Tuesday 16 July 2013 was a special day for me. My first child was born: a beautiful blond haired little boy. This marks the start of a new chapter in my life, and suddenly my life has gained a whole lot of new meaning. I have a responsibility to this little boy, and it’s a bigger responsibility than any other responsibility I’ve ever had before. But I am ready and eager to take it on and to be the best dad I can be.

I want to give him everything that I can to make his life happy, healthy and successful. In light of this, I am looking to start investing early for him. I feel that financial security is vital in this day and age and is a precious gift that parents can provide to their children, firstly by investing for their children from an early age, and then ultimately by teaching their children how to be financially responsible.

My son has one of the most precious commodities on his side: TIME. When time is added to the power of compound returns, this is a phenomenally powerful combination to have on your side when it comes to investing. As his dad, I plan to help him make the most of that time by starting his investment portfolio early, and investing wisely on his behalf. When he’s older, I’ll teach him how to take the portfolio over, and how to manage it correctly and responsibly.

I’ve decided to share with you how I plan to invest for him with a list of 10 stocks that I plan to buy. But before we get into the list of stocks, I want to discuss a little about what time, compound returns and correct asset allocation can do for an investment portfolio.

When it comes to long term investing, my goal is to try and achieve a total compounded annual return of 15% including dividends. Dividends will be reinvested which ultimately makes this rate of return more easily achievable over time. If you can consistently achieve a 15% compound annualised return, your investment will double every 5 years. For my new born son, that means that the investment I make for him now will have the opportunity to double twelve times by the time he reaches 60. To put this into perspective, it means that a R100 000 investment now could grow to over R1.8 million by the time he is 21 years old, and to over R400 million by the time he is 60 years old. And that’s assuming a lump sum investment with no additions to the initial investment. The key is to be able to achieve that 15% per annum compounded return, and to do that requires the correct asset allocation and stock selection.

My first step in achieving that return is to correctly diversify his portfolio and to spread the investment among local and offshore investments.

I’m a big believer in the future of South Africa and of Africa as a regional growth hub, but the developed world simply cannot be ignored. So first and foremost I plan to send 40% of the portfolio offshore to be invested in foreign companies. Of the remaining 60% of the assets, I’ll invest them into the local market but will select shares that generate a substantial portion of their earnings from offshore and with a growing exposure to the African market.

In light of this broad asset allocation strategy, here is how I plan to split the money among 10 different stocks:

Offshore exposure (40%):

I am the first to admit that my knowledge of offshore companies is not as good as my knowledge of local companies, so instead of trying to get smart with offshore stock selection, I plan to split the 40% offshore exposure between two UK listed Investment Trusts: Bankers Investment Trust and Murray International Investment Trust. These are listed vehicles that trade on the London Stock Exchange as shares. They are managed by a team of investment experts who invest the proceeds of the funds into a variety of foreign companies. Doing this allows me to get a diversified offshore exposure to a host of good companies, and the fees that the managers charge are not particularly expensive. I’m happy to outsource the management of the offshore component of the portfolio to more skilled managers than myself. Having done my homework in the offshore investment trust space, the following two appeal to me most:

(1) Bankers Investment Trust (BNKR) (20% of portfolio)

This investment trust is managed by Henderson Global Investors. Its objective is to provide investors with long term capital growth and income from a wide variety of investments around the world. It has been around for 125 years and has a proud history of increasing its dividend payout every year for the past 45 years. The fund’s assets are split globally among various different regions. It invests in a wide variety of medium and large companies across the globe. Management fees are low at just 0.45% per annum and no performance fee is charged. This is a small price to pay for a well-diversified global investment that has such a strong management team and has such a consistent track record of delivering healthy returns (£1000 invested in Bankers Investment Trust 30 years ago would today be worth £38 951). This investment trust trades as a share on the London stock Exchange under the code BNKR. The current share price is approximately £5.65 and the dividend yield is approximately 2.44%. Dividends are paid quarterly. More information on this investment trust can be obtained here.

