How I recommend you weight your portfolio

Co-founder of the Switzer Report
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If you apply a ‘top-down’* approach to managing your share investments, you can’t really consider individual stocks without having a view on the ‘financials’ and ‘materials’ sectors. Together, these two sectors account for almost 60% of the S&P/ASX 200, with the other nine sectors making up the balance.

At Switzer, we recommend an ‘overweight’ position in material stocks (such as BHP, RIO) and an ‘indexweight’ position in financial stocks.

Sectors are ‘weighted’ based on total market value expressed as a percentage of the stockmarket. When weighting your SMSF portfolio, you can choose to hold a percentage of shares in a sector equal to its weighting on the ASX. This is called ‘indexweight’ or ‘equal weight’. If you think a sector will outperform the market, you can increase the amount of shares in that sector and take an ‘overweight’ position. Likewise, if you think a sector will underperform, you can take an ‘underweight’ position.

Across the 11 sectors, our views are:


We expect economic growth in Asia, particularly in China and India, to continue to drive demand for Australian commodities, such as iron ore, copper and coal, supporting the ‘materials’ sector. While the ‘once in a generation’ boom in commodity prices has certainly softened over the last couple of months, we feel it’s too early to call it over.

Notwithstanding the turbulence in the US and Europe, we maintain that the key is China. Provided the Chinese authorities can control inflation and don’t have to slam on the economic brakes too hard, an overweight position is our preferred allocation. This view is supported by Rio Tinto’s fairly upbeat result last Thursday, with the company announcing an increase to its share buyback.

Many SMSFs and retail investors hold an overweight position in financials, sometimes materially overweight, driven by the allure of those fantastic fully franked dividend yields. While this makes sense for SMSFs, we caution about being too overweight and continue to call this sector as an ‘indexweight’ position. We believe that bank shares will lag behind in the next bull market.

Across the globe, regulators are demanding that financial institutions increase their capital base and Australian banks are not being spared from these initiatives. Whereas we have become used to our banks generating a return on equity of 18% to 20% per annum, we need to lower our expectations and should expect that 12% to 15% per annum will become the norm. The other challenge locally is that revenue growth is in the very low single digit. Commonwealth Bank’s result, due out on Wednesday, will provide some further insight.

The other question out there is: is it time to buy consumer discretionary stocks such as Harvey Norman and JB Hi-Fi? These stocks have been smashed recently as the following table shows:

Retail stocks

In addition to anaemic retail sales, there’s a structural change occurring in the retail industry as consumers take advantage of considerably cheaper prices available online. None of these companies has yet been able to demonstrate a robust strategy to fight this shift and hence we are cautious about the sector.

For bottom fishers, there’s no doubt that there are some opportunities out there – although experience tells us that established market trends are rarely reversed without doing a lot of work around the bottom.

* The ‘top down’ approach to analysing shares starts by examining the economy and then individual sectors of the market before identifying standout shares within that sector.

Also in the latest Switzer Super Report:

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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