Intelligent Investor Portfolios turn three
Our Income and Growth portfolios have made a positive start to life.
The age of three is significant for humans, marking a shift from toddlerhood to childhood, where the hopes and dreams of parents are replaced by real growth and development.
Portfolios beating benchmark
Trading kept to a minimum
Focus on long term
Shares follow a similar trajectory. As Ben Graham said: ‘In the short term the market is a voting machine, while in the long term it's a weighing machine.' Hold a stock for a day and its return will be determined by how others perceive it; hold it for three years and actual achievements start to matter.
This is borne out by the performance of our Equity Income and Equity Growth portfolios, which are celebrating their third birthday, after starting to accept real money on 1 July 2015. (The Equity Income Portfolio had an early birthday party on 19 June, when it listed on the ASX under the code INIF.)
Over the portfolios' first three years, the market's perception of stocks has improved, with the forward price-earnings ratio for the S&P/ASX 200 expanding 5% from 15.3 to 16.1, but its underlying earnings have grown 9% so that the underlying index has risen 14%. Throw in dividends and that return more than doubles to 30%, or 9.0% a year.
|Period to 30 June 2018||1m
|* 1 July 2015|
|**Performance is shown after costs|
Our portfolios have done a bit better than that, with the Growth Portfolio returning 11.3% a year and the Income Portfolio returning 12.4% a year, after costs.
Those returns have been supported by the growth and development of some of our largest holdings.
Like much of the market, sentiment has improved towards Trade Me Group, currently the biggest holding in both portfolios, with its price-earnings ratio rising by 16% from 17 to 19. But earnings have outpaced that, growing 23% over the three years to give a share price rise of about 43%. Throw in dividends and the stock has returned 62%, or 17% a year.
ASX, meanwhile, has seen its price-earnings ratio rise 22%, but a 33% increase in earnings and some chunky dividends have pushed its return up to 81%, or 22% a year.
This is not to say that price doesn't matter. It's what you're paying for the underlying ‘weight' of a stock and it will therefore make a huge difference to performance, by virtue of the starting yield you get.
The increase in ASX's multiple, for example, certainly makes it less appealing, which is why we trimmed our weighting in the stock last week. We've also (ahem) traded Trade Me, reducing our holding at a price of $5.32 in September 2016 and increasing it again a few months ago at $4.09.
These are both high quality businesses, though, and we're inclined to give them some leeway; it would take high prices to encourage us to sell them entirely.
Buy in gloom; sell in boom
As a result, these three stocks have provided the best returns for both portfolios – the first two providing annualised returns of 76% and 38% respectively and South32 delivering 72% for the Income Portfolio and 36% for the Growth Portfolio.
The difference in returns from South32 emphasises the point about valuation and performance. Initially we only bought South32 for the Growth Portfolio because at that stage it wasn't paying a dividend. But at a price of $1.27 we couldn't resist any longer and bought some for the Income Portfolio, looking ahead to the dividends we thought its cash flow might eventually support.
From then till our final sale the share price rose almost threefold and, in our final 12 months of ownership, it paid dividends amounting to 10% of our purchase price.
It just goes to show that when you're putting together an income portfolio it's worth looking beyond the highest yielding stocks.
Of course we've had a few stuff-ups to go with our successes.
The worst of these in both portfolios, in dollar terms, were GBST and amaysim, where the growth story described above happened in reverse, with earnings slumping and the multiple placed on those earnings also falling. It resulted in total losses of around 64% for GBST and 49% for amaysim.
For the most part, though, the losers were in smaller positions and they have, in any case, been comfortably outnumbered by the winners. Of all the stocks held over the three years, 81% (30 out of 37) have made a positive contribution for the Income Portfolio, while 77% (27 out of 35) have done so for the Growth Portfolio.
Trading has been kept to a minimum, with only about 71% of the Income Portfolio's average value being sold over the three years and about 64% of the Growth Portfolio's – or less than a quarter each year.
That gives an average holding period for both portfolios of between four and five years, which helps reduce costs and tax. It also helps keep our focus on the long term, which is where we believe our main advantage lies.
This long-term approach is also borne out by the fact that both portfolios still hold seven out of their top ten holdings from three years ago.
After several recent disposals, most notably of Flight Centre, both portfolios now hold around 14% in cash. That's more than usual, but we're in no rush to spend the money. Our preference is to find some more attractively priced stocks that we can hold for many years while they grow and develop. Experience tells us that, if we're patient, opportunities will appear.
Find out how you can invest directly in these and other Intelligent Investor and InvestSMART portfolios by clicking here.
Join us at 1pm on 25 July for a live Q&A on our Income and Growth Portfolio's first three years and how they're planning for the future.
Disclosure: The author owns many of the stocks mentioned, via his holdings in both the Equity Growth and Equity Income portfolios. He also owns Trade Me, Seek and iCar Asia directly.
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