If you have keenly been following the series on ‘get to know your mutual funds’, you would realise that in each post, the top 5 equity holdings of the fund’s portfolio are highlighted. Interestingly, of the few mutual funds covered so far, there appears to be much similarity in their various top 5 equity holdings. In other words, most of the mutual funds list similar companies as their top 5 equities.
Out of curiosity, other mutual funds were also looked into to find out if the similarity trend would remain unchanged. To achieve this, some of the most recent annual reports (where available) of major mutual funds were examined. In all, 19 annual reports were studied, which covered 7 different mutual funds (both equity and balanced funds).
The main purpose was to figure out if the topmost equities repeating more frequently in the various mutual funds could be considered as foundational stocks. In doing so, these stocks could become a sort of principal, key or foremost stock picks for investment portfolios. Many would agree, to some extent, that mutual funds are managed professionally by fund managers. Hence, following in the footsteps of these fund managers by replicating some of their top stock picks can be useful.
Why foundational stocks?
Investing in stocks is one of the most proven means to build wealth. However, picking the right stocks from the market can be challenging, especially for the novice investor. One requires a good portfolio mix comprising the right stocks in order to be successful. Just like building a house requires strong foundation to ensure its robustness, building wealth with stocks may equally require careful selection of stocks, in particular, starting with good foundational stocks.
A poor foundation can cause your building to tremble or worse, topple down, so do poor foundational stocks can cause to your investment portfolio. Arguably, maintaining strong foundational stocks in your investment portfolio comes with some benefits such as good investment returns. Moreover, strong foundational stocks can somehow protect an investor from the impacts of market falls.
Summary procedure for selecting foundational stocks
As stated earlier, the top 5 equity holdings of seven (7) different mutual funds were compared. The mutual funds were Databank Epack, Databank Bfund, SAS Fortune Fund, HFC Equity trust, HFC Future Plan, CDH Balanced Fund and FirstBanc Heritage Fund.
To ensure the use of up-to-date data for decision making, data covering the latest three years (2016, 2015 and 2014) were utilised. The topmost equities frequently appearing in the various mutual funds were preliminary grouped, followed by brief background study of their performances.
The table below provides comparison between the top 5 equity holdings of the seven different mutual funds. For detailed (raw) data of the top equity holdings compilation, click on this link: Top five equity holdings of selected mutual funds.
Table 1: Comparison of top 5 equity holdings of selected mutual funds
Top 5 Ghanaian equity holdings
|1||Databank Epack||EGL, FML, GCB, SCB, MAC||EGL, FML, GCB, SCB, TOTAL||EGL, FML, GCB, SCB, SOGEGH|
|2||Databank Bfund||EGL, FML, GCB, SCB, GOIL||EGL, FML, GCB, SCB, GOIL||EGL, EGH, GCB, SCB, TOTAL|
|3||SAS Fortune Fund||EGL, FML, GCB, SCB, GOIL||EGH, FML, GCB, SCB, GOIL||EGH, FML, GCB, SCB, GOIL|
|4||HFC Equity Trust||EGH, FML, GCB, TOTAL, GOIL||EGH, ETI, GCB, TOTAL, GOIL||EGH, HFC, GCB, EGL, TOTAL|
|5||HFC Future Plan||EGL, FML, GCB, SCB, GOIL||EGL, ETI, TOTAL, SCB, GOIL||EGH, HFC, GCB, SCB, CAL|
|6||*CDH Balanced Fund||CAL, FML, GCB||CAL, FML, GCB||Fund was not yet established|
|7||FirstBanC Heritage Fund||Annual report not available||EGL, EGH, GCB, SCB, SOGEGH||EGL, SOGEGH, GCB, TOTAL, GOIL|
*CDH invested in only three (3) stocks.
Observations and analysis
From the table above, GCB bank Ltd. (GCB) occurs 18 times out of the 19 studied annual reports. This is followed by Standard Chartered Bank (GH) Ltd. (SCB) which can be counted 13 times out of the 19 annual reports.
The rest, in descending order, are Fan Milk Limited (FML), 12 times; Enterprise Group Limited (EGL), 12 times; Ghana Oil Company Limited (GOIL), 10 times; Ecobank Ghana Limited (EGH), 8 times; Total Petroleum Ghana Limited (TOTAL), 7 times; Societe Generale Ghana Limited (SOGEGH), 3 times. CAL Bank Limited (CAL), 3 times; Ecobank Transnational Incorporated (ETI), 2 times; HFC Bank (Ghana) Limited (HFC), 2 times; Mega African Capital Limited (MAC), once.
In total, 12 different stocks could be found in the top five equity holdings of the mutual funds. However, considering the comparatively low occurrences of SOGEGH, CAL, ETI, HFC and MAC, they were delisted, leaving the rest of the seven stocks as the preliminary group for further studies.
