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One year later - 10 stocks I bought for my new born son.

Posted by: Garth Mackenzie Posted on: 2014-07-15


One year ago today, my son was born – an event that changed my life for the better. The past year has been an absolute joy and I cannot imagine what life was like before we had this little bundle of joy running around our house.

 

A year ago, I bought a portfolio of stocks for my son at the time of his birth and wrote a blog article about it. That article can be accessed here.

 

My son was born at 3.5kg and today – one year later - he weighs in at nearly 12kg. That’s a 243% increase! The portfolio I selected for my son has not managed to match his own growth rate, but nonetheless it has done well. 

 

My basic thesis behind the portfolio I selected was to achieve a long term compounded rate of return of 15% per annum including dividends. A consistent compound return of 15% per year allows a portfolio to double every 5 years. I’ll be happy to achieve that type of return for my son, especially given that he is getting a massive head start on his investments. TIME is the most valuable commodity to have at your disposal when it comes to investing. I plan to help him out by making the first two decades of his investing career count until such time as I am able to pass on my knowledge to him and allow him to take over the portfolio.

 

So how has the portfolio done over the past year? 

 

Well I’m pleased to say it has done very well and has far exceeded the 15% per annum hurdle rate that I was looking for. The portfolio is up 26.2% for the year inclusive of dividends. It has indeed been a very good year for equity markets and my son’s portfolio has seen the benefit of that.

 

Here is a re-cap of the shares making up the portfolio, and how they’ve done over the last year:

 

Offshore exposure:

 

I decided that I wanted to send 40% of the capital offshore to allow for some decent diversifying. I didn’t back my own knowledge of offshore stocks sufficiently to do my own stock selection, so I decided to invest in two offshore Investment Trusts – entrusting the money invested to experts in that field. The Investment Trusts have not performed as well as I would have hoped, but a 23% weakening in the rand against the pound has flattered the performance of these investments when converted back into rand.

 

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

 

These were bought at £5.65 last year and they’re currently trading at £5.67. A pretty weak performance given that global equity markets have performed so well over the past year. A dividend of 2.44% was paid during the year which helped a little, but on the whole this has been a disappointing performer over the past year in sterling terms. In rand, this portion of the investment is up 26.22% in the year, thanks almost entirely to the weakening of the rand. Despite the weak return in sterling, I remain confident that the managers of this Investment Trust at Henderson Global Investors will create value in the years ahead as they have done over the long term and I’m not about to sell these shares. I’m not forgetting that £1000 invested in this Investment Trust 30 years ago would be worth over £39000 today and the dividend payout has increased every year for the past 45 years. One dull year is not going to deter me.

 

(2) Murray International Investment Trust (MYI) (20% or portfolio):

 

This has been the second worst performing asset in the portfolio. It would have been the worst had it not been for the sharp weakening in the rand over the past year. These were bought for £11.60 and they’re currently £10.60. A 3.4% dividend has been paid in the year which has helped, but in absolute sterling terms, the investment is still under water. In rand terms however, the investment is up 15.94% which is bang in line with what I need to achieve the hurdle rate of 15% per annum. It’s a pity that this has come about as a result of a weaker currency. As with Bankers Investment Trust, I won’t be deterred by one year of poor performance. The managers at Aberdeen Asset Management have a proud history of delivering consistent long term returns, and I’ll remain invested here for the long term.

 

Local exposure (60%):

 

The JSE has delivered an excellent return over the past year and all of the stocks I selected - with the exception of one - have beaten the performance of the JSE All Share Index. The stocks were selected with a view to creating a diversified exposure across industries, with 8 stocks holding a weighting of 7.5% each.

 

(3) Aspen Pharmacare (APN) (7.5%):

 

This Durban based pharmaceuticals supplier has had a stellar year of growth with continued expansion beyond South Africa’s borders. The share has given a 27.3% return over the past year including a small dividend. Growth continues to look robust for the future and I’m happy to remain invested in this stock and I’m confident that it will continue to deliver a sound performance to meet or beat my 15% per annum hurdle.

 

(4) BHP Billiton (BIL) (7.5%):

 

When I entered this stock last year, I made the point that one need look no further than BHP Billiton for resources exposure. The company has a broad geographic spread of commodities that it produces and it operates in many diverse geographies around the world. It has one of the best management teams in the world for a resource company and has a progressive dividend policy. Investing on the basis of these factors has proved successful over the past year and has ensured that we avoided the many problems associated with several of the single commodity producers in 2013 / 2014. I maintain the view that one need look no further than BHP Billiton for commodity exposure when investing in this sector. The share has given a 31.7% return over the past year, and with a further further 3.9% in after tax dividends, that brings the total return to 35.63% for the year – more than double the required hurdle rate!

 

(5) Mr Price (MPC) (7.5%):

 

I chose this retailer because it has among the widest profit margins in the sector, and it operates predominantly in cash, with a growing African footprint. It has delivered well beyond my expectations and has been the best performing stock in my son’s portfolio over the past year with a total return of 53.2% including dividends. The company remains well positioned to continue to capitalise on African expansion and the simple business model as well as its exposure to the middle income market in Africa make it a firm favourite. 

 

(6) MTN (MTN) (7.5%):

 

The past year has shown that this business is not yet mature and there is still plenty of growth potential for the company in the mobile data space. MTN continues to expand into emerging markets and penetrate markets that are far from saturated in terms of mobile data usage. Many people in less developed economies will see the internet for the first time on a mobile phone, and this is a growth area that MTN is targeting. This growth is also accompanied with a healthy dividend yield thanks to solid cash flows from the more developed markets where MTN operates. The return from this portion of the portfolio has been 25.35% in the last year. Looking ahead, I’m confident that this stock will continue to yield at least 15% per annum and I’m therefore happy to keep holding it.

