Portfolio construction & stocks to watch Date 12 April 2011 - PowerPoint PPT Presentation

Portfolio construction & stocks to watch Date 12 April 2011

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. 2

Portfolio construction • Choose assets which work together • About managing risk • Valuation, timing important • Have a view 3

The point of diversification 100% International 16.10% 15.90% 15.70% 50% Mix Return 15.50% 15.30% 15.10% 14.90% 100% Australian 14.70% 14.80% 15.80% 16.80% 17.80% 18.80% 19.80% 20.80% Risk 4 Source: IRESS, XAO, MSCI 1984- 2001

Looking at risk • Risk as standard deviation or tracking error 5

Distribution returns All ords: 1980-2010 Mean: 9.8% Standard deviation: 22.11% Average (mean) –1 deviation +1 deviation Probability 66% –2 deviations +2 deviations 95% -12.27% 9.80% 31.95% –34.39% 54.06% Return 6 Source: IRESS, XAO, 1980-2011

Distribution returns All ords: 1980-2010 Mean: 9.8% Standard deviation: 22.11% Probability -12.27% 8.74% 31.95% –34.39% 54.06% Return 7 Source: IRESS, XAO, 1980-2011

Valuations are crucial for performance Source: IRESS, PERXAO 1981-2011 8

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 9

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 .” 10

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 11

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 12

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 14 Property 13 Discretionary 13 Source: IRESS 31 March 2011

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% 14

Why income investing? Tax effective Performance ASX 200 57.9% ASX 200 AI 148% Source: IRESS 15

Top 5 industries Industry Dividend yield Telecom 9.6% Utility 7.0% Financial 5.5% Staple 4.5% Source: IRESS 16

Sustainability Dividend payout ratio Increasing earnings Past dividend history 17

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 18

Scanning for income NAB 5.7% TLS 9.8% CBA 5.7% MAP 7.1% ASX 5.2% WDC 6.9 CNA 4.7% CFX 6.8% WOW 4.4% QBE 6.8% CCL 4.1% SGP 6.1% Source: IRESS 19

Exchange Traded Funds (ETF) S&P/ASX High Dividend: IHD SYI RDV 20

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 21

Market index – ETF 22

Growth screening Strong historical earnings growth Strong forecast earnings growth High return on equity Capacity to expand 23

Growth screening • Quarter earnings positive and growing faster than a year ago last 3 quarters over 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 24

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 & Legal services Gordon 25

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 26

Currency and commodities move together 27

Summary • Valuations are fair value • Stock-picking important • Diversification to manage risk 28