Model portfolios get a spring clean
At last year's roadshow event I nominated Caltex as an ugly duckling that could turn into a swan. Once it converted the lousy Kurnell refinery into an import/export terminal the company would be left with a highly profitable fuel retail business benefiting from the increasing use of higher margin fuels, such as diesel.
I'm glad it's up over 50% since then for several reasons. First, I didn't embarrass myself with a lousy stock pick. Second, it justified our view that you were more likely to find value amongst messy, complicated businesses that weren't the sort of high yield or reliable growth stories most investors were desperately searching for. And lastly, with most of the value that we uncovered now realised we're taking some profits. As a result, it serves as a reminder to spring-clean your portfolio on a regular basis so you don't get caught with a portfolio of expensive stocks if the market turns wintry.
You can see the full list of changes in the model Growth Portfolio in the table below. It's a mixture of trimming around the edges and exiting some positions to raise the cash holding to 16%. That gives us some firepower for future opportunities, which are bound to be better than what we're seeing currently.
Most of the portfolio's holdings have performed well, which is great, but it also means we need to find new ideas to meet our objective of achieving double-digit annual returns. When we can't find them we're prepared to hold cash even if it detracts from our performance in the short term, as experience tells us that your long-term returns will be superior if you wait patiently for the right opportunities.
Stock (ASX code) | Buy/Sell | Shares (no.) | Price ($) | Value ($) | Date |
---|---|---|---|---|---|
ASX (ASX) | Buy | 200 | 36.34 | 7,268.00 | 15 Sep 14 |
AWE (AWE) | Sell | 4,175 | 1.6825 | 7,024.44 | 15 Sep 14 |
Caltex Australia (CTX) | Sell | 150 | 28.36 | 4,254.00 | 15 Sep 14 |
Cochlear (COH) | Sell | 40 | 67.40 | 2,696.00 | 15 Sep 14 |
Computershare (CPU) | Sell | 710 | 12.19 | 8,654.90 | 15 Sep 14 |
Echo Entertainment (EGP) | Sell | 1,500 | 3.21 | 4,815.00 | 15 Sep 14 |
M2 Group (MTU) | Sell | 1,650 | 7.505 | 12,383.25 | 15 Sep 14 |
Macquarie Group (MQG) | Sell | 85 | 58.735 | 4,992.48 | 15 Sep 14 |
Sonic Healthcare (SHL) | Sell | 500 | 16.73 | 8,365.00 | 15 Sep 14 |
Sydney Airport (SYD) | Sell | 1,605 | 4.27 | 6,853.35 | 15 Sep 14 |
Trade Me (TME) | Buy | 1,856 | 3.14 | 5,827.84 | 15 Sep 14 |
We're selling the small AWE stake as the higher share price means by definition that the situation has become more speculative. Unfortunately it wasn't a profitable investment, but eliminating a bunch of smaller positions like these over time should make it easier for you to emulate the portfolio if you wanted.
We've retained a good chunk of Caltex as we think there's more value to be realised, and we'll update the situation in a few weeks. We've trimmed the Cochlear stake as the stock has performed well recently, and we knocked our Computershare position down to 4% as the increase in corporate activity doesn't seem to be helping the company's earnings as much as we'd hoped.
We've sold Echo Entertainment as the large mispricing stemming from last year's announcement that Crown Resorts was opening a rival casino in Sydney has reduced. We're also eliminating M2 Group after the recent increase in its share price, though it clearly shows we were never meant to be traders as the share price was almost $8 when we started this process.
We're reducing our position in Macquarie for the same reasons as Computershare, and we're eliminating Sonic Healthcare after a great performance over the past few years.
We're trimming our position in Sydney Airports, which has been a wonderful investment since the GFC, and increasing our stakes in ASX and Trade Me as their share prices have remained stagnant despite some improvements in their businesses.
Income Portfolio
The only difference with the Income Portfolio is that we're trimming our position in ALE Property Group, which deserves a toast due to the 23% annualised return of the initial shares we purchased.
Stock (ASX code) | Buy/Sell | Shares (no.) | Price ($) | Value ($) | Date |
---|---|---|---|---|---|
ALE Propery Group (LEP) | Sell | 1,730 | 3.26 | 5,639.80 | 15 Sep 14 |
Computershare (CPU) | Sell | 460 | 12.19 | 5,607.40 | 15 Sep 14 |
M2 Group (MTU) | Sell | 1,000 | 7.505 | 7,505.00 | 15 Sep 14 |
Trade Me (TME) | Buy | 720 | 3.14 | 2,260.80 | 15 Sep 14 |
You might ask why we're selling stocks that are still Hold recommendations. The short answer is that we expect our Hold recommendations to do at least as well as the market, but the aspirations are much higher for our model portfolios. That often means selling Hold recommendations in favour of cheaper opportunities or holding some cash until the next great opportunity appears.
Managing your portfolio should be kept as simple as possible, as too much activity generally leads to poor results. But one of the lessons from our experience with QBE Insurance was to start selling as your stocks approach fair value if you don't intend to hold them through thick and thin. This takes a lot of discipline as it's hard to sell a stock that's been going up, but if you need some encouragement here's a few choice words from Seth Klarman in his 2004 letter to investors.
'It wouldn't be overstating the case to say that investors face a crisis of low returns: less than they want or expect, and less than many of them need. Investors must choose between two alternatives. One is to hold stocks and bonds at the historically high prices that prevail in today's markets, locking in what would traditionally have been sub-par returns. If prices never drop, causing returns to revert to more normal levels, this will have been the right decision. However, if prices decline, raising prospective returns on securities, investors will experience potentially substantial mark to market losses, thereby faring considerably worse than if they had been more patient.'
'Betting that the markets never revert to historical norms, that we are in a new era of higher securities prices and lower returns, involves the risk of significant capital impairment. Betting that prices will fall at some point involves opportunity cost of uncertain amount. By holding expensive securities with low prospective returns, people choose to risk actual loss. We prefer the risk of lost opportunity to that of lost capital.'