It began with China and ended with Britain, and in the middle there was a fright about US interest rates. With all the excitement – and a trading range of 18% – it’s hard to believe that the All Ordinaries Index ended the 2015/16 year almost flat.
The sensitivity to interest rates gives a hint as to the market’s apparent resilience. When trouble looms, it sets back the timetable for interest rate rises and reassures investors, which is of course largely the point.
The alternative threat is deflation. An excess of that, though, and anyone with too much debt will quickly go bust – and governments around the world right now have too much debt. We’ve had a few rounds of money printing so far, but you ain’t seen nothing yet if deflation looks like settling in.
So we continue to believe that real assets – notably shares in strong cash-generative businesses – are the best place for long-term savings. The government’s debt is nominal (a fixed number of dollars), but its taxation receipts are real (floating along with economic performance) – so it’s a fair bet that in a pinch it will favour the real assets. So it should, because they represent real investment in the economy.
Both portfolios comfortably outperformed
Helped by mid-cap preference
Portfolio turnover low
While the All Ords only managed a 2.0% total return, though, this was dragged down by a lousy performance from the market’s biggest stocks, with the ASX 20 index registering a 7% loss, led by the big four banks. Since the ASX 20 contributes a little over half the All Ords, this means the rest of the index managed a gain of around 14%.
We haven’t seen much value in the market’s biggest stocks for some time, so our Growth and Equity Income portfolios have been well positioned to benefit from this disparity, returning 13.1% and 12.2% in the year. Since they were set up in 2001, the portfolios have now returned 10.2% a year and 13.3% a year, respectively, compared to the 7.6% return of the All Ords.
Trade Me and Sydney Airport were the biggest contributors to the positive performance of both portfolios, combining excellent returns – 50% and 28% respectively – with decent portfolio weightings – each around 6–7% at the start of the year. Trade Me’s weighting is now up to about 8% in both portfolios, somewhat higher than our maximum recommended weighting of 6%.
We’re comfortable with that for the time being, but may look to take some profit if it rises much further. Note that our maximum recommended weightings are set with reasonably conservative investors in mind, and we won’t necessarily follow them in our portfolios.
We’ve already reduced our positions in Sydney Airport – from about 8% to 5% at the time – and the stock has ended the year with a weighting slightly above 5% in both portfolios. Again, we’re comfortable holding this high quality stock for the moment, but it’s not far below our $8 sell price and we’d likely take some further profit before it got there.
Other shout outs go – in both portfolios – to Monash IVF (returning 48%), Virtus Health (35%), Seek (27%), and Washington H Soul Pattinson (24%). In the Growth Portfolio, Fleetwood (34%), Nanosonics (31%) and Hansen Technologies (27%) also stood out; while, in the Equity Income Portfolio, ALE Property (30%) and Hotel Property Investments (27%) were other strong performers.
On the other side of the ledger, Origin Energy has lost 33% and Computershare has lost 13% in both portfolios. GBST, another stock held in both portfolios, lost 18% in the Growth Portfolio and 14% in the Equity Income Portfolio. These losses were contained, though, by smaller starting position sizes and top-ups in the case of GBST and Computershare (the former at $4.53 and $3.61, and the latter at $9.95).
With the benefit of hindsight, 6% was too much to have in GBST in the Growth Portfolio at the start of the year, although the top-up made sense at such an attractive price (down 37% from the beginning of the year).
GBST had recovered much of its ground before tumbling 24% at the end of the year following the UK’s decision to leave the European Union. With sterling falling 10% against the Australian dollar, GBST’s revenues in that currency – which amount to almost half its total – will take a similar hit on translation.
The costs associated with those revenues, however, are also mostly in sterling, so we don’t see a structural problem. A slowdown in the UK economy may also delay some projects, but we expect the strong expected growth in the UK platform market to assert itself over time. The risks, however, have undoubtedly increased.
Buys and sells
Aside from the top-ups in Computershare and GBST, both portfolios bought new holdings in Ansell, BHP Billiton, Macquarie Group, News Corp and Seek. The Growth Portfolio additionally found room for a new position in Amaysim, while the Equity Income Portfolio bought into PMP and South32 and added to its weightings in Commonwealth Bank, Westpac and Woolworths.
The Equity Income Portfolio’s weightings in Commonwealth Bank and Westpac, however, are still only around 2.5-2.7%, which is far below their index weightings of 9% and 7%. Woolworths, by contrast, is now at 4.9% of the portfolio, representing our growing confidence in the stock. If it fell much further it would likely find a place in the Growth Portfolio as well.
As well as the part sale of Sydney Airport, we also reduced Carsales in both portfolios and sold out of Washington H Soul Pattinson and Servcorp. In the Growth Portfolio, we also reduced our holding in ResMed by two percentage points to 3.7%. Rather than reflecting any negative thoughts towards those stocks, however, these sales were more to do with raising money to purchase stocks we preferred.
With purchases representing 17% of starting value for the Growth Portfolio and 25% for the Equity Income Portfolio, this implies an average holding period of 4–5 years and we’d expect something similar in future.
Whilst we measure value over the long-term, the relationship between price and value moves more quickly. The past year has shown how rapidly prices can change; no doubt that will continue and we’ll be ready to take advantage.
|Company||Buy Price ($)||Quantity||Last Price ($)*||Value ($)||Weight (%)||Return (%)|
|Ainsworth Game Tech(AGI)||2.76||236||2.16||510||2.3||-21.7|
|Monash Ivf Group Ltd(MVF)||1.50||407||1.82||741||3.3||21.3|
|News Corp Voting(NWS)||14.91||50||15.64||782||3.5||4.9|
|Ozforex Group Ltd(OFX)||2.23||354||2.32||821||3.7||4.0|
|Trade Me Group(TME)||3.25||390||4.42||1,724||7.7||36.0|
|Virtus Health Ltd(VRT)||6.77||155||6.87||1,065||4.7||1.5|
|Company||Buy Price ($)||Quantity||Last Price ($)*||Value ($)||Weight (%)||Return (%)||Dividend Yield (%)|
|Ainsworth Game Tech.(AGI)||
|Ale Property Group(LEP)||2.18||218||4.55||992||4.5||108.7||4.5|
|Ioof Holdings Ltd(IFL)||8.70||119||7.83||932||4.2||-10.0||7.0|
|Monash Ivf Group Ltd(MVF)||1.53||345||1.82||628||2.8||19.0||4.2|
|News Corp Voting(NWS)||14.91||49||15.64||766||3.4||4.9||1.5|
|Ozforex Group Ltd(OFX)||2.23||362||2.32||840||3.8||4.0||3.1|
|Trade Me Group(TME)||3.24||401||4.42||1,772||8.0||36.4||3.3|
|Virtus Health Ltd(VRT)||6.77||159||6.87||1,092||4.9||1.5||4.2|
|Westpac Banking Corp(WBC)||24.96||19||29.40||559||2.5||17.8||6.6|
Disclosure: The author owns shares in ASX, Amaysim, Carsales, GBST, iCar Asia, News Corp, OzForex, Perpetual, Seek, Trade Me, Virtus Health and Woolworths.