Traders Corner Blog


My son's portfolio 3.5 years on and investment decision time for my second son

Posted by: Garth Mackenzie Posted on: 2017-01-09

In July 2013 my first son was born and I started an investment portfolio for him. I wrote a blog article detailing the shares I had bought for him at his birth with reasons as to why I had chosen the shares I did. The value of the portfolio was not disclosed in the initial blog article I wrote and I’ll continue to keep that information private. The value doesn’t matter – the shares I chose are what matters and what should interest the reader most.


The reason I did this for my son is that TIME is the single most valuable asset you can have on your side when it comes to investing. I wanted to give my son the maximum benefit of his time by starting his investment portfolio from birth.


My aim with the portfolio is to try and generate a 15% compounded annual return. If one can successfully achieve a 15% compounded return, your money doubles in value every five years. Harnessing the power of compound growth in investing is an incredibly powerful way to build wealth. But TIME is the critical element needed to harness the power of compound returns. I wanted to give my son the full benefit of compounding from the time he was born, and then ultimately teach him how to manage the portfolio himself as he grows older.


I reported back on his portfolio performance on his first and second birthdays. I neglected to report back on his investment portfolio for his third birthday in July last year, so I’m reporting back now when he is three-and-half years old. I am also extremely privileged to be the proud father of a second son who was born at the end of September 2016. I need to now decide how I will invest the same amount for him as I did for my first son. I’ll discuss this at the end of this article.


At the time of the initial investment in July 2013, I felt it prudent to diversify quite aggressively offshore. I chose to send 40% of the funds offshore and keep 60% in South Africa to invest into quality local companies listed on the JSE.


Offshore component


The 40% offshore component was invested into two offshore investment trusts listed in London. To me, this made sense as I would effectively be leaving the offshore investing activities up to managers with far greater expertise in the offshore markets than I have.


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 129 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 £7.04 which is a 24.6% return in pounds. It has also paid 56 pence in dividends since it was purchased which increases the total return in pounds to 34.5% over three-and-a-half years. The rand pound exchange rate was around R15.00/£ when this initial investment was made. At the current weaker rand pound rate of R16.88/£ the performance of this investment is flattered even further. In rand terms, the investment is up by 52% in rands. I’m happy to continue holding this investment in my son’s portfolio.


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


This is also an investment trust and it is managed by Aberdeen Asset Management. It also trades as a share on the London stock exchange. This investment trust has a reasonably high weighting to some emerging markets, so its performance has been weakened somewhat by below par returns in some emerging markets over the past few years. But nevertheless I will continue to hold it. The weaker rand has helped to flatter the performance somewhat. I bought these shares at £11.60 in July 2013. Today they are worth £11.70, so they have barely moved up since I bought them. A total of £1.47 per share in dividends has been paid to date which also helps to improve the performance since inception. When dividends and a weaker rand are factored in, the investment has gained 29% in rand terms. This is below my benchmark of 15% per annum compounded, but I feel this aspect of the portfolio adds some nice diversification to the mix, and I’m going to continue to back this investment on my son’s behalf.


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. Three-and-a-half years on I am far less bullish on the prospects for South Africa and I think the need is even greater to have a substantial portion of one’s investments diversified beyond South Africa’s borders.


I initially selected 8 JSE listed stocks with a weighting of 7.5% each to make up the 60% local portion of the portfolio.


Aspen Pharmacare (APN) (7.5% initial weighting)


This Durban based multi-national pharmaceutical company is a favourite among South African investors. For good reason. Its shares have however been weak in the past six months following a slightly disappointing set of results and after having to write off R870 million in Venezuela. But at the current price, the stock trades on a sub 15X PE multiple which is very reasonable value for this company. I bought the shares for my son in 2013 at R218.00 each. They are currently valued at R275.00 and the company has paid R8.09 in dividends since they were purchased, taking the return to date to 28.3%. This is below the required run rate for the portfolio but I am confident that this company will continue to grow and that it will be a great performing investment for my son in years to come. I’m therefore happy to continue holding it.


