Portfolio planning

In this section of PWM we test the performance and volatility of two investment strategies using model portfolios. Each month we look at two separate baskets of stocks related to these strategies. Global portfolio The model used for this strategy is a time weighted risk-reward formula covering five periods over the past two years. Past performance is no guarantee, but an optimal risk reward ratio for the next six months can beat the index. Which markets, sectors and stocks offer the best performance? Our analysis shows that the clear front-runners are emerging equity markets and the Nasdaq. Small caps are favoured over traditional large caps in the US, although not yet in a big way in the other economic zones over a time frame of 12 months. The top sectors are clearly located in the high tech areas such as Internet software and services, Internet catalogue retail, communications equipment and biotechnology. The best non-technology sector can only be found in 10th position (marine business). The last allocation step is the selection of a portfolio of 12 quality stocks that reflect the strength of the best markets and sectors. Chart 1 shows the excellent performance of the portfolio over the last four months and it could well be argued that a pullback is overdue. August and September are notoriously bad months after good runs into July. A pullback could be awaited before creating this portfolio, built with a time horizon of six months. The heat map (Chart 2) shows on topside the sectors and countries where volatility was found within the portfolio; green indicates the lowest volatility. The pie chart (Chart 3) shows the MSCI top level sector distribution of the top down momentum portfolio.

European portfolio In the May issue, a portfolio of high yielding stocks was presented that slightly underperformed the pan-European indices since March. This was because defensive stocks have been unable to follow the pace of the bullish environment, in which growth stocks tend to be market leaders. The trend could last into summer 2004. But what about reasonably yielding growth stocks that also show value characteristics? This might well be a good compromise for a higher return than passive investing in equity indices. There are currently just nine growth stocks in Europe with a market cap of at least E1bn, paying a gross dividend of +2.57 per cent or more, and with a dividend coverage of at least 50 per cent. The portfolio demonstrates that the total gross dividend is +3.894 per cent, while a very low price to sales ratio of 0.4292 is calculated. The dividend yield of almost 4 per cent is a big advantage in a bull market. For further information on Brainpower’s professional portfolio analysis software, please visit www.brainpowerweb.com or contact Alan Parmenter on +44 (0) 20 7392 7108. In Chart 1, the high yielding portfolio (blue line) has done better than Stoxx50 even without taking into account the annual average dividend yield of almost 4 per cent. It has also shown good price momentum up to the end of July when most market indices were locked into a sideways movement. The heat map, Chart 2, shows the sectors (topside) and countries where volatility was found within the portfolio. Green indicates the lowest volatility. Chart 3, the pie chart, shows the MSCI top level sector distribution of the top down momentum portfolio.

Data, charts and comment supplied by Brainpower