Article / 18 March 2015 at 10:30 GMT

One simple move that could cut equities risk by 75%

Head of Equity Strategy / Saxo Bank
Denmark
  • Diversification is a critical tool of any equity portfolio
  • Benefits of diversification rise with each increment of risk dilution
  • Glut of potential equity picks highlighted across all sectors
  • Find more from Garnry on how to trade, here and here in these Saxo TV specials

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 Burberry shares are up 16% in 2015 as strong Asian sales help propel growth. Photo: istock

By Peter Garnry

Diversification is the closest you get to the holy grail of investing. By expanding the number of stocks in your portfolio from 1 to 10, the diversifiable risk is reduced by 75%. 

The portfolio will still have risk but it will be closer to that of the market. 

The risk reduction from 2 and 3 stocks to 10 stocks is 65% and 50% respectively. So with little effort your portfolio gets a better risk profile with no material drag on your potential return.

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  Saxo equity alpha picks (UK large caps) 
The table below represents Saxo’s top equity picks among UK large caps based on the best mix between quality, valuation and positive price action. 

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Below are recent events and the positive drivers for each stock.

easyJet: FY14 H2 in November in line with estimates; sales growth y/y fell to lowest in four years; short-term headwind from wrong fuel hedge, but the rebound in Europe’s economy will offset and support growth

Schroders: shares are outperforming FTSE 100; best in class in terms of diversity across clients, region and asset classes; strong net inflows to continue in ’15 on backdrop of rising equity markets

BAE Systems: good H2 result in Feb, 3% EPS surprise; potential increase in US military spending in ’16 is supporting sentiment on the stock; risk is UK election in May

Mondi: very strong H2, 13% EPS surprise but -3% sales surprise; positive sales growth expected in ’15 with margins expanding 

Marks & Spencer: FY 15 H1 result in Nov surprised positively, shares jumped 10%; stock is trading at discount to peers; UK economy to support growth

BT Group: showed recent discipline in the Premier League auctions; key foucs on £12.5B acquisition of EE, to finish in 15/16; high quality company with expanding margins

IAG: good top line growth with stable load yield and expanding margin will push investor sentiment higher; improving global economy will support demand growth

Burberry: shares are up 16% YTD as company continues to outperform peers driven by strong online execution; Asia demand and margin pressure are a concern

LSE: strong outperformance over the past year; monetary policies are supporting trading volume; LSE has advantage in OTC clearing and Indices

Kingfisher: strong rebound in the stock since Nov; cheap valuation for stable business with high return on invested capital; UK housing recovery will support business
Saxo equity alpha picks (US mega caps)
The table below represents Saxo’s top equity picks among US mega caps based on the best mix between high quality, valuation and positive price action. 

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Below are recent events and the positive drivers for each stock.

Apple: strong FY15 Q1 results, 18% EPS surprise and 30% sales growth; iPhone 6 is taking market share in Asia; Apple Watch to go on sale in ’15

UnitedHealth: good FY14 Q4 result in Jan, 3% EPS surprise and 7% sales growth; strong momentum across high growth businesses such as Optum, Medicaid and Med Adv

FedEx: disappointing FY15 Q2 result in Dec, -5% EPS surprise and slowing sales growth; strong US economy in ’15 should boost profits (US segment is 72% of total revenue)

Boeing: very strong FY14 Q4 result, 10% EPS surprise and top line beat; rising global demand for travelling on increasing consumer demand; biggest ever order book

Wal-Mart: Q4 result in Feb best since ‘13, 4% EPS surprise but slow sales growth of 1%; lower fuel costs and stronger US labour market will support growth in ‘15

Home Depot: fantastic Q4 result, 12% EPS surprise and sales growth acceleration to 8% y/y; improving margin will push stock higher; increasing momentum in US housing market

General Dynamics: Q4 result in line, 2% EPS surprise and 4% sales surprise; Aerospace segment looks strong in ’15; Defense segment is turning around; margins are improving

Lowe’s: good Q4 result, 6% EPS surprise and 2% sales surprise; improving margins on stronger demand driven by increasing momentum in US housing

Altria: disappointing Q4 result; -1% EPS surprise and 2% sales surprise; margin improvements as input cost pressure remain subdued; stable low digit sales growth

Union Pacific: strong Q4 result, 6% EPS surprise and 9% sales growth y/y; growth is expected to continue as US manufacturing continues to climb back following the financial crisis.

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 That Boeing engine is firing up after a very strong Q4 result. Photo: istock

— Edited by Martin O'Rourke

Peter Garnry is head of equities strategy at social trading leader Saxo Bank
4y
fxtime fxtime
LOL reveiwing my so called diverse portfolio I find that I only have one of the ones you suggest ....LSE !! Seems I better re-assess as I try and maintain 20 equities in my sipp for max diversification and have bought a precious metal equity (NOT gold) to add to the diversification ! The simplistic model I tend to utilise is ''fair value'' !!
4y
JOSHUA63 JOSHUA63
Good call last week about automakers ...
Bmw and Daimler were at crazy inflated prices

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