BHP Billiton (BIL) (7.5% initial weighting)


I’ve always maintained the view that when it comes to Resources stocks, this is the best of the bunch. It is well diversified across a number of different commodities and geographies and has one of the best management teams of any diversified mining company in the world. Resources companies are very cyclical in nature and hence one can experience huge up and down swings in the share prices of these companies through the cycles. My son’s portfolio endured a severe downward swing in this stock into the beginning of 2016, but things have begun to improve as the Resource cycle looks to have entered another upward swing. The BHP Billiton shares I bought for my son in 2013 cost R261.00 each. The current share price at R224.29 means this portion of the portfolio is still under water. But there have been some generous dividends paid by BHP Billiton in the course of the past three years. A total of R37.90 in dividends per share to be precise. Those dividends have helped to just push the return since inception into positive territory. With dividends included, the return on this portion of the investment is at a measly 1.38%. It’s been a rocky ride, but I’m confident that the longer term outlook for this company has turned more positive. I’m going to continue holding these shares as part of this diversified portfolio.


Mr Price (MRP) (7.5% initial weighting)


At the time of my son’s second birthday this was one of the top performing shares in his portfolio. It has had an awful 2016 however with the shares almost halving in the 4th quarter of 2016. A really weak set of results in August last year resulted in a sharp de-rating of this stock. I bought the initial shares in my son’s portfolio at R125.00 each and for a brief moment in November 2016, the share price went back to the levels I had paid for them in July 2013. My son now has some experience of what a crash in a share price looks like! It seems to have stabilised over the past two months and my feeling is that the worst is probably behind this company for now. Fortunately some chunky dividends have been paid by the company over the years and these have served to improve the performance. A total of R19.57 per share in dividends have been paid since inception to take the return on Mr Price to 38.5% since inception. (This portion of the portfolio was up well over 100% in August last year before the crash into Q4 2016). As frustrating as it is to have seen such a large part of the appreciation in Mr Price shares being eroded, I am happy to continue holding these shares in my son’s portfolio. I still like the business and the management of Mr Price and I feel that now is no time to be selling these shares.


MTN Group (MTN) (7.5% initial weighting)


This is the only stock in the portfolio that is showing a loss, even after dividends are included. The fact that MTN has had a torrid time in Nigeria (of the company’s own making…) has made investors in this company very annoyed. Last year, the company was slapped with a massive fine by the Nigerian communication authority for failing to terminate a large number of sim cards that had not been properly verified. This saw the MTN share price dropping by more than half from its 2015 peak to its 2016 low. I bought these shares for my son’s portfolio at R180.00 in July 2013. After peaking at around R250.00 in 2015, the shares plummeted to below R110.00 in 2016. Today the shares trade at R135.00. Total dividends of R38.40 per share have been paid during the time that my son has owned these shares. That means that the return since inception is negative 2.9%. Very disappointing indeed. The question now is whether the worst is in the rear view mirror for this company. It may be and I’m willing to give it another year to see whether things can improve. I still think the telecoms sector is a hot sector to be invested in for the future.


Rand Merchant Investment Holdings (RMI) (7.5% initial weighting)


This stock has quietly gone on to be the second best performing share in my son’s portfolio. I’ve always liked the spread of insurance businesses that RMI owns: Oursurance, MMI Holdings, RMB Structured Insurance and a healthy chunk of Discovery shares. It’s a power-packed group of companies. I bought these shares for my son in 2013 at R25.50. Today they trade at R39.26. Since the initial purchase of the shares, RMI has paid out a further R3.97 in dividends to take the total return to 69%. I’m confident that this company remains well positioned to continue delivering solid returns for the years to come, and I’m therefore happy to continue holding it in my son’s portfolio.


