Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Financial Planner’s morning report – Tuesday
Fed to the rescue
The ASX 200 (ASX:XJO) caught up to Wall Street’s Friday falls, dropping another 2.2% and taking the losing streak to three consecutive days. The weakness was driven by a combination of cyclicals and the financial sector, with energy down another 3.4% along with consumer discretionary.
Wesfarmers Ltd (ASX:WES) lead the sector lower falling -3.4%, whilst Myer Holdings Ltd (ASX:MYR) announcement that KPMG had been engaged to advise the company was not well received, falling 6.0%. The losing streak, however, appears to be coming to an end as quickly as it started as all three US indices including the S&P 500 (IND:SPX) managed to recoup initial falls of 2.5% to finish up between 0.6% and 1.4%.
The driver was the Federal Reserve’s follow through on its pledge to buy US corporate bonds on the secondary market. The outlook is also improving in China with industrial production, -4.4%, unemployment falling to 5.9% and retail sales down just -2.8% on the previous year in May, which compared to a drop of -7.5% in April; this bodes well for the Australian economy despite increasing trade rhetoric, expect BHP Group Ltd (ASX:BHP) to bounce today.
Weakness to be expected
The FTSE 100 (IND:UKX) couldn’t manage a similar recovery, falling 0.7%, as investors struggle to come to terms with one of the weakest economies in history falling a 20% contraction on the previous month and -25% on the same time the previous year.
It was another busy day for the Australian companies seeking to navigate the post-COVID-19 malaise with Super Retail Group Ltd (ASX:SUL), announcing a $203 million capital raising at $7.19 to ‘support strategic initiatives’ for the business. Despite reporting a strong recovery in sales from its Rebel Sport and Super Cheap Auto franchises, up 26.5% in May, the company seems to be preparing for the end of the Job Keeper program like many others.
Building product supplier Boral Ltd (ASX:BLD) bucked the trend, adding 1.7% as the board announced Zlatko Todorsevski as its new CEO, bringing a strong track record in charge of the financials of both Brambles Ltd (ASX:BXB) and Oil Search Ltd (ASX:OSH) in recent years. This is a positive move and may trigger a revaluation of the company as non-core business lines are demerged or sold to free up capital.
Private equity is just warming up
BGH Capital continued strategy of capitalising on short-term weakness announcing it will acquire the Primary Care, or General Practice business of Healius Ltd (ASX:HLS) previously Primary Healthcare, for close to $500 million.
City Chic Ltd (CCX) as specialist supplier of so call ‘plus-size’ ladies clothing rallied close to 6% after management elected to close 14 of its 100 stores due to lack of progress in renegotiating new leases with its landlords. This move is a positive and a sign of the power once again moving to the tenant.
CCX is a popular holding among small cap managers including Pendal Group Ltd (ASX:PDL) and Wilson Asset Management. Globally, BP Plc (LON:BP) continues its transition to a lower carbon business under the new CEO, writing down the value of assets by some $17.5 billion and cutting its workforce by 14% or 10,000 people. It is a direct reaction to changing expectations for cleaner energy and fragile energy markets that may actually put the company in a stronger long-term position.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
