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
It was a mixed finish to the week
With markets waiting with baited breath for President Trump’s speech on his policy towards China. The ASX 200 (ASX:XJO) fell heavily in the afternoon to finish down 1.6% for the day. However, it was not enough to stop the second consecutive monthly gain of 4.2%, taking the year to date loss to 14%.
Looking at the month more broadly, it was the IT sector (+20%) behind Afterpay (ASX:APT) and Energy (+13%), thanks to a recovering oil price. The US fared markedly better with the S&P 500 up 0.5% and Nasdaq, 1.3%, as Trump took what appeared to be a more conciliatory tone in his response to the introduction of the Chinese Security Law in Hong Kong. This meant the S&P 500 finished the month down just 6% for the year.
Tesla (NASDAQ:TSLA) founder, Elon Musk, had a busy weekend with his Space X program successfully launching NASA astronauts, whilst also meeting the criteria for a $770 million to stock bonus issue. This came as riots engulfed several US cities following the death of George Floyd at the hands of a Minneapolis police officer.
Well known muesli and long-life milk producer Freedom Foods (ASX:FNP), fell 15% to finish the week following an asset writedown and earnings downgrade. This one was unexpected given the non-perishable nature of their product line, which was a strong beneficiary of hoarding in early March. It seems the businesses out of home business including contracts with McDonald’s was the driver, down 75% from expectations in April and 50% in May.
Dispersion…
Dispersion remains the name of the game in global sharemarkets. Dispersion refers to the diverging performance of companies within the same index; think CSL (ASX:CSL) vs. Westpac Banking Corporation (ASX:WBC) on the ASX. Case in point is the S&P 500 strong performance since bottoming in March, but with relatively few companies, including Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Alphabet and Facebook moving the market higher.
Also known as attribution, dispersion simply means that less companies are seeing share price increases and the ‘big are getting bigger’. Dispersion has historically been a fertile hunting ground for active investors, whilst markets overall appear overvalued individual companies are anything but. I am adopting an active, stock selection approach in this environment for my clients.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
