Traders Corner Blog

Back



10 Stocks I'm buying my new born son

Posted by: Garth Mackenzie Posted on: 2013-07-29


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)

 




Posts on this thread

Click on the 'Post' button to make a comment, or use the Arrow next to a Post to reply to that specific post.


Reply to this post 1 Tyron Hi Garth, would you like to explain how your offshore exposure would compare to a DBXWorld tracker fund. If we are not willing to go through the process of setting up a offshore bank account, get a sars foreign tax clearance certificate etc, would buying a DBXWorld tracker fund give us a similar performance to your offshore exposure, thank You. 

Reply to this post 2 Garth 1 Tyron - The DBXWorld tracker would be a decent replacement for the offshore Investment Trusts if you didn't want to go through the process of sending funds offshore. Would be more diversified, but a decent replacement and cost effective way of getting offshore exposure. 

Reply to this post 3 Rieneke Congratulations! and what a great idee, both for your son and your subscriber community! Hope you keep us updated on how this portfolio is performing? 

Reply to this post 4 Masike Hallo Garth Thanx for the great advice on long term investing. 

Reply to this post 5 Keith congrats to you and your wife on your new arrival! and congrats also on being far-sighted enough to start investing early for your son, I wish I had the same foresight when my boys were born some 30 & 28 years ago! 

Reply to this post 6 Claire I worry, this kid may never have to work a day in his life ;-) 

Reply to this post 7 Rightbehindu Hi Garth Congrats on your new born! Can you tell me in what vehicle will you house these? Are you setting up a trust?  

Reply to this post 8 Terence Hey Garth! Been a while. Congrats on your new arrival an may he fill your life with lots of joy! Looks like a lot happened to both of us since whe last spoke about Rhett and Peter. I also became a father for the first time, also a boy, on 30 March. I am currently in the process of opening a share account for him at PSG, so your advice could not have come on a better time! :-D Keep well! 

Reply to this post 9 Joline CONGRATULATIONS!! 

Reply to this post 10 Garth 7 Rightbehindu - I'll open an account in his own name to do this. No need to over complicate it with other legal structures. 

Reply to this post 11 Francois Would you use this fund to finance a child's studies eventually? 

Reply to this post 12 Garth 11 Francois - Yes, you could use a portfolio like this to invest for future studies / education if you wish to. 

Reply to this post 13 Rudolph Garth, congratulations and thank you! Our first child was also born earlier this year. Definitely something to seriously consider. Now just have to find that R100k!  

Reply to this post 14 alan well done and congratulations 

Reply to this post 15 Nadeem Hi Garth, how would i go about doing you have done for your son,where do i start? 

Reply to this post 16 pierre CONGRATULATIONS, just had my 2nd grandson, should do the same for both. this means you make the investment and leave it for 21 years.  

Reply to this post 17 bjorn Congrats. Would the portfolio be actively traded by increasing or decreasing the number of shares in the local exposure basket? 

Reply to this post 18 Mulalo Hi Thanks for a great article What would you say are the disdavantages of housing a similar portfolio in a trust? 

Reply to this post 19 TaxGuy Thanks for the information and confirmation. My first son is now 10 weeks and looking to build him a huge portfolio and started trading the small cap equities the idea being the 300-600% LT growth. Would you say a second portfolio on the blue chips is a good side bet? I've also taken out an RA for him which he'll never know about till its payday. 

Reply to this post 20 Rob Hi Garth, Congratulations! Thank you for some more informative advice! May I ask who you are investing through please? 

Reply to this post 21 Garth Mackenzie 15 Nadeem - You can open an account with a stockbroker, deposit some funds and you can buy the shares mentioned on the JSE. A list of stockbrokers can be found at www.jse.co.za. 

Reply to this post 22 Garth Mackenzie 17 bjorn - This is a buy and hold strategy. I will look to add to the portfolio by using dividend income to buy more shares, but that will be the only activity on the account. Buying and selling attracts commission costs and tax, so the stocks I buy will be bought with a view to hold for the long term. 

Reply to this post 23 Garth Mackenzie 18 Mulalo - The disadvantage of a Trust is that the Capital Gains Tax rate is higher and you have to have the Trust audited each yer which increases the costs and complicates it. I would prefer to keep this simple in my son's personal name. 

Reply to this post 24 Garth Mackenzie 19 TaxGuy - My personal experience with small caps has not been good, and hence I tend to avoid them now in favour of quality companies. The trouble is that for every one samll cap that makes it big, there are dozens of others that crash and burn. This makes them risky. For me personally, I would prefer to stick to quality. You can get very rich buy buying quality and allowing the returns to compound over time. 

Reply to this post 25 Garth Mackenzie 20 Rob - The offshore component is at SAXO Capital Markets, and the local component can be done with any local stockbroker. 

Reply to this post 26 usb powered monitor Thank you for this article. That’s all I can say. You most definitely have made this blog into something special. You clearly know what you are doing, you’ve covered so many bases.Thanks! usb powered monitor 

Reply to this post 27 Isaac Ndlovu thank You for basic explanation into investing I am busy growing my interest in investing and I have to say I start at the right time with the guide lines you have provided. I am busy looking at the prices of the brokers to register my portfolio and get on board the ship, congratulations on your new born hopefully he will become one of the wise advisers 21 years from now like his father. 

Reply to this post 28 Johan du Preez Garth Two quick questions. 1. The "10 shares I'm buying my new born" article - which platform would you suggest are you using to invest with the lowest ongoing costs? I use standard bank online share trading myself but seems overkill to open an account in my child (1year) name and pay monthly for a fairly static long term portfolio? 2. Which platformService do you use to execute for your own trades? 

