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10 Stocks for my son - 2 years on. How's it doing?

Posted by: Garth Mackenzie Posted on: 2015-08-04


Two years ago my life changed for the better. My first son was born - a beautiful little blond boy. He turned two recently and he is rapidly growing into a little boy, full of character and a zest for life.

 

When he was born, I started an investment portfolio of ten stocks for him. TIME is the most important asset we can harness when it comes to investing, and as his dad, I wanted to give him a head start in life by starting his investing from the time he was born. The portfolio I constructed for him sought to generate an annualised return of at last 15% per annum including dividends.

 

An investment that returns a compounded 15% annualised return will double every five years. Compound returns are an incredibly powerful way to build wealth over time, but TIME is the secret recipe to compounding and you can never start too early. I wanted to give my son the benefit of compounding from the time he was born, and then ultimately teach him how to manage the portfolio himself as he grows older.

 

So how is his portfolio doing now that he is two years old?

 

Offshore component

 

The portfolio was constructed with a 40% weighting to direct offshore exposure in the form of two investment trusts listed in London: Bankers Investment Trust (BNKR) and Murray International Investment Trust (MYI). The thinking was that these would serve to provide a diversified offshore exposure and protection against rand weakness. Indeed the rand has weakened sharply over the past two years so seeking to diversify offshore has proved a good strategy. The rand has weakened by 32% against the pound since my son was born, from R15.00/GBP to the current level of R19.75/GBP. The investment vehicles that I selected have provided only a modest return in pounds however, but overall they have performed well when translated back into rands.

 

Bankers Investment Trust (BNKR): (20% of initial portfolio)

 

This is an investment trust managed by Henderson Global Investors. It seeks to generate long term capital growth as well as income by investing in a portfolio of global companies. The Investment Trust has been around for 127 years and has a proud history of solid returns. This vehicle trades as a share on the London Stock Exchange. I bought it for my son’s portfolio in mid-2013 at £5.65. Today the shares trade at £6.41 each which is a 13.5% return in pounds. It has also paid 56 pence in dividends since it was purchased which increases the total return in pounds to 18.5% over two years. However when one factors the weakness of the rand into the equation, that portfolio is substantially flattered in rands. The rand value of the investment has increased by 62.4% including dividends. I’m happy to keep holding this vehicle in my son’s portfolio and view it as a solid anchor to the overall portfolio.

 

Murray Investment Trust (MYI): (20% of initial portfolio)

 

This is also an investment trust and it is managed by Aberdeen Asset Management. Frankly this has been a very disappointing investment as it has moved from £11.60 at the time of purchase to the current level of £9.02. That’s a 22% drop in pounds. The weakness in the rand offsets this loss so the performance is still positive in rand terms but nevertheless this has been a big disappointment. When dividends are included this part of the investment has delivered a 9% total return in rands over two years. The reason for the underperformance has been that the investment trust has a meaningful exposure to emerging markets, and these have underperformed dramatically over the past year. I’ll give this part of the investment one more year to see how it performs, but if in a year from now it is still not delivering up to my requirements I will cut it and probably rather look to allocate this portion of the capital to another developed market investment trust or an EFT.

 

Local component:

 

I decided to allocate 60% of the portfolio to local stocks listed on the JSE, but these had to be stocks that derived a significant portion of their profits from offshore operations. At the time of my son’s birth I wrote that I was bullish on South Africa but aware of the challenges the country faced. Two years on I am less optimistic about things in South Africa and hence I think the need is now greater than ever to ensure that your investments have a strong leaning towards developed economies beyond South Africa’s borders. Initially I selected 8 JSE listed stocks and allocated a weighting of 7.5% to each stock.

 

The JSE All Share Index has gone sideways over the past year and has not delivered any growth at an overall index level. However if one digs below the surface, this masks the fact that the industrial and financial sectors have done reasonably well, whilst the resources sector has performed terribly over the past year. The stocks I selected for my son’s portfolio have delivered a mixed performance over the past year.

 

Aspen Pharmacare (APN) (7.5% initial weighting):

 

This holding has grown from R218.00 per share at the time of my son’s birth to the current price of R364.00. That’s a 67% return in two years and the company has also paid a total of R3.45 in dividends in the time we’ve owned the stock to take the total return up to just shy of 70%. The share price has come under some pressure in recent months since GalxoSmithKlein sold a 6% shareholding in the company in an accelerated book build, but on a bigger picture view I am not concerned about this. This company remains a top quality asset with a strong global growth profile and I believe it remains one that will continue to deliver exceptional performance for years to come.

