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
Markets slump on tariffs and a second wave
The ASX 200 (ASX:XJO) finished marginally higher again on Wednesday, adding 0.2%, driven primarily by technology names including Afterpay Ltd (ASX:APT) and Xero Ltd (ASX:XRO) after both reached all-time highs. These gains will be reversed today as US markets tumbled heavily, down between 2% and 3%, as the resurgence in COVID-19 cases continued to grow; this must be investors worst nightmare.
Every sector fell with the most exposed being financials, energy and industrials, which dropped over 3% each. As expected, cruise and travel companies were among the hardest hit falling in excess of 10%. Exacerbating the volatility was another White House announcement of potential tariffs on as much as $3.1 billion in imports from Europe, resulting in both the FTSE 100 and Eurostoxx 50 falling in excess of 3%.
One of the more unique movements in recent weeks has been the strength in the price of Gold, hitting an eight year high of USD$1,775. The price typically doesn’t rally when equities markets are suggesting will continue to oscillate for the foreseeable future.
Turning the corner
As highlighted on Wednesday, AMP Ltd (ASX:AMP) finally saw its insurance sale approved for $2.5 billion; with only half of this amount earmarked for other purposes, I’m expecting a potential return of the dividend in 2020; the stock fell 2.9%. TPG Telecom Ltd (ASX:TPG) and Vodafone Hutchison Ltd (ASX:HTA) finally saw their merger approved by shareholders and the court, sending both higher, but the latter up over 6%.
The Virgin Australia Holdings Ltd (VAH) debacle appears to be coming to a head, with suffering bond holders lobbing a last-minute proposal to recapitalise the company and convert their investment into equity. This group of investors stand to lose up to 65% of their investment in a private equity takeover, but only 30% if the debt is simply converted into equity. The events are giving Australian investors a first-hand insight into the powerful ‘bankruptcy’ or administration process; always back self-interest.
Falling values
Mirvac Group (ASX:MGR) became the latest to devalue their property portfolio, with primarily retail assets reduced by 10% for a total of $306 million. On the anecdotal evidence I’m seeing, including empty stores, limited sales and massive e-commerce improvements, 10% is only the tip of the iceberg; I’d be avoiding any exposure to retail or office property for the time being.
Sonic Healthcare Ltd (ASX:SHL) was the latest health company to buck the market trend, adding 4.7% after suggesting earnings will be flat on 2019 and not down; an incredible result in the circumstances. It was a difficult day for Freedom Foods Group Ltd (ASX:FNP) with management announcing an internal investigation at the same time the CEO went on leave unexpectedly. This once again shows the difficult for agricultural companies trading on listed markets.
If there is one takeaway for readers in another busy week, it is that knowing the company you own is becoming more important than ever with the difference between the good and bad likely to be wide as we enter reporting season.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
