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Portfolio construction & stocks to watch
Date 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 Risk
Source: IRESS, XAO, MSCI 1984- 2001
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Looking at risk
- Risk as standard deviation or tracking error
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Return Probability
9.80%
Average (mean) Mean: 9.8% Standard deviation: 22.11%
31.95%
–1 deviation +1 deviation
–34.39% 54.06%
–2 deviations +2 deviations
66% 95%
Distribution returns All ords: 1980-2010
Source: IRESS, XAO, 1980-2011
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Return Probability
8.74%
Mean: 9.8% Standard deviation: 22.11%
31.95%
–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
effect Dreman 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 valuations
Sector 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 average Materials sector: 15% Staples sector 6% Utilities sector – 6% Financial sector -8%
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Why income investing?
Tax effective Performance
ASX 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 ratio Increasing earnings Past dividend history
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Scanning for income
Current dividend yield greater 5% 5 year dividend growth EPS 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: IHD SYI RDV
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Market index – ETF
S&P ASX 200 IOZ, STW S&P ASX 50 SFY S&P ASX 20 ILC ASX 200 Financials QFN ASX 200 Listed Property SLF ASX 200 Resources QRE
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Market index – ETF
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Growth screening
Strong historical earnings growth Strong forecast earnings growth High return on equity Capacity to expand
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- Quarter earnings positive and growing faster
than
a year ago last 3 quarters
- ver 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