 

BHP Billiton (BIL) (7.5% initial weighting):

 

When I wrote the initial blog article at the time of my son’s birth I made the point that when it comes to resource exposure, one need look no further than BHP Billiton for a well-diversified commodities play. I remain of that view however this stock has not managed to escape the rout that has occurred in the resources space over the past year. This stock has lost substantial value in the past year and has gone from being a stellar performer at the time of my son’s first birthday, to being in a loss making position at the time of his second birthday. Such is the cyclicality and volatility associated with commodity investing. The initial shares were purchased at R261.00 in mid-2013 and today they are worth R227.60. That’s a 13% loss. Fortunately the company has paid some reasonable dividends over the two years that we’ve owned the stock and that brings the total performance from BHP Billiton to a break even situation over the past two years.

 

Should we continue to hold the stock? This is the only commodity exposure we have in the portfolio and I still maintain the view that this is the best diversified commodity play available on the JSE. My feeling on the sector is that it will continue to face challenges for years to come. The commodity boom that happened in the prior decade was driven by a rapidly growing global economy and a scarcity of natural resources. We now sit in a situation where the high commodity prices of the past decade gave rise to a slew of mining activity in an effort to extract even the most marginal reserves out of the ground, and this has substantially increased the supply of natural resources and consequently reduced commodity prices. At the same time the global economy is not growing nearly as fast as it was in the prior decade and even China’s rate of growth is looking precarious at the moment.

 

While this is the case, I think that a number of smaller commodity producers simply won’t survive through the bottom of the next cycle and we will see a lot of consolidation in the sector via mergers and acquisitions. The good news is that this will probably end up being positive for the larger players like BHP Billiton as they have the balance sheet strength to see through the cycle and may end up picking up some reasonable assets at bottom of cycle prices. When the commodity space has consolidated we may then see profit margins start to widen again for the larger players who survived once they regain some pricing power again. This may take a while to play out, but I do think that there is reason to retain the long term position in BHP Billiton on that basis.

 

Mr Price (MPC) (7.5% initial exposure):

 

This Durban based retailer was selected initially for its wide profit margins, simple business model and the fact that it is growing its footprint into the African continent. It has continued to deliver solid returns over the past year. The shares were initially bought at R125.00 in mid-2013 and today they are worth more than double that at R257.00. In addition to the excellent capital growth, the company has paid a total of R10.62 in dividends over the past two years. This takes the total return from Mr Price to 114% over two years. I maintain the view that this company will continue to deliver solid returns going forward and I’m therefore happy to continue holding it.

 

MTN (MTN) (7.5% initial exposure):

 

This company has delivered solid returns to its shareholders over the years since its listing. The past year has been a tough year for the company however, with a strike among a part of its workforce and a weakening Nigerian currency following a sharp drop in the oil price. This company derives 40% of its revenue from Nigeria. That country is heavily dependent on oil exports and the rapid decline in the oil price has meant that the value of the Nigerian Naira has weakened. When translating those earnings back into rands, the rand value suffers. This has meant that the MTN share price has declined by nearly 25% from its 2014 peak. These shares were bought for my son’s portfolio at R180.00 in mid-2013. Today they are worth R206.00. The company has also paid a total of R22.80 in dividends during the time we’ve owned the shares, taking the total return to 27% over the two year period. This is slightly below the 15% annualized compound return I’m looking for but nevertheless I believe the stock is worth holding as these issues are unlikely to plague the company forever. On the plus side, sanctions on Iran are being lifted and the company will be likely to release vast cash reserves that have been stuck in that country. This remains a quality telecoms play which has a decent growth profile and is highly cash generative. As the African continent continues to advance the use of smart phones and data will continue to grow and MTN is well placed to capitalize on that.

 

Rand Merchant Insurance Holdings (RM) (7.5% initial exposure):

 

This company has continued to deliver solid returns over the past year. It is an insurance investment holding company with its main assets being stakes in Discovery, MMI Holdings, Outsurance and RMB Structured Insurance. These are all quality businesses which are extremely well managed. The shares were bought at R25.50 at the time of my son’s birth and today they trade 75% higher at R44.70. The company has also paid dividends of 215c in that time that we’ve owned it taking the total return to 83% in two years. I’m confident that this business will continue to deliver solid returns and I’m therefore happy to retain its position in the portfolio.

 

SAB Miller (SAB) (7.5% initial exposure):

 

The share price appreciation of SAB Miller over the past two years can mainly be attributed to the weakening in the rand pound exchange rate over that time. The share’s primary listing in London has gone sideways for the past two years. This company is a rand hedge stock, but also something of a reverse rand hedge stock. What does that mean? SAB Miller operates in many emerging markets around the world and, like South Africa, many emerging economies have seen their currencies weaken in the last few years. Thus when SAB Miller reports the profits from its various regions back into pounds, the profits are negatively affected by the weakness in the emerging market currencies where the revenue is derived. The shares were bought at R485.00 in mid-2013 and they are valued at R672.00 now. When including the dividends that have been paid while we’ve held the stock, the return from SAB Miller has been 40% which comfortably exceeds the 15% annualized return I seek to achieve.