Table 2: Preliminary group of foundational stocks
|Stock||Number of occurrences in top 5 holdings|
To study further on the above stocks, their historical performance trends were looked into. Simply, two main performance indices were examined- annual returns and dividend yields. It must be noted that stocks with fairly good returns can be indication of investors’ confidence in the companies.
Furthermore, while dividend pay-outs provide regular income source, they also signal financial stability of companies. The latest 5-year annual returns and dividend yields of the stocks can be seen in the tables below.
Table 3: Latest 5-year performance results
|Company||Trading symbol||Return, %|
|1||Enterprise Group Limited||EGL||26.3||291.7||-6.9||37.1||0||69.6|
|2||Fan Milk Limited||FML||50.4||86.5||-20.7||40||51.7||41.6|
|3||Ghana Oil Company Limited||GOIL||93.8||43.5||19.1||33.3||-21.4||33.7|
|4||GCB Bank Limited||GCB||13.5||131||13.4||-34.9||-6.1||23.4|
|5||Ecobank Ghana Limited||EGH||-6.3||87||35.5||–7.6||-8.6||20|
|6||Standard Chartered Bank (GH) Ltd.||SCB||-74.7||29.9||36.2||-19.9||-25.2||-10.7|
|7||Total Petroleum Ghana Limited||TOTAL||18.5||N/A||20.6||-16.4||-61.2||-9.6|
Table 4: Latest 5-year dividend yield
|Company||Trading symbol||Dividend yield, %|
|1||Enterprise Group Limited||EGL||3.33||0.00||1.43||1.04||2.1||1.58|
|2||Fan Milk Limited||FML||1.13||0.00||1.71||0.00||1.4||0.85|
|3||Ghana Oil Company Limited||GOIL||2.26||1.61||1.52||0.00||1.8||1.44|
|4||GCB Bank Limited||GCB||3.33||2.94||3.96||8.44||8.7||5.47|
|5||Ecobank Ghana Limited||EGH||8||5.18||5.66||11.27||12||8.42|
|6||Standard Chartered Bank (GH) Ltd.||SCB||26.52||3.14||5.65||0.00||2.3||7.52|
|7||Total Petroleum Ghana Limited||TOTAL||2.81||13.72||1.61||2.25||2.3||4.54|
In terms of annual performance, with the exception of Standard Chartered Bank (SCB) and Total Petroleum Ghana Ltd. (TOTAL), the rest of the stocks show impressive positive results.
Moreover, their average returns exceed that of the GSE (all-share index) in the same period. Enterprise group limited (EGL) beats the GSE index in 4 out of 5 years. Fan Milk and GCB similarly perform better than the market index in 4 out of 5 years while Ecobank and GOIL both exceed the index in 3 out of 5 years.
For dividend yields, Ecobank Ghana and Standard Chartered Bank lead with impressive average yields of 8.42% and 7.52% respectively.
It may also interest you that five of these stocks had even been commended in an earlier article recently. In the article by Kofi Busia Kyei (a financial analyst), EGL, EGH, FML, GOIL, and GCB were highlighted together with UNIL and BOPP as the few listed stocks that had offered great returns to investors in the past 10 years (Refer to the chart below).
Even though the performance trend of SCB doesn’t look so good, the high extent of its occurrence in the top five holdings of the various mutual funds may be due to positive future projections. The fund managers may have realised from their analysis, good earning or growth expectations of SCB, thus chasing its shares.
Don’t forget that SCB is one of the few stocks that have recorded impressive returns in the current year so far. In fact, since the beginning of the year, its share price has appreciated by 115.52% as of 8th August 2017. Hence, considering it in our foundational stocks can be worth it.
Unfortunately, because of the comparative low performance of TOTAL, in addition to its least number of occurrences in the top five holdings of the funds, delisting it from the group may be helpful for now. As a result, GCB, SCB, FML, EGL, GOIL and EGH can be finally listed as our proposed foundational stocks- six foundational stocks made up of three banking stocks, one insurance stock, one manufacturing stock and one petroleum stock (see Figure 2 below).
The similarities between top 5 equity holdings of various mutual funds gave rise to this write-up. Through comparison and further background studies, six listed companies have been proposed as foundational stocks. These can be useful to investors in building their stock portfolios.
If you’re a new investor deciding on buying stocks from the exchange, you can think of starting with at least, one of these companies. Furthermore, investors who are already trading in stocks may also consider rebalancing their existing portfolio and perhaps buy more of these particular stocks.
Finally, if you’re yet to own shares of these stocks, my personal advice is to begin moderately with the ones that have already attained high appreciation in their share prices. For instance, the year-to-date returns of GOIL and SCB are currently 108.18% and 115.52% respectively, as of 8th August 2017. Even though they still have the potential to continue with their gains, the potential to fall is also inevitable due to the high prices already achieved.