To kick off the new financial year, Credit Suisse has released its annual “Bufferoo” portfolio of Australian stocks.
Once a year, research analysts Hasan Tevfik and Peter Liu select a basket of stocks from the ASX100 that they think would look attractive to investing legend Warren Buffett.
Here’s the list for the 2018 financial year:
This year the portfolio has been reduced from 6 stocks to 5, and historically it has never held more than 8.
The Credit Suisse analysts quoted the Oracle of Omaha himself, who has previously said “diversification is protection against ignorance. It makes little sense if you know what you are doing.”
Tevfic and Liu select the Bufferoo portfolio on 30 June every year, and they make no changes to it over the following 12 months.
This year’s portfolio includes Insurance Australia Group (IAG), which Buffett’s Berkshire Hathaway actually did invest in two years ago.
It’s since performed well for Buffett, with Berkshire’s 3.7% stake in the company delivering a total return of 35% in that time.
Tevfic and Liu’s latest portfolio is comprised of stocks from 5 different sectors. Each of the stocks selected has fundamentals which align with Buffett’s traditional investment thesis — solid businesses at reasonable valuations.
The portfolio hasn’t held any defensive stocks since 2013.
“Back then the portfolio owned Telstra and Resmed. While defensive stocks in Australia are sound companies we find valuation precludes many of them from the portfolio,” the analysts said.
Last year’s Bufferoo portfolio actually outperformed Berkshire Hathaway, in terms of both absolute returns and returns relative to their respective stock markets.
The combined price-to-earnings ratio of this year’s Bufferoo portfolio is 16.6, in line with the market. Last year the portfolio had a PE ratio of 14.2, which was a 15% discount to the ASX200.
“Mr Market is certainly not as generous this year as it was last year, just after the Brexit vote. For this reason, we expect returns will not be as strong for the year ahead,” said Tevfik and Liu.
This table shows the historical composition and annual returns generated by the Bufferoo portfolio over the last 7 years:
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