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
Where to from here?
It was a mixed end to the week for the ASX 200 (ASX:XJO) falling 1.9% but recovering from intra-day lows of 3.4% as US markets showed investors were ‘buying the dip’. The S&P 500 (IND:SPX) and Dow Jones (IND:DJI) recorded gains of 1.3% and 1.95% respectively even as the likes of California and Beijing reported outbreaks and the threat of a second wave of infections.
The result was negative return for the week of 2.5% with energy (-6%) and real estate (-3.5%) among the hardest hit whilst consumer staples (-0.2%) are once again showing their diversification benefits. It’s clear that certain sections of the market have run ahead of themselves with a recent spike in volatility likely here to stay.
There is also a substantial amount of capital in cash on the sidelines from both retail and professional investors, many of whom missed out on the remarkable recovery; so, I expect any sharp falls to be followed by some solid buying in the months ahead. Monday’s trade is looking positive despite more tensions in the US and spiking infection rates in both Africa and the Middle East.
A changing of the guard?
The second week of June saw the long-awaited Standard and Poor’s index announcements with many investors positioning in advance of the statement. The particular highlights were poker machine manufacturer Aristocrat Leisure (ASX:ALL) moving into the ASX 20 at the expense of Amcor Ltd (ASX:AMC), A2 Milk Ltd (ASX:A2M) pushing AMP Ltd (ASX:AMP) out of the ASX 50 and Next DC Ltd (ASX:NXT) leaving Unibail Rodamco Westfield (URW) in its dust.
URW, which owns Westfield’s overseas and primarily European shopping mall assets, was similarly the worst performing company for the week, dropping some 17% as investors grow increasingly concerned about sustainable rental income post-COVID 19. On the positive side, TPG Telecom Ltd (ASX:TPM) was a rare gainer on Friday, adding 1.9% after floating a potential 50 cent per share special dividend should the merger with Vodafone go ahead later this year.
No pain, no gain
As predicted several in the middle of the economic shutdown, Seek Ltd (ASX:SEK) appears to be at the forefront of the economic recovery, announcing that job advertisements for the week ended June 7 had increased 60%. This compared positively to growth rates of 30%, 40% and 50% in the preceding periods.
Zip Co Ltd (ASX:Z1P) reported monthly revenue growth of 78% to $15.6 million with transaction volumes up a similarly strong 63% to $189 million. Z1P now has similar transaction volumes and revenue as Afterpay Ltd (ASX:APT) but is valued at just $3 billion vs. $14 billion for the latter with the added benefit that the company undertakes credit assessments on its borrowers.
G8 Education Ltd (GEM) which operates childcare centres flagged a $250 million devaluation of their property assets, a natural result of COVID-19 and a sign of things to come for many sectors of the property market.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
