Markets & Equities

Compile your share portfolio like the heavyweights do

In most of my reports, I always try to give investors the necessary tools to make informed decisions regarding their personal investment portfolios. Upon recently visiting my doctor following a somewhat incorrect self-diagnosis, he jokingly stated that “Dr Google” thinks he knows everything, often to the detriment of his patients. Not only did I make the mistake of trying to diagnose myself, but I also purchased the wrong medicine. Only after feeling even worse three days later, a medical professional had to point out that my own inner wisdom and bright ideas can only take me so far.

I keep a close eye on what other investment professionals (companies) are doing, both locally and abroad. One of the biggest tools they give us can be found on their fact sheets (aka Minimum Disclosure Document or MDD) in the form of their top 10 holdings. These documents are also released in a more comprehensive form by companies such as Bloomberg, Thomson Reuters and many others and this week, I would like to show investors how you can use this data to your advantage when compiling your own share portfolio.With this in mind, I’m going to contribute to the Dr Google analogy – not in the medical sense, but in the field where I am a professional: investment management. But I urge investors to proceed with extreme caution and not to simply implement what they read here. It is imperative that you contact an investment professional prior to any big investment decision, to determine whether the information provided to you by portfolio managers such as myself, falls within your risk profile.

Step 1: Identify equity funds that have performed well in accordance with your needs

Here you can use several strategies, from looking for funds that have delivered the best risk-adjusted returns over the long term, to something as simple as funds that kept the least number of shares in their portfolios while still managing to deliver good returns.

To support this strategy, I only used the top 10 South African General Equity Funds. Although this isn’t really the criteria I normally base my fund choices on, one cannot argue against the fact that these funds are as big as they are thanks to the way they have successfully managed their investors’ capital over the years.

Graph 1: Average Top10 largest SA Equity Fund returns vs. SA General Equity Fund returns over 5 years (source: ProfileData)

Step 2: Determine the average shareholding of the abovementioned funds’ top 10 shareholdings

After identifying the top 10 funds in Step 1, it’s time to look at their most recent shareholdings, simply because I know that these fund managers put a lot of time and effort into analysing these shares before they were included in their funds. So out of my 10 selected funds, I then find the average top 10 shares – the 10 best of the best.

Step 3: Allocate these top 10 shares according to weight

This is a crucial step, and one where investors should exercise caution. Many investors are tempted to place all their eggs in one basket because they feel that if a company can place its largest shareholding in Naspers, they can allocate all of their capital to it. But this can cause massive problems if you (and they) turn out to be wrong. I suggest that you push your emotions aside and rather distribute these top 10 shares according (or as close as possible) to the weights they carry in your identified top 10 funds. In other words, if Naspers makes up the largest portion of the fund’s shareholding, then proportionately it should also make up the largest portion of your share portfolio, but not all of it.

After allocating my top 10 shares according to this method, my portfolio looks like this (grouped by sector):

Resources:

  • Anglo American -12%
  • BHP Billiton – 8%
  • Sasol – 12%

Industrial:

  • BATS – 13%
  • MTN – 5%
  • Naspers – 26%

Financial:

  • FirstRand – 5%
  • Nedbank – 5%
  • Old Mutual – 4%
  • Standard Bank – 10%

All that said, it is important to remember that an equity investment remains a highly specialised area, and that although the steps outlined in this document may be a good tool to use when compiling your own share portfolio, we always recommend that you consult a professional before executing your investment decisions.

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.

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