Reply to this post 29 Johan du Preez 25 Garth Mackenzie - Are you using the SAXO CLASSIC offshore account Min £ 2,000? 

Reply to this post 30 Garth Mackenzie 28 Johan du Preez - You can use any stockbroker to effect similar trades. You'll find that when it comes to underlying equities, the rates are similar at most brokers. Perhaps shop around to see who will offer you the best deal. I do my underlying equity investments through Nedbank Private Wealth (previously BoE) - mainly because I used to work there and all my accounts have always been held there. If you bank with Standard Bank, they have a product called Auto Share Invest which will allow you to add your trades to a bulk order at the end of the month to get economies of scale, and significantly reduced costs. The Auto Share Invest product is also great if you want to make a monthly debit order to buy more shares in the portfolio. This is a great offering and something to seriously consider. As for offshore, I've used SAXO Capital Markets locally who have handled the money transfer, and the offshore transactions on my behalf. 

Reply to this post 31 Rachel Is purchasing a monthly ETF through your chosen brokers share trading account the most cost effective way (with regards to fees), would I end up paying my broker fees each month ontop of the annual etf fees? 

Reply to this post 32 Garth Mackenzie 31 Rachel - Yes, doing a monthly purchase of an EFT is a good idea. You may find that you'll get a better deal by going to Satrix.co.za and making use of their debit order facility to buy their ETFs each month, rather than going through a stockbroker. You will pay commissions for each trade as well as the annual management fees for the ETF. A number of the banks also offer a monthly debit order to buy shares on their platforms (eg: Standard Bank Auto Share Invest, and I think FNB has something similar too). 

Reply to this post 33 bjorn hi garth. I like your long term view strategy and the idea of using the compounding returns. more people should take notice. Would you say that ETFs or equities are overpriced at the moment? Cause timing can make all the difference. Thanks for the prompt response. Bjorn 

Reply to this post 34 Haroun Hello Garth and everyone. Garth congrats on your new born. I have found that to generate income Property trusts like FPT and Sycom are good to add. It add the property segment to the portfolio and over time the income stream supplement your monthly contribution for capital investments. One could like any property investmentgear the property portion and deduct the rental/interest agains the cost of borrowing. Over time the asset becomes free and the income then helps build the quity portfolio. A word of caution capital prices could drop with Property trusts as interest rates could rise. But if you oing for the long term then rather buy reglarly as you invest instead of gearing. 

Reply to this post 35 PETER Thanks for the good advice - keep them coming 

Reply to this post 36 Horst I think your plan is wonderful! I took out life insurance at the birth of both my children but this was stupid! Then at their 21st Birthday Parties I handed them an account with SCMB with a bundle of shares that they could trade. Their share portfolios have done much better than their life insurance, despite the crash in recent years. They now both actively trade and are enjoying it immensely! 

Reply to this post 37 Graham Congrats on your son! Interesting portfolio! I notice no property stocks? With the expectation of high inflation in the future how do you think this portfolio and stocks in general will perform? 

Reply to this post 38 BOET I am looking for a good affordable share screening program? What would you recommend? 

Reply to this post 39 Xhasa I do not have a lumpsum to invest but which will be the suitable ETF on the Satrix funds seeing that Warren wrote off the most performing fund Satrix INDI. Will it be advisable to choose one fund from the satrix for a long term investment looking at 20 yeras or so. 

Reply to this post 40 Neil Bisschoff Hi Garth, good read and sure your son will be very impressed when he is 18. I am looking at doing something similar for my daughter (same age as your son) in the near future. In the meanwhile I only bought a Nelson Mandela medallion to keep for 17+ years. Thanks for the advice! Hope you get some sleep with the little one.  

Reply to this post 41 Iain Konkol Hi Garth - thanks for the informative article, it has given me a new outlook on LT investing. Just a few questions: 1.) Are FNB's products for local trading any good? Aparently their fees are reasonable. 2.) Best time to invest in above mentioned companies? 3.) Are your dealings with SAXO effortless for offshore? Thanks  

Reply to this post 42 Faizal Amod 28 Johan du Preez. You can open an account for your child with Standard Bank OST and have the account linked to yours. You will pay no additional fees. 

Reply to this post 43 Nico 1) Would the Satrix 40 be a viable alternative for your ten stocks? (2) Would you buy and leave the stocks you picked, or would you open and close them as circumstances change. Lets say you mention Aspen as a short in the morning's analysis, should one then just hold or short and open again. Thanks  

Reply to this post 44 Garth Mackenzie Nico, The Satrix40 is a representation of the 40 largest shares on the JSE by market capitalisation, and the ETF is weighted according to the shares' weights in the index. So you will find that the performance of the Satrix40 will be vastly different from the shares I have selected here. I like the Satrix40 as a passive investment vehicle for a market related performance, but personally I prefer to select my own shares to buy for passive investing. 

Reply to this post 45 Dudu Hi Garth, I was listening to you last week on 702 and have been thinking lately about investing in unit trusts. I have R50k that I would like to invest for my 3 year old daughter and 1 year old son to access when 18 years old. I have no idea how the stocks work so I was thinking of investing with Allan Gray, would you recommend that? Any suggestions would be greatly appreciated. Thanks 

Reply to this post 46 Garth Mackenzie Dudu, Allan Gray have a long and successful track record. But you should consult a financial advisor to decide which fund to invest in. the key is to get started early which you seem eager to do. Well done! 

Reply to this post 47 Kutlwano Hi Garth, I am ready to invest. If you were starting this year with your plan, would you stick with the same shares or would you make  




Add a comment:


Your name 
Your comment
Please verify