(2) Murray International Investment Trust (MYI) (20% of portfolio)

This investment trust is managed by Aberdeen Asset Management. It has been in existence since 1907. Its objective is to achieve capital and income growth by investing in a portfolio of approximately 65 different equities worldwide. It has either increased or maintained its dividend payout every year for the past 20 years. £1000 invested in Murray International 10 years ago would today be worth nearly £6000. This investment trust offers a dividend reinvestment option whereby they will pay you out in additional shares instead of cash – a great option for those looking for a hassle free way to compound returns. The management fee structure is a little complex but works out at approximately 0.6% per annum. This investment trust trades as a share on the London stock Exchange under the share code MYI. It currently trades at a price of around £11.60. The current dividend yield is around 3.4% per annum and dividends are paid quarterly. More information on this investment trust can be found here.

Many might be wondering about the ability to send funds offshore and foreign exchange approval etc. This is not an issue for smaller investors as anyone can send up to R1 million offshore without having to obtain SARS Tax Clearance.

There are numerous brokers locally who have offshore operations or partnerships, and can enable you to trade directly into foreign markets and who will assist you with transferring your money overseas. I personally use SAXO Capital Markets for my offshore investing.

Local exposure (60%):

I’ve selected 8 individual stocks that are listed on the JSE. These are from a cross section of sectors and industry groups. Most are blue chip companies that derive their income both locally and from offshore. In selecting these companies, I am looking for a combination of long term growth potential and dividend income growth. Dividend income will be reinvested back into the portfolio by buying more shares in either the company that paid the dividend or possibly in different companies. I will split the 60% local exposure equally among these stocks with a weighting of 7.5% each:

(3) Aspen (APN) (7.5%)

This home grown pharmaceuticals supplier has followed a rapid growth trajectory over recent years, but this growth path looks far from over as the company continues to spread its wings globally. It is now represented in 15 different countries worldwide, and continues to look to new investment destinations to supply its products. The Asia Pacific region remains a massive growth opportunity for the company and this region is expected to replace South Africa as the group’s largest revenue generator by the end of 2013. The company has a close working relationship with global pharmaceuticals giant GlaxoSmithKlein in many regions which is aiding its rapid growth path. This is a well-managed business with a very defensive product line. The growth path continues to look exciting for years to come and I’m confident that it will exceed the 15% per annum hurdle rate that I’m looking for in the whole portfolio.

(4) BHP Billiton (BIL) (7.5%)

I’ve long held the view that if you want exposure to the resources sector, you need look no further than BHP Billiton. This company has a greater geographic spread than any other resources stock on the JSE, and also produces a greater diversity of commodities than any other company. It’s exposure to South Africa is minimal and it is therefore less affected by all the labour and political issues that are plaguing the rest of the resource companies listed on the JSE. It is well managed, and has a progressive dividend policy which is unique in the sector. It is no wonder therefore that it has outperformed the JSE Resi10 index by more than 300% over the past 15 years. To my mind, this is the only stock you need to own if you want exposure to resources in the long term. Resources are typically cyclical and share prices are volatile, but over time I’m confident that this company will provide at least a 15% per annum compounded return when the generous dividend yield is factored in.

(5) Mr Price (MPC) (7.5%)

This well-known retailer has been a phenomenal performer over recent years. It is well positioned to continue growing in years to come, particularly in Africa where it has begun making inroads. What I like about this business is its simplicity and the fact that it is well positioned to cater to a low to middle income market. This is an exciting place to be positioned in Africa which is showing strong economic growth, and is likely to continue seeing per capita income rising in years ahead. The profit margins at Mr Price are among the best in the retail space thanks to excellent management. This company pays a decent dividend (current yield 3.2%) and I’m confident that between earnings growth and the dividend, it will exceed my 15% per annum hurdle rate over the long term.

