Portfolios back best ideas
Chairman Robert Milner recently said in regards to Washington H Soul Pattison's investment strategy that 'we've taken a long term decision that we're happy to sit with... we're not trying to match an index for the next three months'.
Likewise, as value investors, we at Intelligent Investor Share Advisor are looking to invest for the long term – and over long time periods our model portfolios show significant outperformance, even if the Income Portfolio has performed less well than usual over the past year. This is no surprise: given its more conservative make-up, we'd expect the Income Portfolio to lag when the market rises sharply, but to more than make up for it during downturns – as it has tended to in the past.
The market's recent rise, despite ongoing risks, underlines the need to keep an eye on quality and value. With this in mind, we have made several adjustments to our portfolios with the view of increasing our holdings in quality businesses – companies that would remain profitable in spite of potential further problems in Europe and China.
Key Points
- Several changes in both portfolios
- Changes in portfolio limit guidelines
- Increased positions in high quality businesses
We've also decided that our range of portfolio limits for our recommendations isn't wide enough and that some blue-chip stocks in particular deserve higher limits. In the past we've also tended to apply the limits based on our view of valuation and quality at a single point in time, but we think it would be more informative to provide a maximum limit and let you combine this with our recommendation guides and risk ratings to decide how much to invest.
This won't have much effect on medium to higher risk stocks, but expect to see the maximums being tweaked higher for some safer stocks. Ideally we'd also like to have fewer stocks in each portfolio, but this will depend on our being able to find better bargains.
Income Portfolio
We want both our model portfolios to reflect our best ideas, but the Income Portfolio's focus on safety and income has sometimes prevented this in the past. While Macquarie Group, CSL and News Corp have been among our best-performing recommendations over the past year or two, they haven't been included in the Income Portfolio because they didn't pay high fully franked dividends. But even in a conservative income portfolio there's room for some stocks that are dirt cheap, even if the current dividend yield is relatively low.
What matters is the overall income from the portfolio, and how that might develop over time, rather than an unflinching focus on current dividends; there's nothing like a stock that doubles for supporting a portfolio's potential to generate income. Over time, therefore, we plan to include more of our best ideas in the Income Portfolio.
Our sole removal from the portfolio in the current round of changes is the Betashares US dollar ETF. Lower cash balances and increased exposure to the US economy through ResMed and Computershare weaken the argument for diversifying our cash.
We have increased our holdings in ALE Property Group from 3.4% to 5% and bought a 3% stake in BWP Trust, the owner of Bunnings Warehouse properties. These property trusts both offer attractive assets with secure leases. The current yield of around 6% for both BWP and ALE is attractive due to the potential for future inflation driven increases in rent.
We have increased our holding in Computershare from 3.9% to 7% as we think the business remains attractive even after the 25% increase in price since our initial purchase. It only offers a yield of 3.3%, but that's more than cash and 5-year government bonds at the moment and we believe there is considerable potential for dividend growth thanks to cost initiatives in the US and the acquisition of BNY Mellon, not to mention the possibility of a cyclical upturn.
We have also added stakes in ResMed and Origin Energy, stocks that are not typically associated with income. ResMed currently offers only a 1.5% dividend yield but, as explained in ResMed's dream run continues on 25 Jan 13 (Long Term Buy – $4.52), there is significant growth potential. Apart from growth, ResMed adds a diversification benefit to the portfolio as the majority of its revenue is derived from the US.
We have started with a small 3% stake in Origin. We currently believe that the share price does not adequately reflect the potential of its APLNG project. However, there are significant risks associated with this business. In the interim, the main energy business will continue to deteriorate while APLNG will require significant investment before production of LNG begins in 2015. However, with its current 5.3% dividend yield we think this is an interesting opportunity though our small position size reflects the associated risk.
Stock (ASX code) | BUY/SELL | Shares (no.) | Price ($) | Value ($) | Date |
---|---|---|---|---|---|
Australand ASSETS (AAZPB) | SELL | 100 | 96.60 | 9,660 | 20/02/2013 |
ResMed (RMD) | BUY | 2,300 | 4.22 | (9,706) | 20/02/2013 |
Carsales.com (CRZ) | BUY | 600 | 9.27 | (5,562) | 13/03/2013 |
Challenger Inf. (CIF) | CAPITAL RETURN | 3,600 | 0.15 | 540 | 20/03/2013 |
Betashares USD ETF (USD) | SELL | 750 | 9.46 | 7,095 | 03/04/2013 |
ALE Property Group (LEP) | BUY | 1,300 | 2.56 | (3,328) | 03/04/2013 |
Computershare (CPU) | BUY | 650 | 10.09 | (6,559) | 03/04/2013 |
Origin (ORG) | BUY | 450 | 13.16 | (5,922) | 03/04/2013 |
BWP Trust (BWP) | BUY | 2,600 | 2.39 | (6,214) | 03/04/2013 |
Growth Portfolio
For similar reasons to the Income Portfolio, we have sold our US dollar ETF and increased our holdings in Computershare, Origin and ResMed.
We have also halved our positions in ARB Corporation and News Corp. While these remain strong businesses, we have sold due to valuation reasons. ARB's share price is up more than four times since its addition to the portfolio and News Corp's is up about 80%. We believe there are better growth opportunities elsewhere.
Woolworths and Sydney Airports are two such examples. Both are high-quality businesses which should continue to churn out profits even in the face of global economic shocks. At current prices, both also offer reasonable value and we've added to each position accordingly.
We have also doubled our stakes in Tap Oil and Silver lake Resources. After the recent fall in its share price, Tap Oil looks attractive, with production set to increase significantly in coming years. Silver Lake has the potential to grow earnings significantly if it meets its forecast target of 400,000 ounces by 2014 with gold remaining at current prices.
Stock (ASX code) | BUY/SELL | Shares (no.) | Price ($) | Value ($) | Date |
---|---|---|---|---|---|
ResMed (RMD) | BUY | 2,000 | 4.15 | (8,300) | 31/01/2013 |
Carsales.com (CRZ) | BUY | 900 | 9.27 | (8,343) | 13/03/2013 |
Challenger Inf. (CIF) | CAPITAL RETURN | 9,000 | 0.15 | 1,350 | 20/03/2013 |
ARB Corp (ARP) | SELL | 650 | 12.52 | 8,138 | 03/04/2013 |
News Corp (NWSLV) | SELL | 350 | 29.51 | 10,329 | 03/04/2013 |
Betashares USD ETF (USD) | SELL | 1,100 | 9.46 | 10,406 | 03/04/2013 |
Sydney Airports (SYD) | BUY | 2,350 | 3.27 | (7,685) | 03/04/2013 |
Tap Oil (TAP) | BUY | 5,250 | 0.545 | (2,861) | 03/04/2013 |
Woolworths (WOW) | BUY | 185 | 34.05 | (6,299) | 03/04/2013 |
ResMed (RMD) | BUY | 2,050 | 4.415 | (9,051) | 03/04/2013 |
Silver Lake Resources (SLR) | BUY | 1,950 | 1.96 | (3,822) | 03/04/2013 |
Computershare (CPU) | BUY | 500 | 10.09 | (5,045) | 03/04/2013 |
Origin (ORG) | BUY | 650 | 13.16 | (8,554) | 03/04/2013 |