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 – Thursday
Another spike
The US market ended its winning streak overnight, with the Dow Jones (IND:DJI) retreating 0.6%, the S&P 500 (IND:SPX) -0.4%, with the NASDAQ (NASDAQ:NDAQ) once again immune from any weakness, adding 0.1%. The driver was another spike in COVID-19 cases in 9 US states, with several hitting daily records, at the same time Beijing is dealing with an outbreak of its own. On the positive side, US housing starts rose unexpectedly, 4.3%, boosting the hopes of a V-shaped economic recovery.
The picture wasn’t much prettier in Asia, with the Nikkei 225 (JAP:NIK) off another 0.6% after the Japanese economy saw exports slide 28% in May, but those specifically to the US falling over 50%. On the other hand, the ASX200 (ASX:XJO) finished in positive territory, adding 0.8%, but will take a negative lead into today’s trading.
Yesterday’s strength came later in the session as investors moved into traditional defensive assets including the property and consumer staples sectors, Woolworths (ASX:WOW) +1.8% and Wesfarmer’s (ASX:WES) +1.5% were key beneficiaries and should remain stalwarts within all portfolios.
It’s all about tech
Once again, it was all about the technology stocks, with Carsales Ltd (ASX:CAR), +6%, and Oracle Corporation (NYSE:ORCL), -3%, updating markets on Wednesday. CAR offered some positive news with revenue growth for the financial year expected to be 0-1% on 2019 on an adjusted basis, but down some 5-6% on reported numbers. Net profit was similarly expected to fall 6-9% to between $134-$138 million.
The inclusion of Adjusted vs. Reported figures will be as important as ever as markets enter the most important reporting season in a decade in July. ORCL, which offers cloud-based technology and enterprise planning system fell just short of guidance, with revenue down 6% to $10.4 billion as management blamed stalling investment from its core hospitality, retail and transport customer for the weakness. The standout was 32% year on year growth in sales of its Fusion Enterprise Resource Planning System.
Australia’s leading respiratory care technology manufacturer, Fisher and Paykel Healthcare (ASX:FPH) rebounded from recent weakness, +5%, buoyed by the spike in cases. All three remain global leaders and solid investment opportunities post COVID-19.
Cash is cash
Bloomberg reported that assets held in Money Market Funds, a high yielding cash alternative for US investors, had reached an all-time high in May, hitting $4.6 trillion; the previous high was $3.8 trillion during the GFC. This flood to cash goes some way to explaining why the market remains in a Kangaroo pattern with capital flowing back into any weakness.
It’s clear that investors should be taking heed of the Reserve Bank of Australia’s recent comments regarding the speed of the market recovery post COVID-19, but particularly those nearing or in retirement, with the importance of hedges, like Gold (ASX:GOLD) and alternative assets growing by the day.
The economic outlook remains difficult at best, with reports that one in six Brisbane and Sydney apartments are now vacant following years of excessive construction, the issue being that it only takes a single landlord to sell at a cut price to see the market collapse quickly; difficult times for Lend Lease (ASX:LLC).
On the other hand, the ‘Great Reset’ appears to be in full swing as retailers, restauranteurs and consumer facing businesses around the world seeking a new deal with landlords who have benefited from ever increasing rent levels; many are simply refusing to reopen without discounts, Myer Holdings Ltd (ASX:MYR), City Chic (ASX:CCX) and Premier Investments Ltd (ASX:PMV) are among the biggest culprits.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
