The perfect portfolio for kids

Financial journalist and commentator on 3AW and Sky Business
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Getting kids interested in the stock market is a very rewarding experience. Gaining an understanding of this massively powerful compounding machine for wealth creation gives young people a head start on the journey to creating wealth. The longer they can give their share market investments to work, the more rewarding the experience is likely to be, because the share market is ultimately a way of getting rich slowly. (You can read more about actually buying shares for kids here.)

According to research firm Andex Charts, the Australian share market’s main index (since 1980 the S&P/ASX All Ordinaries Accumulation Index), which counts all dividends as reinvested, has earned 12.1% a year, well ahead of both bonds, at 7.4% a year, and inflation, at 5.2% a year. The stock market’s performance has turned $100 invested at the beginning of 1950 (the equivalent of $2,556 in today’s dollars) into $153,634.

Make it relevant

I am helping a Year Nine student at the moment with a school project on the share market, and while I am certainly telling him about this long-term track record of the market, I’ve found that before that, I have to make the idea of the market relevant to him – the things that he knows, and to which he can relate. So while I am telling him about how an investor buys shares and becomes a part owner in those companies, the examples that I use are familiar to him.

I’ve told him that he can become a part-owner of Coca-Cola Amatil, and benefit every time someone buys a Coke, a Fanta, a Powerade or a Mother energy drink. Or become a part owner of Ardent Leisure, and earn a margin every time someone buys a ticket to get into Dream World, or go tenpin bowling at AMF. Or become a part owner of Amalgamated Holdings and clip the ticket on their friends going to the movies at Greater Union cinemas. He gets that.

I want to put a portfolio together for my young friend Mitch – a mix of companies that he knows, and companies that will benefit from the longer-term trends that will affect the world in which Mitch will grow into adulthood.

First of all, I want him to invest in the share market. By that I mean I want him to lock away in his portfolio the long-term return from the share market, by buying and holding one of the exposures that gives investors precisely that.

We could consider an ASX-listed exchange-traded fund (ETF) like the iShares MSCI Australia 200 ETF (IOZ) or the SPDR S&P/ASX 200 Fund (STW), both of which track the performance of the Australian share market fairly closely. However, I want him to look at two listed investment companies (LICs) with actively managed portfolios: Australian Foundation Investment Company (AFI) and Argo Investments (ARG).

Over the last 10 years, AFI’s net tangible asset (NTA) per share – plus franking credits – has returned 11.8% a year to June 2013, compared to 10.9% a year for the S&P/ASX 200 Accumulation Index. Argo gives 15-year figures: on a similar basis, ARG has returned 9.4% a year, versus 8.3% a year for the S&P ASX All Ordinaries Accumulation Index. I am happy to recommend that Mitch put some money into either AFI or ARG: they are very well-managed investment companies and pay good dividends.

Things he understands

Now to pick up on some strong themes that will shape Mitch’s world.

Healthcare will be tough to sell to Mitch, because 15-year-old boys don’t have much experience with hospitals. But I hope to convince him that Ramsay Health Care (RHC) is an outstanding stock to benefit from increasing health spending, because it picks up on everyone else’s health needs, from birth to aged care. Ramsay owns 151 hospitals and medical centres across Australia, France and Indonesia and has excellent continued growth prospects. Ramsay has grown total returns (shares and capital growth) by almost 39% a year for the last five years.

Another way for Mitch to tap into this theme might be the iShares Global Healthcare ETF (IXJ), an ETF that gives him an investment (in A$) to an index of global healthcare stocks, including Johnson & Johnson, Novartis, Pfizer, Roche, Merck, Glaxo SmithKline and Bayer. This stock should increase in value for him as healthcare costs rise globally: it has generated 15% a year over the last five years.

To get Mitch to relate to his portfolio more, I want him to buy Coca-Cola Amatil (CCL), to benefit from its stellar portfolio of beverage brands, pricing power and strong presence not only in Australia, but Pacific growth markets of Indonesia and PNG. Indonesia, in particular, has a beautifully positioned demographic pyramid, ensuring a steady supply of young people with growing spending power over the next few decades, and they are likely to spend big on CCL’s brands. (I won’t tell Mitch yet about the company’s alcohol strategy, but its swag of alcoholic beverages – such as Jim Beam, Famous Grouse and Maker’s Mark – and its move into brewing in Australia, are also growth areas.)

Supermarket giant Woolworths (WOW) is another strong performer that justifies a long-term buy, being the major player in Australian supermarkets. There would have to be a very profound change in Australians’ shopping habits for Woolworths to come under pressure, and the move into the home improvement market with Masters (in joint venture with Lowe’s) has only just got going.

Things he needs

On the energy front, Woodside Petroleum (WPL), the largest oil and gas producer in Australia, has very good long-term growth opportunities in gas, which has the advantage of being a cleaner, lower-emission fuel than coal. While it might make more sense in the portfolio of a 15-year-old to look for a really good renewable energy company, there really aren’t any such candidates on the Australian market and I think Mitch will enjoy quite a few years of gas-driven success in Woodside.

The growth story of China and its effect on the resources sector has a long way to go. The best way to pick up on this remains BHP, which is a massive shipper of iron ore, but also has petroleum, copper and coal to boost its earnings. Longer-term, potash could be a major growth area for BHP, and also make it a way to play a similar boom in ‘soft’ (agricultural) commodities as it has ridden in ‘hard’ (resources) commodities.

Lastly, I want to combine in one stock the two themes of Australia’s huge growth in superannuation and the growing realisation that Australians need to invest overseas, both for opportunities and diversification. Magellan Financial Group (MFG), which runs six global investment funds, is an excellent stock that has generated 84% a year in total return for shareholders over the last five years, but still has plenty of potential: the group manages $25 billion on behalf of investors, but reckons it can at least double that.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.

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