2017 PROGRESS REPORT
The Skaffold Top 5 portfolio has been published each year since 2012. At the start of each year five stocks are chosen. In 2017, the portfolio comprised Northern Star Resources (ASX: NST), Vita Group (VTG), Nick Scali (NCK), OFX Group (OFX) and Commonwealth Bank (CBA). These are held for 12 months and then sold, with the proceeds, plus dividends, reinvested equally across the five stocks chosen for the next year. Note this is a hypothetical portfolio.
Australian gold miner Northern Star Resources is experiencing strong organic-driven growth as it benefits from $250 million invested over three years in the business. This has extended mine life by 10 years and increased reserves by 2.3million oz to 3.5m oz. Rebalancing the portfolio and strong cost management are also improving earnings margins.
Nick Scali continued to outperform the broader market. The furniture retailer has benefitted from the residential construction boom and the positive wealth effect from rising property prices. The stock has made the cut again for the Top 5 portfolio in 2018.
Commonwealth Bank returned 2.7% in 2017. As with the other three major banks, the underperformance was due more to sentiment than their financial performance, which has been solid. The banks faced a hostile political environment, negative media publicity and a tougher regulatory environment. Specific to Commonwealth Bank were claims filed by AUSTRAC alleging the bank had contravened anti-money laundering and counter terrorism financing laws. Ongoing speculation about a royal commission did not help either. The royal commission was finally announced at the end of November after the major banks took the unprecedented step of writing to the federal treasurer to ask for an inquiry to be established to remove uncertainty caused by ongoing speculation. This pre-emptive move helped them manage the scope of the inquiry.
Technology retailer Vita Group had a dismal year as the risk of being tied to one major partner came to fruition. In May 2017, its key partner, Telstra, announced further cuts to remuneration arrangements from those agreed earlier between December 2016 and February 2017. After falling below 90c, the share price has recovered somewhat but is still way below where it was at the start of the year.
Foreign exchange services provider OFX Group delivered a negative total return in 2017. After a very challenging 2016 and a weak trading update in February, the share price began to recover after the company reported a fiscal 2017 result in May which showed promising signs. However, the interim fiscal 2018 result was underwhelming, and the competitive environment is becoming tougher along with rising risks that the regulatory regime around international money transfers may increase and bring higher costs.
The 2017 portfolio delivered a 4.7% return over the 12 months versus 12.5% for the S&P/ASX All Ordinaries Accumulation Index. The two best-performing stocks in the portfolio were Northern Star Resources and Nick Scali, which returned 71.0% and 13.3% respectively in 2017. The overall portfolio performance was weighed down by Vita Group, which returned -50.8%, and OFX, which delivered a -12.5% return. M