It’s been a while since I last mentioned the model portfolio that I run as part of the investment newsletter I launched last year. The constituents of that portfolio match exactly those in my personal pension fund, so this is much more than simply a model that I’m ‘messing about’ with.
The idea of the fund is quite a long way from the deep value investing approach that I started out with five or so years ago. Instead of looking for obscure or despised stocks, the portfolio invests in some of the largest and most well known companies in the world.
There are several reasons for this, but mostly it’s because I know that many investors, including myself, are much more comfortable investing in companies that have been profitable and paid a dividend in every one of the last ten years and which are often the market leaders in their industries.
I also think that it is just as possible to outperform the wider market with medium, large and mega-cap companies as it is with small companies. For one thing, the improved market liquidity makes it very easy to buy and sell shares in a single transaction with a small trading spread.
The basic principles of the portfolio can be summarised as:
- Invested 100% long in equities at all times (or as near as possible given dividend income etc.)
- invest in FTSE 350 companies
- invest for income, growth AND valuation mean reversion
- hold 30 companies
- don’t hold more than two companies in the same industry
- only invest in companies that have been profitable in every one of the last ten years
- only invest in companies that have paid a dividend in every one of the last ten years
- only invest in companies that have been relatively stable in the past ten years
- only invest in companies that have grown revenues, earnings and dividends in the last ten years
- only invest where debt levels are low at best, manageable at worst
- only invest in companies that are in the market-leading group
- only invest where either the valuation, the dividend yield or the growth rate (and preferably all three) are significantly better than the market average
- sell a holding if neither the valuation, the yield or the growth rate are better than the market
The fund includes such obscure companies as BP, Vodafone, SSE (Scottish and Southern Energy), Reckitt Benckiser and AstraZeneca.
At the end of Q1, the yield for the portfolio (assuming a yield of 1% for the cash holdings, which make up 10% of the fund) was 4.8%, well above the 3.6% that was quoted for the FTSE 100 at the time.
The median 10-year growth rate is 8% compared to the 5% or so from the index. The median PE10 (price relative to 10-year average earnings) is 13, while the FTSE 100 is currently at 14.
So the portfolio as it stands has a higher yield and a higher historic growth rate, both of which have effectively been bought at a lower valuation relative to past earnings.
I think the prospects of a diversified group of 30 market-leading, steadily profitable, dividend-paying companies bought at below-average valuations should be quite reasonable.