A Portfolio Journey: The Allocation

Pakistan has one of the lowest numbers of people who are invested into the capital markets and in most cases, people are unaware of how to invest or are unwilling to take the first step. Thos who end up taking the first step usually struggle with engaging in the market so this series is going to go step by step into how a portfolio can be constructed. Once the portfolio is constructed, we will periodically check its performance, ROI, and even make changes to the portfolio if needed.

We will defer to academic research across many decades that the balanced mix is 60% equities and the remaining 40% is into more safer assets - most notably fixed income. In our case alter the fixed income element but we do apply some limitations on the equity's allocation. As an investor we want to do a few things:

• Track the market.

• Generate Income.

• Capital Preservation.

Asset Allocation - Equities

Given our initial capital of 500k we will be diverting 300k into equities. From this portion of our capital, we want to track the broad market trend on the index, generate income by investing in dividend paying stocks, and have exposure to equities that have high growth potential:

• Invest in an index tracking ETF.

• Invest half of the portion of these funds into stocks that pay dividends.

• Invest remaining amount in equities that offer high growth potential.
  

Assuming our price of purchase is the close price on May 12 we allocate 50k to invest into an ETF. There are four main options to track the broad market; NITFETF, NBPGETF, MIIETF, or the AKD index tracker fund. The last one is a mutual fund and has to be invested in directly so we will keep things simple and just put the money in NITGETF. ETF's usually trade in multiples of 500 so we will purchase 1500 shares for Rs.54,750.

For Dividend paying stocks we carry out a process of elimination opposed to selection. There are 192 stocks that pay dividends, we filter for those that have a dividend per share greater of equal to Rs2.5 for the trailing twelve-month period. We then filter only for equities that have a close price less than 55 - in order to get the equities in which we can take moderately sized positions. This leaves us with a population of 17 equities, still quite a few, so our next decisions hinges on investing based on liquidity, which can be proxied by the Market Cap, so we focus on equities that have a market cap greater than 10bn, leaving us with LOTCHEM, KAPCO, BOK, GHGL, BIPL, DCR, BOP. The judgment we make is that we have enough exposure to Banks from the ETF and given the energy transition the country is going energy stocks may exhibit volatility, so we choose LOTCHEM and DCR as our dividend paying picks and we purchase 2,070 & 2,750 share respectively, leaving us a little more than 95k to invest a growth stock.

The growth stock has to be added into an equity that is mid-cap, so it has upside potential, is liquid, and is not volatile like small or micro-cap stocks. Much like the dividend paying stocks we want to invest in sectors that are not going to be bogged down by the war or the country's issues of circular debt and balance of payments, which excludes energy and power stocks. The sectors that we target then are Capital Markets and Consumer Staples and through just basic sampling we choose to GDL - Ghani Dairies Limited and we get 4,522 shares.

Asset Allocation - Non Equity

The main focus of this capital allocation is capital preservation and grow it a little while not investing in assets that are deemed risky. Our allocation will then focus on three distinct areas:

• 50k into a commercial bond.

• 100k into a mutual fund that is focused on generating low to moderate income.

• 50k into a silver.

We are choosing a commercial bond largely due to its higher return profile and most issued bonds in Pakistan are highly rated and have little risk of default. Our decision to choose silver is driven more by the knowledge that Silver has upside while Gold seems to be at the upper ceiling of its price as capital has flowed into the precious metal. We will start our investment with a Futures contract for Silver on the PMEX. We will purchase a Silver 10 ounces contract with maturity in September, SL10-SE26. The contract price is 23.928 per unit and each contract is for 10 units, so the capital investment is 66,687.34, well over the amount that we had allocated to an investment in metal.

We will also get 495 of KELSC5 for a value of 49,970.25 and the remaining amount will be invested into a mutual fund - HBL Income fund, which results in us getting 681 shares at the NAV on May 12, 2026. This leaves us with 44.69 rupees from the 500k which gives us enough to get 1 more share of DCR.