Build your port­fo­lio like a pro This is a fol­low-up to Schalk Louw’s ar­ti­cle pub­lished in the 4 De­cem­ber 2014 edi­tion. How did the 10 shares he picked do over the past 18 months?

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­ is a port­fo­lio man­ager at PSG Wealth.

ial­ways try to pro­vide my clients with as many tools and aids as pos­si­ble when­ever I re­lease a re­port in or­der to help them to make the best pos­si­ble de­ci­sions re­gard­ing their in­vest­ment port­fo­lios. This also en­cour­ages me to go back in time every now and then, to eval­u­ate which mod­els and tools were more suc­cess­ful than oth­ers.

Roughly 18 months ago (4 De­cem­ber 2014 is­sue), I showed fin­week read­ers how to com­pile a per­sonal share port­fo­lio like a pro. I pointed out 10 shares with spe­cific weights, be­lieved to the favourites of fund man­agers at that time. They were An­glo Amer­i­can, Bri­tish Amer­i­can Tobacco, Bid­vest, FirstRand, Mr Price, MTN, Naspers*, Reinet, Sasol and Stein­hoff. Since then, we saw that out of these 10 shares, some re­mained su­per­stars, while oth­ers, like An­glo and MTN, lost more than 30% in value over this pe­riod.

The FTSE/JSE All Share In­dex rose by 11.05% (to­tal re­turns) over this pe­riod, while the SA Gen­eral Eq­uity sec­tor rose by 6.98%. My rec­om­mended port­fo­lio rose by 16.07% over the same pe­riod, but how did I com­pile this port­fo­lio and how is it per­form­ing in our cur­rent mar­ket con­di­tions?

Step 1: Iden­tify the eq­uity funds that per­formed the best ac­cord­ing to your needs

This is an in­ter­est­ing point of de­par­ture. Many in­vestors may think that I mean they should look for the eq­uity funds (unit trusts) that have per­formed the best over the last 12 months. The prob­lem with this is that al­though a par­tic­u­lar fund may have per­formed the best over this pe­riod, its per­for­mance over a longer pe­riod, say three to five years, may not have been so good. My per­sonal pref­er­ence lies with funds with the high­est pos­si­ble risk-ad­justed re­turns (re­turns di­vided by an­nual volatil­ity).

After ap­ply­ing this method to all of the SA Gen­eral Eq­uity Funds, I was left with 10 funds that, firstly, per­formed bet­ter than the FTSE/ JSE All Share In­dex over the last five years, and se­condly, showed lower volatil­ity over the same pe­riod. It was very in­ter­est­ing to see that 60% of the funds that made the list of suc­cess­ful funds 18 months ago based on the above cri­te­ria held firm on the new list.

Step 2: Cal­cu­late the av­er­age share­hold­ing of the funds’ top 10 share­hold­ing

After iden­ti­fy­ing the top 10 funds in Step 1, I had a look at their top 10 share­hold­ing, sim­ply be­cause I know that fund man­agers put a lot of time and ef­fort into analysing these funds be­fore al­lo­cat­ing their funds’ 10 heav­i­est weights to these shares, which fi­nally makes up nearly 50% of these funds’ to­tal weights. Out of these top 10 funds, I then found my top 10 av­er­age share­hold­ing – my 10 best of the best shares.

Step 3: Di­vide the Top 10 shares ac­cord­ing to weight

largest part of its share­hold­ing in Naspers, for ex­am­ple, it has to be a safe enough bet to place all your cap­i­tal into this one share. This may cause mas­sive prob­lems, how­ever, should you (and the fund man­ager) be wrong. My sug­ges­tion is to keep your emo­tions in check and rather distribute your cap­i­tal as close to the av­er­age weight al­lo­ca­tions de­ter­mined in Step 2. This means that if Naspers car­ried the largest weight across the top 10 funds, it should prefer­ably also carry the largest weight in your port­fo­lio (but not all of it).

After al­lo­cat­ing my shares ac­cord­ing to this method, my port­fo­lio will look like this (ac­cord­ing to sec­tor): This means that shares such as An­glo, Bid­vest (which came close to mak­ing the list), Mr Price, MTN and Reinet have fallen off the list com­piled 18 months ago, while Aspen, Old Mu­tual, Rem­gro, SABMiller and Stan­dard Bank have taken their places.

In con­clu­sion, eq­uity in­vest­ments re­main a highly tech­ni­cal area and al­though this may be a good in­vest­ment tool when com­pil­ing and test­ing the suc­cess of your per­sonal share port­fo­lio, I rec­om­mend that you al­ways con­sult an ex­pert be­fore mak­ing big in­vest­ment de­ci­sions.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.