 

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

 

Solid returns during 2014 have seen this share doing well. It has yielded 29.8% inclusive of dividends during the past year. This company is an insurance holding company with meaningful assets in the form of 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 all solid businesses with a defensive character, and decent growth opportunities on the global stage. The most exciting aspect of the business is the stake in Discovery which continues to go from strength to strength. I’m confident that this company will continue to meet or beat my hurdle rate of 15% per annum growth.

 

(8) SAB Miller (SAB) (7.5%):

 

A sharp weakening in the rand is responsible for most of the growth in this stock over the past year. In sterling terms, the share has not done fantastically. In fact it is flat for the year. The company operates in many emerging markets which have all had weakening currencies over the past year. This means that when profits are reported back into pounds as a reporting currency, they are somewhat diluted by the weakening currencies of the emerging markets where SAB Miller operates. But the share is dual listed in London and South Africa, with a primary listing in London. Hence the local share price needs to maintain parity with the UK listing. For this reason, the 23% weakening in the rand has helped this stock to move higher on the JSE in the past year. It has gained 25% in rand in my son’s portfolio when dividends are included. The company remains as solid as ever and I’m happy to maintain the exposure. This is a proper blue chip company.

 

(9) Tigerbrands (TBS) (7.5%)

 

This has been the worst performer in the portfolio. I have to concede that one of my colleagues was right when he said to me that “the only person who is going  to benefit from the Dangote Flour Mills deal will be Mr Dangote himself”. Tigerbrands bought a meaningful stake in Dangote Flour Mills in Nigeria last year from Nigerian billionaire and Africa’s richest man, Aliko Dangote. Tigerbrands paid a hefty price for it as part of their plans to expand aggressively into Nigeria. Two months ago it was announced that Tigerbrands would impair half of the cost of that transaction for R850 million, so it certainly does seem that the only person to have benefitted from that deal so far was Mr Dangote himself. But now that the impairment has been taken, the slate is clean and it is likely that Nigeria remains a promising growth market for Tigerbrands. The share price of Tigerbands was R303.10 at the time of purchase one year ago, and it’s at approximately the same level today. The only thing to have assisted with a 2.8% return on capital on this portion of the investment in the last year was a dividend. I’ll retain this investment however as it is likely that the worst of the Dangote deal has been accounted for, and the growth outlook from here looks decent.

 

(10) Zeder (ZED) (7.5%)

 

This stock was my outlier pick. It was not a “blue chip” like the rest of the companies I’d picked, but it comes from a stable that has a very strong track record of delivering spectacular returns. I’m talking about the PSG stable started by the “Boere Buffet” Jannie Mouton. The same stable that brought you Capitec, Curro and Thembeka Capital. Zeder has not disappointed. It has gained 38.4% in the past year to be the second best performing stock in the portfolio. Zeder is in the food sector, focussing on agriculture, food, beverages and food processing. In a world where the global population is set to rise to 9 billion people by 2050, food and water security will be an ever more important theme and this company is well positioned to take advantage of that investment theme. As a long term play, I’m very happy to retain this position in my son’s portfolio.

 

Looking ahead:

 

The past year has been an excellent one but the JSE and many international markets are not cheap. That’s not to say that they’re excessively expensive either. The momentum that we’re seeing in markets currently may well last for a while longer, but we need to be realistic about the fact that this bull market is rather mature with it having entered its 6th year. Nonetheless, long term investing is not about timing the market, but rather about “time in the market”. On this basis I am happy to retain the exposure I have built for my son and ride out any volatility that may come along.

 

This portfolio has yielded just over 3% in dividend income in the past year and it is always a good idea to re-invest dividends back into the market in order to compound your returns. I’ve waited for the dividends to add up so that I can make a meaningful addition to the portfolio at the end of year one. It is often not economically viable to re-invest small dividends as the transaction costs on small trades become prohibitive. So I’ve waited for the dividends to add up to invest a larger lump sum.

 

A stock that I am particularly interested in now and will be investing the collective dividends into is Curro Holdings. This is a private school company that is positioned where the old Model C schools used to be positioned. Their business model is simply brilliant and I see this company becoming a huge cash generator over time. Quality education is limited in this country and Curro is aiming to fill the gap where government is failing dismally. Education is one area where parents do not skimp. They will cut out other expenses before they cut back on their children’s education. Curro is currently busy building a school where I live and my son will most likely go to that school in the next few years, so it seems fitting that he should own a few of the bricks that his future classroom will be built from.

 

Curro recently concluded a rights issue to raise fresh capital for future growth. This has seen the share price come under some short term pressure. To me, the current weakness to the R26.00 area looks like an ideal buying opportunity, so this will become the 11th share in my son’s portfolio.

 

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

 




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Reply to this post 1 Beau Barfknecht Hey Garth congratulations on your son's first birthday - certainly a fantastic and undescribable life changing event you would have experienced 1 year ago. The comment I wish to make that came across well in the course and is now highly evident here in your son's portfolio - is how simple you keep everything. You have applied your initial investing principles so easily, split the portfolio up local and offshore, acquired only 10 shares and (apart from the UK pedestrian stuff which will come right)have achieved an admirable return. you haven't dived into any funny products, derivatives, or tried to chop and change during the course of the year. Thank you for emphasizing the "simple" importance throughout your course and traders corner. Clearly with this simple approach young McKenzie should easily achieve another >15% by 07/2015 




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