Building a diversified portfolio of ASX shares and exchange-traded funds (ETFs) is one of many different ways to invest in the Australian economy.
Given the choice, my preference right now would be to invest in Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares. This appeals to me more than buying into an ETF such as the Vanguard Australian Shares Index ETF (ASX: VAS).
Now, the VAS ETF is not a bad investment. It has plenty of positives, including diversification, dividend yield and franking credits, and a low management fee. Investing in the Vanguard Australian Shares Index ETF can work well as a strategy for people wanting to take a more passive hand-off investment approach.
But I'd prefer to buy Soul Patts shares for a few different reasons.
Concentrated investments
I like that, as an investment house, Soul Patts has flexibility in its choice and allocation of investments, depending on the size of the opportunity.
Its biggest strategic positions include TPG Telecom Ltd (ASX: TPG), New Hope Corporation Ltd (ASX: NHC), Brickworks Limited (ASX: BKW), Pengana Capital Group Ltd (ASX: PCG), Apex Healthcare, Tuas Ltd (ASX: TUA) and Aeris Resources Ltd (ASX: AIS).
Soul Patts is also invested in a wide variety of ASX blue-chip shares, ASX small-cap shares, property, structured yield (credit/bonds), private businesses and so on.
The VAS ETF is heavily invested in a small number of miners, banks and others, while its allocation to smaller businesses is very limited.
I like that Soul Patts has the freedom to allocate its capital wherever it likes. In its FY23 presentation, it described its investment style as "active and thoughtful" with an "unconstrained mandate", and it did not invest to replicate any index.
I think concentrated investments in the right areas can lead to portfolio outperformance for Soul Patts shares.
Defensive setup
Soul Patts invests heavily in a number of industries that can provide defensive and resilient cash flows.
Banking and retailers, which make up a sizeable portion of the S&P/ASX 300 Index (ASX: XKO), are not defensive in my mind if a recession comes along. Miners are not exactly resilient in all conditions, but they can provide returns that are largely uncorrelated to the rest of the market.
Soul Patts invests in fairly defensive/uncorrelated areas like telecommunications, resources, swimming schools, property, healthcare, agriculture and more.
Strong dividend income
The VAS ETF typically offers a good dividend yield, but the distributions are not consistent. That's mostly because an ETF passes through the investment income it receives, and dividends from the underlying holdings can change year to year – just think about how the BHP Group Ltd (ASX: BHP) dividend has bounced around.
Soul Pattinson has grown its dividend every year since 2000. While its starting dividend yield isn't as high as the VAS ETF, the dividend is consistently growing. Having said that, growth is not guaranteed.
Soul Patts shares have outperformed
Past performance is not a guarantee of future returns, but Soul Patts' portfolio has done well at beating the market over time.
At July 2023, the end date of its FY23 result, it said its total shareholder return (TSR) was 11.3% per annum over five years, 12.4% per annum over 10 years and 12.5% over 20 years, beating the All Ordinaries Accumulation Index (ASX: XAOA) return by 3.6%, 3.9% and 3.5% per annum, respectively.
I think Soul Patts' investment choices now and in the future can enable it to deliver outperformance over the next decade. For example, in recent times, it has ramped up its investments in credit, unlocking equity-like returns.