SAB Miller (SAB) (7.5% initial weighting)


This company has been de-listed from the JSE following the acquisition of the company by AB Inbev last year. I didn’t hold these shares all the way to the buy-out last year. At the time AB Inbev made their intentions known to buy out SAB Miller the shares of SAB Miller rallied massively. I was actually sceptical of whether the deal would go ahead as there were hints that SAB Miller shareholders might want more or that certain parties might try and block the deal. My thinking was that the risk to the downside if AB Inbev walked away would significantly outweigh the potential for any further upside in SAB shares if the deal went ahead. I thus decided to sell my son’s shares at R750.00 last year. These shares had been purchased at R485.00 in 2013. When dividends are added in, this portion of my son’s portfolio returned 58%. I have not re-invested the cash from the sale of the SAB Miller shares as yet.


Many past SAB Miller shareholders have used the proceeds of the buy-out of their SAB Miller shares to buy an equivalent value of AB Inbev shares. I am not in agreement with this strategy. From the day the deal was conceived I thought it was a great deal for SAB Miller shareholders, but a bad deal for AB Inbev shareholders. AB Inbev overpaid for SAB Miller in my view, and they will struggle to achieve a return on investment to justify the price they paid. I think this was a deal driven by management egos rather than common sense. I’d rather deploy the funds from the SAB Miller buy-out into another industry. Mediclinic and Woolworths shares look appealing to me at current levels as a possible place to deploy the cash. More on this at the end of this article.


Tigerbrands (TBS) (7.5% initial weighting)


After a tough year in 2015, this stock came roaring back in 2016. The company has now put the Dangote Flour Mills acquisition into the history books and moved on from that poorly conceived acquisition. Tigerbrands basically wrote off almost the entire purchase price of that deal. Things are looking up now however. At just below R400 per share, Tigerbrands is almost trading at an all-time high. My initial purchase price for my son’s portfolio was R305.00. The shares have spent a fair amount of time under water since I bought them, but my patience seems to be paying off. After dividends of R35.10 have been added back, this portion of the portfolio is now showing a return of 38%. I’m confident that this company remains well positioned to deliver good performance into the future and I’m therefore happy to continue holding it.


Zeder (ZED) (7.5% initial weighting)


This was my outlier pick for my son’s portfolio and I’m happy to say that my enthusiasm for this company has been proven correct. It’s the top performing share in my son’s portfolio with a return of 89% since inception. This company was born out of Jannie Mouton’s PSG stable. The “boere Buffet” as he is affectionately known, has a history of excellent deal making and investment capabilities. Zeder is a business that is involved in food security. This is an investment theme that I continue to think has legs as the global population expands and scarce food and water resources remain under threat. Everyone needs to eat and Zeder is perfectly positioned to take advantage of the ever increasing need for food security through its various investments in food producers and suppliers. I bought these shares for my son’s portfolio at R3.80 in 2013. Today they are worth R7.00 each. I’m happy to continue holding these shares in my son’s portfolio for the long term.


Curro (COH)


This stock was not among the initial shares I invested in for my son in 2013. But I have gradually been building up a position in this company from the dividends that have been paid by all the other shares over the years. At the end of 2014 I used the dividends from all the other shares to allocate 3% of the portfolio to Curro. At the end of 2015 I did the same again to take the exposure to Curro up to around 6% of the total portfolio. Re-investing dividends is one of the corner-stones of compounding returns, and I’m pleased to say that the decision to re-invest my son’s dividends into this affordable private education company has been well rewarded. The shares in Curro now make up 6.5% of my son’s portfolio and they’re looking strong. I am a firm believer that Curro has a very bright future ahead of it while the government continues to fail to deliver quality education to its citizens. Where government fails, private enterprise can thrive. This company is proving just that! 


Looking forward


The past 18-months since I last re-invested my son’s dividends have yielded a further 4% of the portfolio value in dividends. That cash has been adding up in my son’s portfolio and needs to be re-invested. I’ve always said that it is better to allow the dividends to add up in order to have a bigger chunk of cash to re-invest at once, rather than buying tiny amounts of new shares after each dividend is paid. This is a more cost effective way to re-invest.


