Infigen (IFN) | -16.7 | Speculative Buy – $0.22 (27 Jun 12) | 18,500 | 0.23 | 4,163 | 1.8 |
Macquarie Group (MQG) | 9.3 | Long Term Buy – $25.66 (18 May 12) | 490 | 26.00 | 12,740 | 5.4 |
Sydney Airport (SYD) | 9.0 | Long Term Buy – $2.61 (27 Feb 12) | 4,027 | 2.90 | 11,678 | 5.0 |
Metcash (MTS)~ | -16.6 | Hold – $3.25 (10 Jul 12) | 2,100 | 3.37 | 7,077 | 3.0 |
News Corp Non-Voting (NWSLV) | 24.6 | Hold – $21.95 (28 Jun 12) | 710 | 22.42 | 15,916 | 6.8 |
Platinum Asset Mmt (PTM) | 10.5 | Hold – $3.69 (11 Jul 12) | 2,700 | 3.89 | 10,503 | 4.5 |
QBE Insurance (QBE) | 3.1 | Buy – $14.09 (05 Apr 12) | 1,043 | 13.70 | 14,285 | 6.1 |
Servcorp (SRV) | 1.5 | Long Term Buy – $2.85 (22 Feb 12) | 1,636 | 2.65 | 4,335 | 1.8 |
Silver Lake (SLR) | -6.6 | Hold – $3.05 (20 Jun 12) | 850 | 2.81 | 2,389 | 1.0 |
Sonic Healthcare (SHL) | 12.6 | Hold – $12.81 (16 May 12) | 1,000 | 12.70 | 12,700 | 5.4 |
Tap Oil (TAP) | 16.0 | Speculative Buy – $0.64 (18 May 12) | 4,600 | 0.69 | 3,174 | 1.4 |
Westfield Group (WDC) | 21.6 | Hold – $9.18 (16 May 12) | 695 | 9.50 | 6,603 | 2.8 |
Woolworths (WOW) | 6.8 | Long Term Buy – $26.44 (01 Jun 12) | 430 | 26.80 | 11,524 | 4.9 |
^Held via US dollar ETF at current market prices | Cash (AUD) | 16,121 | 6.9 | |||
*Since purchase for new additions | Cash (USD)^ | 10,758 | 4.6 | |||
~Sold post 30 June | Total portfolio value ($) | 234,380 | ||||
Return since inception (p.a) | 8.1 |