Marcus Today SMA: The Golf Portfolio
If we could show you how it was possible to generate a 6% return, using Top 100 equities and hybrids, would you be interested? Well, that’s what we’ve got for you today. In the last in our series of income investing articles we have constructed the GOLF PORTFOLIO - a portfolio for the investor who wants to live off income, is prepared to take an equity market risk, but wants to play golf without worrying about the stock market all the time. You will find below our stock picks and weightings as we invest a hypothetical $1m. This portfolio can be adopted as the foundation stocks for any Member looking for income from equities and hybrids with contained risk. With term deposits offering a negative real return this portfolio is for risk-averse investors - it offers a 6.21% yield and suits any Members forced into equities looking for yield. The conditions for the portfolio are as follows:
- For the sake of the experiment we have invested a hypothetical $1 million.
- Asset allocation is 80% equities, 20% hybrids. We have included hybrids to lower the risk. Some portfolios we see hold a lot more hybrids than this. Hybrids bring down the total portfolio risk although they also marginally lowers the yield.
- Sector Allocation is shown below – the main points are obvious – the portfolio holds no resources and is 15% overweight financials. This table shows the sector weighting compared to the ASX 200 sector weightings. The column on the right shows the underweight and overweight position of the sectors.
- There are 40 equities and four big bank hybrids and the Challenger hybrid (which has a higher yield).
- Of the 40 equities the top 20 holdings account for 71% of the portfolio. These are the large market capitalisation stocks which will tend to be less volatile and more stable.
- The bottom 20 income stocks account for just 9% of the portfolio and are more to give you ideas of second-tier income stocks.
- The equities have been picked out as low volatility stocks, which includes a heavy weighting in banks, other high yielding industrials, quite a few REITs, and the stock selection has favoured infrastructure and utility stocks, and has a tail of small holdings in other slightly more risky but commonly picked income stocks.
- Despite the high yields at BHP and RIO we have avoided resources stocks which tend to be cyclical and more volatile and unreliable with their dividend payments. BHP and RIO for instance are forecast to significantly cut their dividends going forward.
- Stocks are market capitalisation weighted in the portfolio. In other words the weighting of a company with a $2 billion market capitalisation will be twice that of a company with a $1 billion market capitalisation.
- Using the market capitalisation formula ended up with the Commonwealth Bank being 18% of the portfolio and the Westpac bank 14%. I felt that was too high so have gone with a fairly standard maximum weighting for one holding of 8%.
Using this formula we come up with the following summary numbers.
As you can see we have achieved a 6.21% yield in quite low risk stocks. This does include franking. Couldn’t quite get to 7% as I’d hoped without massively overweighting the banks.
- This is a chart of the portfolio showing holding sizes (blue bars) and the yield of each holding including franking (yellow dots).
- A million-dollar portfolio invested in these stocks will, on current forecast, return $62,185 a year which includes a $16,182 franking credit refund. This is guesswork of course, it is based on broker forecasts which change daily.
- The risk on the portfolio is 3.31% which means that the value of this portfolio has moved in a 3.31% range from top to bottom each week averaged over the last 14 weeks. That is a relatively low level of risk. An ETF over the ASX 200 for instance moves in a 1.85% range. Some of the client portfolios we see regularly have portfolio risk at 5% and for portfolios that have focused on Mid-Cap growth stocks it can range between five and 10%. So this is a relatively low level of overall risk for an equities portfolio.
- This is a chart showing the risk of each holding as measured by the weekly ATR (average true range). This measures the trading range from high to low of each holding on average each week over the last 14 weeks. This is a simple measure of volatility which allows you to identify the risky rather than low volatility holdings. The blue columns represent the size of the holding as a percentage of the total portfolio. Note that with this portfolio the smaller the holdings get the more risky they are. This whole area of the portfolio could very easily be avoided and in so doing at quite significant value by reducing volatility and avoiding losses. As you can see, the smaller the holdings the higher the risk. You can also see the very low risk nature of the hybrid holdings on the right-hand side. The risk on hybrids is very low at 0.41%.
I hope this series of income articles and the concluding portfolio has been of value to you all. When I decide the market is 'safe' again we will re-build the MT INCOME PORTFOLIO and the MARCUS TODAY INCOME SMA along these lines.
RECENT INCOME ARTICLES