Portfolios hold firm as market tumbles

Portfolios hold firm as market tumbles 20 Oct 08 | Issue 259

By Alex Chin It’s been a wild ride on the stockmarket since our June portfolio update, but our Income and Growth portfolios have put in a resilient performance. We’re pretty pleased with the performances of our two model portfolios since 30 June, considering the carnage that’s been wreaked on world stockmarkets. Based on Friday’s closing prices, our Income Portfolio lost 3.8% and ourGrowth Portfolio lost 8.8% over the period, but that compares very favourably with the All Ordinaries Accumulation Index, which dived 23.9%. Probably the main factor has been the relatively low exposure of the two portfolios to resources stocks. That hurt us in the first half of the year, but it’s helped since, with the bursting of the resources bubble knocking BHP Billiton and Rio Tinto down 44% and 54% respectively. Solid income The Income Portfolio’s fall of 3.8% since 30 June, compared to 23.9% for the All Ords Accumulation Index, puts it well ahead of its benchmark over the seven years since inception on 10 July 2001, with a total return of 13.6% pa compared to 6.6% pa for the index. Portfolio performances at 17 Oct 08   Since 30 Jul 08 Since incep. (2001) Income Portfolio  (3.8%)  13.6% pa Growth Portfolio  (8.8%)  4.3% pa All Ords Accum.  (23.9%)  6.6% pa The world’s banks have been the talk of the markets over the past few months, but our own have fared pretty well. Westpac has posted a gain of 7% since 30 June, while ANZhas declined 10%. Commonwealth Bank has managed an increase of 3%, helped along by a positive reaction to its purchase of BankWestfor the lowly price of $2.1bn. You can see our own valuation of CBA in today’s feature, What’s Commonwealth Bank worth?. Highly geared non-financial stocks, however, have fared less well, andTimbercorp has dropped 25%. While there’s a lot of debt, the company is being priced at only one-third of its net assets, which provides a considerable margin of safety. TREES2 have dropped 36% as the difficulties faced by their issuerGreat Southern have become more apparent. We recently downgradedTREES2 to Hold. An exception to the rule, however, was Sigma Pharmaceuticals, which rose 36.4% despite relatively high debt levels, after its half-year result provided evidence of an improved performance. And Westfield Group was able to confound gloomy projections for the global economy by edging up 2%. The portfolio’s only real exposure to the resources sector, Washington H Soul Pattinson, dropped 15% as the value of its shareholding in coal miner New Hope Corporation fell 39%. We’re going to tender all of our holding in MMC Contrarian in its buyback scheme. About half the shares should be bought back at 70.9 cents per share, making a useful $7,500 available to buy any bargains that appear. Mixed results in Growth The Growth Portfolio lost 8.8% over the period, which puts its return since inception on 7 August 2001 at a disappointing 4.3% pa compared to 6.6% pa for the All Ords Accumulation Index. You can read the reasons for this in our past half-year portfolio updates, but the long and the short of it is that we didn’t get off to a good start and some of our recent investments are yet to pay off – to put it kindly – and we plainly got into one or two a bit early. Roc Oil was the major casualty, with a fall of 68% alongside the rapidly falling oil price, the controversial merger with Anzon Australia and the death of CEO John Doran. But the trouble wasn’t limited to resources, and fears of a downturn in the advertising industry sent STW Communications down 35%. On the positive side, Cochlear saw its stock jump 32% as demand for its products continues to grow. The portfolio’s financial stocks provided a mixed performance. Macquarie Groupand fund manager Treasury Group were in the doghouse, with their stocks down 36% and 28% respectively. But Platinum Asset Management chalked up an 11% gain as the performance of its funds improved, and RHG Group clocked up a rise of 110% as the cash rolls in and the company buys back shares. This is an interesting time for both portfolios. You can see what’s in them and follow their progress in the Portfolios section of our website. There has been no buying or selling over the quarter, but the current market is an ideal time to change that. There’s spare cash in the Growth portfolio, so look out for some buying in the near future. Disclosure: The author, Alex Chin, and other staff members own shares in many of the companies mentioned in this article. See the staff portfolio on our website for a full listing. http://www.intelligentinvestor.com.au/articles/259/Portfolios-hold-firm-as-market-tumbles.cfm?articleID=820420