January Review Comments
Written by Tony Gray   
Thursday, 13 January 2011 09:14

Portfolio Valuation & Comment

Please find attached a copy of your portfolio as at the 31st of December.  A reminder that access to the portfolio is available via the www.tgfinancial.com.au website and please contact us if you require user name and password details.

Please note that I will be taking leave from the 10th to the 21st of January and will then be conducting portfolio and position reviews.  As always, please do not hesitate to make contact or arrange an appointment if there are any matters you wish to discuss. 

There has not been a clear change in investment market sentiment early in 2011 – with relatively attractive growth asset valuations offset by understandable and real concerns about unsustainable spending and/or money printing by Europe and the US.  There are also inflationary concerns in China and India, with interest rates rising in those economies.  China’s workforce has now peaked and is expected to decline by 0.1% per annum over coming decades due to the one child policy.  By comparison, India’s working age population is reportedly increasing at the rate of one million additional workers per month.

Despite the uncertainty, I have tended to find through various cycles that when individual investments ‘stack up’, that returns will tend to be stronger.  One current example is Woolworths.  Considered a boring stock by most, it is trading at ~$26.30, down almost $4 from the October 2010 peak.  The share price has been ranging from the mid to high $25 level to the high $29/low $30 level for three years now.  Prior to that, the stock peaked at $35 in 2007.

Consider then that in 2007 the dividend was 74 cents per share fully franked – which at $35 per share represented a miserly dividend yield of 2.11%.  The dividend has steadily and for 2010 totalled $1.15 per share – boosting the yield to a far more satisfying 4.37% - or 6.24% when grossed up for the franking credit.  We expect continued growth in earnings and dividends.

The ability to buy stocks such as Woolworths, generating the same income yield as a term deposit, but with the likelihood of continued earnings and dividend increases illustrates value in the current market.  We intend adding to equity holdings in portfolios.

A sector that we are keen on is energy and specifically oil and gas.  The price of oil is far more sensitive to developing economy growth than in the past (3 times more than a decade ago according to one recent report).  We expect oil will follow the same growth path as gold, coal and base metals but with more constrained supply.  The price of copper recently exceeded the 2008 peak and by comparison oil at $88.38 per barrel US is still well below the 2008 peak of $147 per barrel.

Aside from Australian shares, listed property remains attractively priced – with discounts to asset backing, healthy distributions backed by rental income flows and stable (non residential) property prices.

We continue to extend the duration of term deposit portfolios.  There is a risk of inflation developing and higher interest rates being applied by the Reserve Bank of Australia.  Equally, if any of the myriad of major overseas problems result in a weaker economy, then interest rates in Australia will be cut quite rapidly to stave off recession.  Since fixed interest represents a defensive portion of portfolios and the focus is on income, we think a rolling maturity strategy is the safest approach – avoiding a rapid fall in interest income if rates are cut and still able to apply shorter dated maturing deposits to new, higher yielding deposits, if interest rates increase.

The government has extended indefinitely the guarantee on deposits of less than $1 million, although details have not been released.

Regular two way communication is important, so do not hesitate to make contact if you have any investment or planning questions, or would like us to discuss the portfolio and positioning.

Please treat the above comments as General Advice, with no action to occur until we have considered with reference to your financial position, needs and goals.

 

 

Portfolio Management


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