Topping up model portfolios

We wrote recently that, ‘Equity investing is far from dead. If history is any guide, investing in cheap, well-selected stocks today will sow the seeds for outsized returns tomorrow.’ (see The five secrets of tough-times investing from 25 Jun 12).                 

It is, however, one thing to write and another to act, which is what we’re about to do. First, to our Growth portfolio, focused on providing market-beating returns.

Growth portfolio

Gold explorer Integra Mining has been a little gem since we added it to the portfolio on 21 May 10, delivering total returns of 105%. Half the position was sold on 10 Aug 10 for $0.61 and now we’re selling the remaining 4,100 shares for $0.375, netting $1,537.50, as the investment is inconsequential and we should've sold the entire position two years ago.

We're also topping up our position in share registry operator Computershare; a recent addition to the Growth portfolio (see Portfolios pounce on bargain prices). We’re adding 300 shares at $7.375. That increases our portfolio position to 6%.

We’re also making a change to the way we hold cash. We’ve been encouraging members to look overseas for possible bargains aided by the strong Aussie dollar (see the recently published special report Ripe for the picking: Eight overseas stocks to buy right now).

With that in mind, we’re shifting a portion of our cash holding into US dollars. As we can only buy Australian-listed securities in the portfolio, we’re purchasing 1,100 units in the BetaShares US Dollar Exchange Traded Fund (ETF). (If you’re unfamiliar with ETFs, see What’s an ETF and why you need to know or this three-part video series). All up, this purchase accounts for about 40% of our cash holding. While we won't earn any interest (we don't credit interest to the model portfolios anyway), if the Aussie dollar falls substantially then the value of our USD ETF will increase. We'd then sell the security and buy more stocks, as lower stock prices are likely to go hand in hand with a lower Aussie dollar.

Income portfolio

We’re also putting some of the large cash pile in the Income portfolio—focused on stable, low-risk income generation—to work.

Firstly, though, we’ve sold the stake in Australand. Whilst its security price is closer to an upgrade than a downgrade, property related investments make up over 20% of the portfolio, with 10% specifically in Australand. We've been debating this situation for months, and have agreed that this is too high. We’ve kept the Australand ASSETS, and the sale nets the portfolio $7,497, which we’re putting to good use.

ASX has an enviable market position and is trading on an attractive forecast dividend yield of 5.9%, one of the key reasons for the recent upgrade (see ASX: Into the light from 08 Jun 12 (Long Term Buy – $29.87)). We opened our account with a 3.5% position but are adding another 80 shares at $29.26, taking our total portfolio position to 5.5%.

Computershare is another new addition. Whilst the current dividend yield is only 2% (60% franked), it has strong growth potential. And even an income portfolio needs a few cheap stocks that can protect it against inflation and increase the portfolio's purchasing power through capital gains. We’re opening the account with a 4% position.

We’ve also recently upgraded ALE Notes 2 and yesterday added 60 notes at $100.50. This investment is a far more attractive income option than the recent spate of poor-quality income securities. It offers a current all-in yield to maturity of 8.1% per year, making it a perfect candidate for the Income portfolio.

We’re also diversifying our cash holdings in this portfolio by purchasing 750 units in the BetaShares US Dollar Exchange Traded Fund for $7,425.00, around 20% of the portfolio’s cash holdings. This is unlikely to earn the portfolio any income (US interest rates are near zero), but this isn't a specific issue for the Income portfolio as we assume it doesn't receive interest on any of its cash holdings in lieu of the fact that we also assume there are no brokerage costs. We're more interested in the protection against a lower Aussie dollar that it provides, and the buying power it'll give the portfolio if a fall in the Aussie dollar corresponds with lower local stock prices.

These transactions should increase the current yield of the portfolio but still leave us with $23,442.32 in the kitty for future investment. Current market conditions require a hand-cut approach to investing; these changes to the model portfolios illustrate that point nicely.

Note: Look out for our regular six-monthly portfolio update post 30 June.