Economy Financial Planning Portfolio DIY

Building your portfolio like a pro – Part 2

I always 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 (5 December 2014), I showed Finweek readers how to compile a personal share portfolio like a pro. I pointed out 10 shares with specific weights, considered to be the favourites of fund managers at that time. They were Anglo American, BAT, 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 both 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).

Graph 1: Average Top 10 risk-adjusted SA Equity Fund returns vs. FTSE/JSE All Share Index returns over 5 years (source: ProfileData)
Graph 1: Average Top 10 risk-adjusted SA Equity Fund returns vs. FTSE/JSE All Share Index returns over 5 years (source: ProfileData)

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, each 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 share holding of the funds’ top 10 share holding

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

When you reach this point, I recommend that you play it safe. Many investors are tempted to place all their eggs in one basket, because they believe that if a fund manager places the 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 at bay and to 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):

Resources:

*Sasol 2%

Industrial:

*Aspen                 0%

*BAT                    7%

*Naspers             5%

*Remgro             2%

*SAB                    6%

*Steinhoff           5%

Financial:

*FirstRand 8%

*Old Mutual 0%

*Standard Bank 5%

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, SAB and Standard Bank have taken their places.

In conclusion, equity investments remain a highly skilled 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.


The opinions expressed in this blog are the opinions of the writer and not necessarily the opinions of PSG. These opinions do not constitute advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken on information contained in this blog. 

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

Leave a Reply