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5 ASX shares to build a diversified portfolio around

Tristan Harrison
Portfolio, Diversification

One of the best pieces of advice for any regular person is to start investing in a share portfolio.

It can be a good strategy just to invest in exchange-traded funds (ETFs) like iShares S&P 500 ETF (ASX: IVV). But whilst you get exposure to a lot of good businesses through the ETF, you also get exposure to some not-so-good ones as well. If only you could exclude the bad ones from your investing. 

The key for good investing and strong returns could be uncorrelated businesses where you get different returns from shares. For example, the performance of Nick Scali Limited (ASX: NCK) and Beacon Lighting Group Ltd (ASX: BLX) is probably going to be fairly similar over a relatively short time period.

You could build a diversified portfolio around these five ASX shares:

Xero Limited (ASX: XRO) 

Xero is a cloud accounting software business that receives regular monthly cashflow from its customers. The benefits of using Xero are strong for subscribers because they get loads of time-saving automation tools, it’s easy to use and more user friendly than the competition.

It continues to grow at a very impressive rate as it adds subscribers in all regions and keeps increasing its gross profit margin. It’s one of these integral services that business subscribers have to pay for.

Webjet Limited (ASX: WEB) 

Webjet is a travel business that allows customers to find deals and do everything online. Its business model is very scalable because the digital infrastructure is already in place, so a lot of new revenue (excluding payments to airlines etc) falls to the bottom line.

WebBeds in-particular has an exciting future because the growth of corporate travel remains strong, management are aiming for an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 50%. It’s already one of the largest providers in the world and, excluding Thomas Cook which collapsed, total transaction value (TTV) was up 50% in the first 10 weeks of FY20.

BetaShares NASDAQ 100 ETF (ASX: NDQ) 

Some of the best shares in the world are listed in the US, on the NASDAQ stock exchange, like Microsoft, Apple, Amazon and Alphabet. This exchange-traded fund (ETF) is a good way to get a high level of exposure to these exciting tech shares.

You just can’t get the type of high-quality large tech shares on the ASX like you can elsewhere, so I’d definitely be happy to put some of my portfolio towards this group. You get quite good diversification with just this one investment. 

WAM Microcap Limited (ASX: WMI) 

Unless you have many hours of time to dedicate thoroughly investigating small caps it can be a dangerous game trying to pick the small businesses yourself.

WAM Microcap’s job as a listed investment company (LIC) is to find the best small caps on the ASX and invest in them. It has been a very strong performer since listing whilst also paying shareholders a good dividend.

But, in the rough months on the share market you can probably expect WAM Microcap to suffer too, which could be a good buying opportunity.

Duxton Water Ltd (ASX: D2O)

Duxton Water is a business which just owns water entitlements and leases them to agricultural businesses.

The drought conditions continue to cause problems for regional areas which has pushed up the price of water rights. Duxton Water is getting a good return right now and offers very different earnings profile compared to a normal ASX share.

However, if Australia has a rainy period you could expect water rights to fall in value.

Foolish takeaway

Each of these businesses offer different return profiles and could be an excellent way to build a diversified portfolio. At the current prices I think I’m drawn to Webjet and WAM Microcap, I think they could produce the best returns over the next three to five years.

The post 5 ASX shares to build a diversified portfolio around appeared first on Motley Fool Australia.

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Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO and WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended BETANASDAQ ETF UNITS. The Motley Fool Australia owns shares of Xero. The Motley Fool Australia has recommended DUXTON FPO and Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019