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 – Monday
Retail records
A record result for retail sales albeit off a low base, up 16.3% in May, triggered another strong rally in the ASX 200 (ASX:XJO), though it wasn’t enough to offset the threat of more shutdowns with the market finishing up just 0.1% for the day and 1.6% for the week. Consumer discretionary finished the week up 2.6% but it was the associated IT sector, +7.8% and the likes of Afterpay Ltd (ASX:APT) and Zip Co Ltd (ASX:Z1P) that delivered the strongest returns.
In the US, each of the Dow Jones (IND:DJI), Nasdaq (NASDAQ:NASD) and S&P 500 (IND:SPX) delivered returns above 1% for the week with what has been termed the ‘mega-cap safety’ trade continuing to pay off. The trade involves buying the largest, most profitable and cash-rich companies like Apple Inc (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) and its strong performance in 2020 reiterates my preference for overweight exposures to global sharemarkets rather than the ASX.
Volatility remains elevated with the Dow Jones up 371 points during the session only to close down 209.
And more shutdowns
The Victorian Government announced the extension of existing restrictions amid a spike in COVID-19 cases, placing huge pressure on already struggling businesses, but other than this the news remains positive. The trend set by Temple & Webster Ltd (ASX:TPW) which we covered here continued with furniture retailers Adairs Ltd (ASX:ADH) and Nick Scali Ltd (ASX:NCK) reporting improving sales.
On the one hand, Adairs reported a 92% increase in online sales, whilst NCK confirmed profit would be 15-20% higher than 2019 and reinstated its deferred dividend; the share prices were up 10% and 19% for the day.
Despite the strong results and recovery, I’m continuing to avoid the retail sector as there is simply too much uncertainty associated with the potentially higher returns. Consider that Apple Inc. (NASDAQ:AAPL) reported the closure of 11 stores across 4 US states as cases reached record levels once again; in light of the events in Victoria this may become the new normal.
Starting anew
Orora Ltd (ASX:ORA) Australia’s leader in glass bottles and aluminium cans finalised the sale of its Fibre division using the proceeds to return capital to shareholders and become debt-free; the stock dropped 16% on Friday as it went ex-capital return. Scentre Group Ltd (ASX:SCG) fell another -4.7% after QBE Insurance Ltd (ASX:QBE) announced they would no longer insure the trade credit of Myer Holdings Ltd (ASX:MYR) and David Jones suggesting they are wary of the strength of these businesses.
Retail property is likely to remain under incredible pressure for the foreseeable future. One of the talking points in recent months has been imagining what the global supply chain will look like in 2021 and beyond. As I’ve written previously, COVID-19 will have a huge impact on the way we do business and is offering somewhat of a reset for many businesses from retail to manufacturing as they seek to reduce costs (and risk) in a post-pandemic environment.
This will have wide-reaching implications on property valuations, e-commerce, robotics and the embrace of artificial intelligence. In my view, investors have little choice but to be exposed to the global leaders in this sector.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
