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
Takeovers, downgrades and the NASDAQ effect
It was another volatile day for the ASX 200 (ASX:XJO), with the market finishing 0.6% higher, as a weak lead from the US impacted on confidence. The only two detractors were the property and staples sector, with materials and mining once again a highlight, driven by BHP Group Ltd (ASX:BHP), +2.2%, and Rio Tinto Ltd (ASX:RIO), 3.3%.
Afterpay Ltd (ASX:APT) continues to break records, increasing another 11.4% to $73; it seems the company has become the Australian version of the Nasdaq 100, attracting every investor seeking growth despite its sky high valuation. I’m calling it the NASDAQ effect, as whilst I believe the company has some value, it’s simply moved beyond any realm of understanding.
Speaking of the NASDAQ effect, it finished another 0.5% higher whilst the S&P 500 and FTSE 100 both fell 0.6% and 1.7% respectively. Wells Fargo (NYSE:WFC) was a major detractor, down 2.2% after announcing wide ranging staff cuts to deal with the aftermath of COVID-19.
Consolidation and synergies
The superannuation platform space, which offers outsourced administration for financial advisers, remains one of the hottest sectors in the market, after Praemium Ltd (ASX:PPS) announced it was acquiring Powerwrap Ltd (ASX:PWL) for around $55.4 million.
PWL increased 65.7% and PPS 23%, in clear sign that investors expect to see real synergies extracted from this deal. The combined company will have around $28 billion in assets under administration, but a market capitalisation of just $230 million. As a comparison, the leader in the independent platform space, Netwealth Ltd (ASX:NWL) has around $32 billion but is valued at over $2 billion; in my view there is serious value in the smaller players for those with an appetite for risk.
On a more sombre note, Australian home loan applications disappointed, falling 10.2% from April with investment lending down a further 15.6%. When combined with the extension of loan repayment holidays the signs are not good for property or bank profits in 2021 and beyond; my preference is to limit exposure to the embattled sector.
Global earnings
As we move closer to the most anticipated earnings season in over a decade, Treasury Wine Estates Ltd (ASX:TWE) offered a precursor into what investors should be expecting. The company announced weaker sales in all major markets, but particular the US, down 37%, Asia, down 14% and Australia, down 16%, with profits expected to fall 21% to $530 million.
On the other hand, SAP SE (ETR:SAP) which offers enterprise software and systems, announced a stronger than expected recovery in Asia and confirmed its full year outlook, adding 4.6%, but the Eurostox 50 finished 0.8% lower.
German trade appears to be rebounding, with exports improving 9% but imports remaining subdued, growing just 3.5%. Recce Pharmaceuticals Ltd (ASX:RCE) was one of the biggest domestic winners, the $100 million company spiking 54.4% after the CSIRO selected their compounds for upcoming COVID-19 treatment tests.
In a sign of the froth building in Chinese markets, a new IT security company, QuantumCTek Co, turned into a ten bagger immediately upon listing on the speculative exchange, up 924% on day one of trading.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
