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 – Friday
Feeling flat
Global markets continued their recent trend, forgiving recent COVID-19 outbreak spikes and poor unemployment to finish slightly down on yesterday. The ASX 200 (ASX:XJO) dropped -0.9% with every sector but Utilities falling, the Dow Jones (IND:DJI) -0.2% and the FTSE 100 (IND:UKX) down -0.5%. Naturally the pressure was mixed but consumer facing were hardest hit as Australian unemployment increased to 7.1% following a further 227,000 job losses in May; Qantas Ltd (ASX:QAN) fell another -3.8%.
The spike was substantially higher than the 79,000 losses predicted by ‘expert’ economists, putting more pressure on their ability to forecast such unique conditions. When the participation rate, being the number of people wanting to work, is included unemployment was another 3.5% higher at 11.6%. This stands out as the biggest issue for the Government with the likely need for further targeted stimulus and tax reform into 2021.
‘Foot on the gas’
Federal Reserve Chairman Powell’s testimony to Congress could just as easily be used described the performance of the world’s e-commerce businesses in 2020. Australian retailers Shaver Shop Group Ltd (ASX:SSG) rebounded 15% on Thursday after reinstating their previously ‘deferred’ dividend as they experienced 22.3% sales growth compared to 2019 and an 164% increase in online sales for the first half.
The story was similar at Temple & Webster Group Ltd (ASX:TPW) who sell quality furniture direct to consumers via the internet. TPW announced a second half increase in revenue of 90%, with June sales up 100% and online sales persisting into June even as retail stores reopened. For me, the standout was a rare profit of $7.1m for the first half. These companies along with Baby Bunting Group Ltd (ASX:BBN) offer more compelling opportunities than Kogan Ltd (ASX:KGN) which currently trades at all-time highs.
Old vs. new
News from Brazil that miner Vale had been authorized to reopen a number of mines send the iron ore price under $100 for the first time in weeks resulting in a -4.2% fall in Fortescue Metals Group Ltd (ASX:FMG) and Rio Tinto Ltd (ASX:RIO) -1.3%. What is clear from these moves is the true value of BHP Group Ltd (ASX:BHP) diversification across multiple commodities. Closer to home, the Buy Now Pay Later (BNPL) sector remains as hot as ever, with Splitit Ltd (ASX:SPT) double in a single session after announcing it had entered into a joint venture with Mastercard (NYSE:MA) which included the combined launch of instalment payment products and data sharing.
Spotify Technologies S.A (NYSE:SPOT) is quickly establishing itself as the global leader in audio as they seek to replicate Walt Disney’s (NYSE:DIS) model of owning as much content as possible. Management confirmed the acquisition of Kim Kardashian West’s podcast and will work with Warner Bro’s to bring a series of super hero and cartoon episodes to customers. As I wrote recently, the likes of Spotify and Shopify (NYSE:SHOP), which is now Canada’s biggest company, represent the new era of blue chip companies.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
