portfolio construction & stocks to watch · portfolio construction & stocks to watch date...
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Portfolio construction & stocks to watchDate 12 April 2011
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Disclaimer
The information in this presentation is of a general education nature only. It does not take into account the investment objectives, financial situation or needs of any individual investor. Before making an investment decision we recommend that you consult a professional advisor.
The Bell Direct service is provided by Third Party Platform Pty Limited trading as “Bell Direct” (ABN 74 121 227 905) an Australian Financial Services licensee (AFSL314341) and a Participant of the ASX Limited Group.
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Portfolio construction
• Choose assets which work together• About managing risk• Valuation, timing important• Have a view
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The point of diversification
100% Australian
50% Mix
100% International
14.70%
14.90%
15.10%
15.30%
15.50%
15.70%
15.90%
16.10%
14.80% 15.80% 16.80% 17.80% 18.80% 19.80% 20.80%
Return
RiskSource: IRESS, XAO, MSCI 1984- 2001
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Looking at risk
• Risk as standard deviation or tracking error
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Pro
babi
lity
9.80%
Average (mean)Mean: 9.8%
Standard deviation: 22.11%
31.95%-12.27%
–1 deviation +1 deviation
–34.39% 54.06%
–2 deviations +2 deviations66%
95%
Distribution returns All ords: 1980-2010
Source: IRESS, XAO, 1980-2011
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7 Return
Pro
babi
lity
8.74%
Mean: 9.8%Standard deviation: 22.11%
31.95%-12.27%–34.39% 54.06%
Distribution returns All ords: 1980-2010
Source: IRESS, XAO, 1980-2011
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Valuations are crucial for performance
Source: IRESS, PERXAO 1981-2011
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Performance over last 2 years, up 28%
RIO up 85% BXB up 40% WBC up 20% ORG up 10%
WES up 70% ANZ up 40% MQG up 15% WOW up 10%
NCM up 45% SUN up 30% CSL up 15% AMP up 10%
CBA up 40% WDC up 20% FGL up 15% QBE flat
BHP up 40% WPL up 20% NAB up 10% TLS down 10%
Source: IRESS
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Benjamin Graham
“The individual investor should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for
his purchase .”
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What affects performance?
• Not return on equity• Not forecasts• Overriding is low valuations measured by P/E• Best return over 3 years is on cheap valuations
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P/E studies
• Low P/E stocks tend to outperform• Overreaction, Under-reaction and the Low P/E
effectDreman in 1995 paper – Low P/E stocks have greater returns
• Earnings surprises affect stocks in an asymmetric manner which favours “worst” stocks.
• High P/E = overly optimistic• Low P/E = overly pessimistic
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Sector valuationsSector P/E Sector P/E
Utilities 15 Materials 15
Industrials 21 Telecom 11
Energy 26 Staples 17
Financials 13 Healthcare 20
Consumer Discretionary
14 Property 13
Source: IRESS 31 March 2011
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What sectors are likely to outperform?
Discount to 2 yr P/E averageMaterials sector: 15% Staples sector 6%Utilities sector – 6%Financial sector -8%
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Why income investing?
Tax effective
PerformanceASX 200 57.9%ASX 200 AI 148%
Source: IRESS
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Top 5 industries
Industry Dividend yield
Telecom 9.6%
Utility 7.0%
Financial 5.5%
Staple 4.5%
Source: IRESS
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Sustainability
Dividend payout ratioIncreasing earningsPast dividend history
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Scanning for income
Current dividend yield greater 5%5 year dividend growthEPS growth greater than 5%Debt to equity ratio less than 100%Market capitalisation greater than 5 billion
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Scanning for income
NAB 5.7%
CBA 5.7%
ASX 5.2%
CNA 4.7%
WOW 4.4%
CCL 4.1%
TLS 9.8%
MAP 7.1%
WDC 6.9
CFX 6.8%
QBE 6.8%
SGP 6.1%
Source: IRESS
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Exchange Traded Funds (ETF)
S&P/ASX High Dividend:IHDSYIRDV
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Market index – ETF
S&P ASX 200 IOZ, STWS&P ASX 50 SFYS&P ASX 20 ILC
ASX 200 Financials QFNASX 200 Listed Property SLFASX 200 Resources QRE
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Market index – ETF
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Growth screening
Strong historical earnings growthStrong forecast earnings growthHigh return on equityCapacity to expand
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• Quarter earnings positive and growing faster than
a year agolast 3 quartersover the last 3 years
• Annual earnings higher for the past 5 years• Sales growing as fast or faster than earnings• To cut out anomalies, P/E must be 5-43
Growth screening
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Growth stocks
ASX ASX Limited Diversified financial
SGP Stockland Property development
FRI Finbar Property investment
DTL Data 3 Info tech company
BSA BSA Limited Telecommunications
SGH Slater & Gordon
Legal services
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Cyclical stocks
• Stocks whose performance is directly affected by the business cycle
• Out-perform in boom times• Under-perform in bust times • Includes Financial, Industrial and Discretionary• Overweight these stocks in good times• Underweight in bad times
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Currency and commodities move together
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Summary
• Valuations are fair value• Stock-picking important• Diversification to manage risk