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 – Wednesday
Risk On
Sharemarkets around the world continued to rally overnight, with the S&P 500 up 1.5% marking the strongest quarter since 1998. The Eurostoxx 50 was comparatively weaker adding just 0.06% whilst the Nasdaq rallied another 1.9% as investors ignored the existential threat to Facebook Inc (NASDAQ:FB).
The primary driver was an improvement in consumer spending, with smaller companies a key beneficiary. The ASX 200 (ASX:XJO) finished a similarly strong quarter, up 1.4% for the day and 16.2% for the quarter, this took the financial year return to -10.8%, the worst since the GFC.
The standouts for the quarter were the IT sector (+48.7%) lead by Afterpay Ltd (ASX:APT), Consumer Discretionary (+30.1%) thanks to Wesfarmers Ltd (ASX:WES) and Energy (+28.2%). The likes of Santos Ltd (ASX:STO) and Woodside Petroleum Ltd (ASX:WPL) finished the day up over 5% as most of the world showed signs of successful reopening, outside the US at least.
Earnings season ahead
With most companies completely removing any earnings guidance due to COVID-19, this stands out as one of the most interesting and difficulty reporting seasons in history. Earlier in the week I wrote about why I believe Telstra Corporation Ltd (ASX:TLS) has the potential for a positive surprise.
Collins Foods Ltd (ASX:CKF) was the last company to deliver an earnings update for the financial year, confirming a 5.1% increase in net profit to $47.3 million as those stuck at home flocked to the home delivery service available from its KFC and Taco Bell stores throughout the country; sales up 3.5%. The share price lead the market adding 12.7% for the day.
On issue to watch for come reporting season is the reassessment of asset values, particularly those of oil companies around the world following the collapse in the oil price; think Santos and Woodside. This comes after Royal Dutch Shell Plc (AMS:RDSA) wrote down the value of their assets by another $20 billion overnight; for me this is a sector that carries far too much uncertainty to hold at the current time.
Looking to the future
By far one of the most powerful and interesting themes I’ve been using in my portfolio is that of e-commerce and the growing focus on supply chain efficiencies.
On Tuesday, we saw Amazon Inc (NASDAQ:AMZN) sign a 20 year lease with a Joint Venture between our own Brickworks Ltd (ASX:BKW) and Goodman Group (ASX:GMG) for a huge 191,000 sqm fulfilment space in Australia as they seek to continue ramping up domestic operations. On the economic front, the Chinese economy showed signs of life, with factory activity picking up post the COVID-19 lock downs and actually moving into expansionary territory.
I’m writing to clients this week as we undertake our quarterly review and my one key strategy for 2020 and beyond is ‘challenge everything’. It’s time to forget about the companies that performed pre-COVID, move on from dividends and begin investing for the future, by challenging our views on what we believe are the company’s best placed to grow in a very different environment.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
