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 ASX report – ASX down -2.0%, value is dead, long live the FAANG’s
The ASX 200 (XJO:ASX) fell 2.0% on Friday, but managed to hold onto a 0.5% gain for the month; it’s fourth straight winning month. Without sounding like a broken record, the story remained the same, with financials (-2.7%) and energy (-3.1%) hardest hit amid the threat of further economic shutdowns amid spiking cases in Japan, the US, Australia and Europe.
The Commonwealth Bank of Australia Ltd (ASX:CBA) fell 2.8%, with its long awaited dividend announcement on 12 August marked in all income starved investors calendars. Having beaten APRA’s restrictions earlier in the year, I expect CBA will take a conservative view with their dividend, cutting it by at least 50% to just 4.0%.
AMP Ltd (ASX:AMP) was the biggest detractor on the day, falling 12.8% after flagging a 50% drop in profits on 2019, to $140-150 million, and net outflows of $4.4 billion from the wealth management division. The selloff is clearly overdone and exacerbated by a lack of comment around the dividend, with more clarity to be delivered on 13 August.
Welcome to the new world
The Nasdaq continued its recent out performance, adding 1.5% on Friday, compared to the S&P 500, up 0.8%, taking the monthly gains to 5.3% and 4.5% respectively. Of more interest is the year to date gains, 19.8% compared to just 1.2%. Friday saw the first trading post the announcements from Apple (NASDAQ:AAPL), Amazon Inc. (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet Inc. (NASDAQ:GOOGL).
Put simply, the world has changed and those not exposed to the companies of tomorrow will be left behind. The highlights were as follows:
- Apple – Shares increased 10.5% on Friday, leading global markets, as quarterly revenue increased 11% to $59.7 billion, on the back of a 22% increase in Mac sales, 31% in iPad sales and 17% in wearables due to the ubiquitous white ‘AirPods‘. Apple became the largest listed company in world on Friday, surpassing Saudi Aramco.
- Amazon – Shares increased 3.7% with Jeff Bezos reporting $88.9 billion in sales and $5.2 billion in quarterly profits, five times higher than consensus. Growth remains incredibly strong, with product sales up 40.2%, services 38.7% and Amazon Web Services Cloud business up 28.9%. Interesting, 28.9% was a slowdown for the cloud computing division; go figure.
- Facebook – Shares increased 8.2% after management reported revenue increased 11% from 2019 to $18.69 billion. This was a slowdown on the previous quarterly growth of 28%, but still reflective of the company’s importance in disconnected, locked down world. The company reported a 14% increase in users and 2.7 billion global monthly members. Whilst a number of high profile clients have boycotted advertising on Facebook, Founder Mark Zuckerberg, noted that most sales actually come from small to medium businesses, not the likes of Unilever and Coca Cola.
- Alphabet – Shares fell 3.3% after announcing a rare fall in revenue, down 2% to $38.3 billion, the first such contraction since it became public. Ads on its Youtube platform improved as viewers spent more time at home consuming digital content. Google Cloud revenue grew 50% whilst the key Ad Words platform fell close to 10% to $6.69 billion for the quarter as advertisers tightened their belts.
Three key takeaways
Whilst it was a busy week for economic data, little could be taken from the stunning contractions in the US (-33%), France (-14%) and Germany (-10%), with investors already looking towards the future. Throughout the week I noticed a number of signs suggesting things may be much worse ‘on the ground’ in Australia than the headlines suggest.
Estimates now suggest that $42 billion will be withdrawn from super and according to Industry Super Australia, some 27% of Queenslander’s had withdrawn their balances; this despite the state being relative unscathed.
Small business lender Prospa Ltd (ASX:PGL) noted a massive spike in borrowers seeking hardship support and adding a further $20 million to at-risk loans. In a worrying sign, many investment properties and now being listed for sale if they can’t be rented, particularly apartments, putting huge pressure on prices. On the positive sign, Friday’s US reporting season confirmed what we already knew, traditional value investing is dead.
The story is much the same in Australia, where income has driven investment decisions for several decades, but the music has clearly stopped and its more important than ever to be exposed to companies that are growing, rather than trading ‘cheap’.
This couldn’t be better highlighted than through Pacific Current Group Ltd’s (ASX:PAC) announced that they had added $17 billion in assets under management for the quarter, the majority of which went into the GQG Partners Global Equity Funds, a key part of Wattle Partner’s Model Portfolio, and leading growth investors.
Highlights for the coming week include: Transurban’s (ASX:TCL) earnings results on Wednesday, AGL Energy (ASX:AGL) and Nick Scali (ASX:NCK) on Thursday and Resmed (ASX:RMD) on Friday.