(6) MTN (MTN) (7.5%)

This home-grown telecommunications company has been on an aggressive growth path since it was founded some 20 years ago. It has moved aggressively into numerous emerging markets in Africa and the Middle East. Mobile penetration continues to grow in emerging economies. As the world becomes more and more connected via the internet, so this penetration is likely to grow in emerging economies. Many people in Africa will see the internet for the first time on a mobile phone. MTN is well positioned to take advantage of this growing trend. They operate in an industry with high barriers to entry. Although the company operates in a few regions which some analysts are concerned about, (eg: Iran and Syria) the overwhelming majority of the business is spread across a broad number of stable regions. This company pays a healthy dividend as it is very cash generative (current dividend yield is 5% and growing). Eventually it will likely trade like a utility company when it reaches saturation in its markets, but this is still some way off. There is still decent growth potential for the company and between the growth potential and the healthy dividend yield, I’m confident that this company will contribute towards the 15% per annum return that I’m looking for on the overall portfolio.

(7) Rand Merchant Insurance Holdings (RMI) (7.5%)

This company houses the insurance assets that were born out of the Rand Merchant Bank stable. It is effectively an investment holding company, which owns significant stakes a variety of South Africa’s top insurers. Its stakes include a 25% interest in Discovery, a 25% interest in MMI Holdings, an 83% stake in Outsurance and a 76% stake in RMB Structured Insurance. These are quality assets with tremendous growth potential. I am particularly excited about Discovery and was hard pressed to decide between going directly into Discovery, or into RMI. Discovery is making inroads into the Chinese market, and indications are that things are going well there. The Chinese market is massive, and with rising per capita incomes in that region, there is huge potential for Discovery in that country. Outsurance is a major player in the South African insurance space and there is major growth potential in Africa for that business. The dividend yield offered by RMI is decent at 3.5% and growing. I am confident that between the dividend and the growth potential in this business, this holding will easily contribute towards the 15% per annum growth that I’m looking for in the overall portfolio.

(8) SAB Miller (SAB) (7.5%)

This local brewer has gone on to be among the largest brewers in the world, operating on 6 continents and in 75 countries. The company continues to look to new regions to grow into, particularly in emerging markets where per capita incomes are rising. One might argue that a business of this size and geographic diversity is mature and that growth potential is limited, but I think that point is still some way off. This company has a tried and tested model that works well and it has the scale to grow into new regions and offer new products to its existing markets. Growth here is likely to be reasonable and steady, with a reasonable dividend to assist in performance (Dividend yield is currently 2%). This stock is likely to be one of the anchors in this portfolio. It may not always meet the 15% per annum growth that I’m aiming for with the whole portfolio, but its returns will be reliable and steady.

(9) Tiger Brands (TBS) (7.5%)

Tiger Brands is a management company with operations in the branded food, personal care and homecare business. It is well known in South Africa and is a dominant player in the local market. On the local front, the business is quite mature, but it is expanding into Africa where there is exciting growth potential. The company recently acquired Dangote Flour Mills Plc in Nigeria which represents a bold growth step into Africa’s most populous country. With economic growth in sub-Saharan Africa looking promising, this company is positioning itself to take advantage of the growth in the region, whilst relying on its South African business to provide a rock steady earnings stream.

(10)  Zeder (ZED) (7.5%)

This is my outside bet in the portfolio. It is not as well-known as the others, and does not have the same track record as the other shares in the portfolio. But I like what this company does, and I like the stable that it was born out of. Zeder was born out of Jannie Mouton’s PSG stable: The same stable that created market legend Capitec, Curro and Thembeka Capital among others. The company focusses on the agricultural, food, beverages, food processing and related sectors. In the next 40 years, the world’s population is expected to grow by 50% to 9 billion people (to which I’ve just made my contribution). All of these people will need to eat, yet the world’s scarce food and water reserves are under threat. With this being the case, food security is likely to be a bigger and bigger investment theme going forward, and Zeder is well positioned to capitalise on that growing need for food security. On a long term investment horizon, this company looks exciting and has a strong breed of management behind it. If the “Boere Buffet’s” reputation is anything to go by, this company could have massive potential in years to come.

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