In addition to that cash, the proceeds of the sale of his SAB Miller shares are also sitting in cash and waiting to be deployed.


The current cash percentage in the portfolio is sitting at exactly 10%. I’ve been holding back on re-investing any of my son’s cash into new shares for a while as I have generally been somewhat circumspect of the market. But having said that, there are some quality shares that have been hit down very hard over the past year, and I believe are offering a decent entry point.


The first of these I mentioned earlier. Mediclinic. This is a private hospital company which is well-known in South Africa. It also owns hospitals in Switzerland, the U.K and in The United Arab Emirates. The company reverse listed into Al Noor on the London Stock Exchange last year and was re-named to Mediclinic International. The company forms part of the FTSE100 in London. It now has a secondary listing on the JSE. Healthcare is an investment theme that will remain in vogue as the global population lives longer. Mediclinic operates in sound geographies and earns a substantial portion of its revenue from countries where living standards are high and medical insurance is popular. Its shares have fallen by 40% in the past six months. At the current price of around R130 per share, I think this presents a decent entry point and I’m going to deploy half of my son’s cash into shares in this company. Thus 5% of the portfolio will be comprised of Mediclinic.


A second share that has fallen sharply in the past year and which I think offers good long term prospects is Woolworths. It has fallen from around R105 per share at its peak in 2015 to the current level around R70.00 per share. The company is exposed to high LSM consumers in South Africa and also has a growing international footprint in Australia. The current historic PE multiple of 15X presents reasonable value and from a longer term perspective, the current weakness presents an attractive entry point. I’ve decided to use the remaining half of the cash available in my son’s portfolio to buy a stake in Woolworths. Thus 5% of the portfolio will now be comprised of Woolworths shares.


My second son


On 26 September last year, my wife gave birth to our second son. A beautiful, healthy little boy with bright blue eyes. In line with what I did for my first son, I will be forming an investment portfolio for my second son with an equivalent starting value. The big question now is whether I buy the same shares that I did for my first son, or whether I chose differently.


I have decided to replicate the portfolio for my second son with the exact same shares as I have in the portfolio for my first son. The reasons for this are twofold:


Firstly, I don’t want to create any unnecessary sibling rivalry between the two boys. I’d prefer that they are treated equally from the start.


Secondly, I am happy with the stocks I have selected for my first son. Those that have done well I continue to believe will do well. Those that have suffered a sharp decline in 2016 are now at attractive levels in my opinion, so I am a willing buyer of those shares in any case at these depressed leves.


The portfolio sets out to try and achieve a 15% compounded annualised return. At the age of 3-and-a-half that equates into a return of around 60% when the compounding is factored in. My son’s portfolio has grown by 54% since inception. So it’s a little behind the 15% compounded annual return I’m wanting to achieve. But I’m understanding of the fact that 2016 was an annus horibilis for many stocks on the JSE, including some of the ones in my son’s portfolio.


It is important to remember that long term investing is exactly that – LONG TERM. One needs to look through the short term volatility and keep your sights set on the long term goal you’re aiming for. Chopping and changing your portfolio when times are tough is likely to cost you in the long run.


In light of this, I’m sticking with my original strategy for my son and will be implementing the exact same strategy for my second son.


By Garth Mackenzie (Founder and Editor of


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Reply to this post 1 Lawrence All parents should do something like this for their children... Quality is a transient term in the business world so, with all respect to the author, I have to disagree about time being the most important aspect when allocating funds. Investing is really a knowledge game, not a time game in my view, so having the required wisdom to choose winners is much more important to me than simply having the patience to buy and hold. Time in the market is no guarantee after all, eg Japan, and hope is not a strategy as they say.  

Reply to this post 2 Garth Mackenzie Good point Lawrence. Time alone is not all it takes.. quality of investment selection is very important. 

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