I always try to give investors the necessary tools to make informed decisions regarding their personal investment portfolios.
Upon recently visiting my doctor (following a somewhat incorrect self-diagnosis), he jokingly stated that “Dr Google” thinks he knows everything, often to the detriment of his patients.
Not only did I make the mistake of trying to diagnose myself, but I also purchased the wrong medicine.
Only after feeling even worse three days later, a medical professional had to point out that my own inner wisdom and bright ideas can only take me so far.
With this in mind, I’m going to contribute to the Dr Google analogy in the field where I am a professional: investment management.
But I urge investors to proceed with extreme caution and not to simply implement what they read here.
It is imperative that you contact an investment professional prior to any big investment decision, to determine whether the information provided to you by portfolio managers such as myself, falls within your risk profile.
I keep a close eye on what other investment professionals (companies) are doing, both locally and abroad.
One of the biggest tools that these companies give us can be found on their fact sheets (aka Minimum Disclosure Document or MDD) in the form of their top ten holdings.
This week, I would like to show investors how you can use this data to your advantage when compiling your own share portfolio.
Step 1: Identify equity funds that have performed well in accordance with your needs
Here you can use several strategies, from looking for funds that have delivered the best risk-adjusted returns over the long term, to something as simple as funds that kept the least number of shares in their portfolios while still managing to deliver good returns.
To support this strategy, I only used the top ten South African General Equity Funds.
Although this isn’t really the criteria I normally base my fund choices on, one cannot argue against the fact that these funds are as big as they are thanks to the way they have successfully managed their investors’ capital over the years.
Step 2: Determine the average shareholding of the above mentioned funds’ top ten shareholdings
After identifying the top ten funds in Step 1, it’s time to look at their most recent shareholdings, simply because I know that these fund managers put a lot of time and effort into analysing these shares before they were included in their funds.
So out of my ten selected funds, I then find the average top ten shares – the ten best of the best.
Step 3: Allocate these top ten shares according to weight
This is a crucial step, and one where investors should exercise caution.
Many investors are tempted to place all their eggs in one basket because they feel that if a company can place its largest shareholding in Naspers*, they can allocate all of their capital to it.
But this can cause massive problems if you (and they) turn out to be wrong.
I would suggest that you push your emotions aside and rather distribute these top ten shares according (or as close as possible) to the weights they carry in your identified top ten funds.
In other words, if Naspers makes up the largest portion of the fund’s shareholding, then proportionately it should also make up the largest portion of your share portfolio, but not all of it.
After allocating my top ten shares according to this method, my portfolio looks like this (grouped by sector):
- Anglo American: 12%
- BHP: 8%
- Sasol: 12%
- BAT: 13%
- MTN: 5%
- Naspers: 26%
- FirstRand: 5%
- Nedbank: 5%
- Old Mutual: 4%
- Standard Bank: 10%
All that said, it is important to remember that an equity investment remains a highly specialised area, and that – although the steps outlined in this document may be a good tool to use when compiling your own share portfolio – it is always recommend that you consult a professional before executing your investment decisions.
*finweek is a publication of Media24, a subsidiary of Naspers.
Schalk Louw is a portfolio manager at PSG Wealth.