Switzer portfolios outperform again

Co-founder of the Switzer Report
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The solid start to the financial year continued, with the stock market adding 1.6% in September to take the quarterly gain to 8.7%. Sector performance was a little more even in September, although in line with the previous couple of months, the ‘cyclical’ sectors (consumer discretionary, industrials, etc) led the way and some ‘yield’ sectors tended to lag.

Our portfolios continued to perform well, increasing their relative outperformance to the benchmark indices.

Portfolio recap

In January, we made some adjustments to our Australian share ‘Income Portfolio’, and introduced a ‘Growth-Oriented Portfolio’.

The income portfolio is forecast to generate a yield of 5.23% in 2013, franked to 98.3%.

To construct the income portfolio, the processes we applied included:

  • Using a ‘top down approach’ and introducing biases that favour lower PE, higher yielding industry sectors;
  • To minimise the market tracking risk, adopting a rule that says that our sector biases in the major sectors (financials, materials and consumer staples) will not be more than 33% away from index;
  • Identifying 15 to 20 stocks (less than 10 is insufficient diversification, over 25 it is too hard to monitor), with a stock universe confined to the ASX 100;
  • Within a sector, weighting the stocks broadly to their respective index weights, although there are some biases; and
  • Of course, we looked for companies that pay franked dividends and have a consistent earnings record.

The growth-oriented portfolio takes a very different approach to the sectors, in that it introduces biases that favour the sectors that we judge to have the best medium-term growth prospects. Critically, it also confines the stock universe to the ASX 100 (there are many great growth companies outside the top 100).


The income-oriented portfolio to 30 September is up by 19.46% for the nine months to the end of September and the growth-oriented portfolio is up by 20.19% (see tables at the end). Compared to the benchmark S&P/ASX 200 Accumulation Index (which adds back income from dividends), the income portfolio has outperformed by 3.2% and the growth-oriented portfolio has outperformed by almost 4.0%.

Defensive sectors struggle

The largely defensive sectors (consumer staples, property trusts, and utilities) struggled during September and the quarter. The consumer discretionary and industrials sectors continued to shine.

Improving iron ore prices helped the materials sector increase by 14.7% during the quarter, however it is still down 8.3% since the start of the year.

Income portfolio

The income portfolio is overweight financials, consumer staples and telco, and underweight materials. It also has some stock biases – in particular, underweight Commonwealth Bank and overweight NAB. This latter bias has been particularly rewarding, as the market has started to appreciate how cheap NAB was relative to the Commonwealth Bank.

For income, the portfolio has so far returned 4.2%, franked to 94.1%. With three of the major banks yet to declare their final dividend, the portfolio should marginally exceed the forecast dividend yield of 5.23% per annum. Details of the portfolio and its performance are listed below.

Income Portfolio

Growth-oriented portfolio

The growth-oriented portfolio is overweight stocks in the materials, energy and healthcare sectors, underweight financials and consumer staples, and broadly index weight the other sectors. Stock selection in the financials (strong bias towards NAB and the selection of a regional in Bank of Queensland), and in the industrials (with Toll and Brambles) and in consumer discretionary (with Crown) is offsetting the underperformance of the material stocks. Current sector weights are within the parameters of the portfolio construction rules. The portfolio is:

Growth-Oriented Portfolio

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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