 

Tigerbrands (TBS) (7.5% initial exposure):

 

This has been a disappointing performer. The purchase of Dangote Flour Mills was poorly executed and the company paid far too much for it. Tigerbrands has had to write off a significant part of what it paid for DFM and this has eroded shareholder value over the past two years. Looking forward, I’d think that all of the bad news relating to DFM must be priced in now and there should be some upside potential for it. DFM operates in Africa’s most populous country and whilst the acquisition was badly executed, the idea to acquire a large consumer staples producer in Africa’s most populous country was not a terrible idea. The shares were bought for my son’s portfolio at R305.0 and today they trade just below that level at R295.00. The company has paid R18.34 in dividends in the time that we’ve held it which takes the overall performance from Tigerbrands to a measly 4% in two years. This is very far below the performance I seek for my son’s portfolio but I’m not sure that selling this holding now will be a good idea. I’m going to give it another year and then re-assess after that as to whether we continue to hold it or not.

 

Zeder (ZED) (7.5% initial holding):

 

This was my “outlier” pick as it was not a large well-known blue chip. But coming from the Jannie Mouton stable I felt the business looked good, and I liked the fact that the company seeks to capitalize on food security. This is a theme that will continue to dominate our world as the global population continues to expand. Everyone will need to eat, and Zeder is perfectly positioned to take advantage of that theme through its investment holdings in various food producers and suppliers. The shares were initially bought at R3.80 and today they trade at R8.80. That’s a 131% increase in just two years. This is therefore the top performing share in my son’s investment portfolio and there is no reason not to continue holding it.

 

Curro (COH) (3% initial holding):

 

This stock was purchased after my son’s first birthday using the 3% dividend yield that had accumulated over the course of the first year. It is a private education group and also comes from the Jannie Mouton stable of companies. The shares were bought at R26.00 last year and today they trade at R34.50. That’s a 32% return for the year. Whilst the company has been in the news for the wrong reasons recently, I don’t believe that the recent news events will dampen the investment outlook for this company. Certainly the market has not reacted at all to recent racial segregation claims at some of its schools. I’m happy to continue holding this stock.

 

Looking ahead:

 

I’ve waited for the dividends of the past year to add up again so that I can make a meaningful addition to my son’s portfolio again this year after his second birthday. Doing it this way is advisable as tiny share purchases are expensive and not economically viable. It is therefore better to wait for an accumulation of dividends to re-invest a larger lump sum. The portfolio has generated another 3% in dividends over the past year and I will reinvest these dividends into more Curro stock to increase the portfolio’s weighting in Curro to a point where it is more closely aligned with the sizes of the exposures of the other holdings in the portfolio.

 

The JSE overall index has gone sideways for the past year and the bull market that began in 2009 is into its seventh year now. The market is not cheap overall but it is not excessively expensive either. There are some near term risks on the horizon in the form of the start of a rising interest rate cycle, and the recent Chinese market crash. But when it comes to long term investing one needs to keep the long term in mind and ride out any short term volatility. As long as you’re invested in quality businesses you’ll be fine in the end and market volatility should not be a concern for the long term investor.

 

This portfolio of my son’s has delivered a total return over the past two years of 53.7% which is well ahead of my required target of 15% per annum compounded. I’m happy with that and I’m confident that the overall portfolio remains well positioned to continue my objective of getting my son’s investment career off to a solid start.

 

By Garth Mackenzie (Founder and Editor of TradersCorner.co.za)

 




Posts on this thread

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Reply to this post 1 Dick Brilliant 

Reply to this post 2 Arne Fantastic Garth 

Reply to this post 3 Cameron Great feedback, thanks Garth. Since I have been self employed for the past year, after more than 30 years in corporates, I have had to build my own long term portfolio besides my preservation fund. I have taken note of your stock picks! 

Reply to this post 4 kutlwano Hi Garth, if you were starting today with the investment, would you make any changes to the selection of companies? 

Reply to this post 5 Garth Mackenzie Kutlwano, I would pick all the same shares again if I were to do the exercise now. perhaps substitute the overseas investment trusts for DBXUS if you don't want to send money offshore. 

Reply to this post 6 kutlwano Thanks 

Reply to this post 7 Quintus Presumably sold the South 32 shares (BIL split) 

Reply to this post 8 Nonhlanhla Hi Garth, I am assuming your investments are not tax-free. So, assuming the we leveled the playing field, and your investments were subject to the same limitations of a TFSA investment, i.e. R30 00 annual and R500 000 lifetime limit, do you feel your strategy would still outperform a TFSA with equity exposure over the same period?  

Reply to this post 9 Garth Mackenzie Nonhlanhla, yes this investment is subject to tax. It would make sense to do this in a Tax Free Savings account structure and add to it each year. It would greatly enhance your performance in the long run. 

Reply to this post 10 Nonhlanhla Thanks Garth 

Reply to this post 11 Georg Garth, what investment vehicle/platform did you utilise to acquire BNKR, what does this cost and what are the cost structures inherent in BNKR? 




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