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
Sideways….a weak opening ahead
It was another bumpy, albeit positive, week for markets with the ASX 200 (ASX:XJO) gaining 0.4% on Friday and finishing around 2.0% higher for the week.
The primary driver remained Australia’s main recovery hope, commodity exports, with the materials sector finishing 4.2% as the iron ore price remained above USD$115 per tonne.
In a sign that the investors are once again moving back to traditional safe haven assets, utilities also recovered adding 3.1%. The story was similar overseas with the broad-based S&P 500 improving 1.3%, but with Netflix Inc. (NASDAQ:NFLX) dragging down the FANG’s (-5.5%) and the tech focused Nasdaq index falling 1.8% in a rare under performance.
The Eurostoxx finished broadly flat, as investors were left disappointed by the ECB’s decision to leave rates on hold and increase bond purchases by ‘only’ $120 billion.
Despite this export-exposed companies including Mercedes Benz owner Daimler AG (ETR:DAI) and BMW (ETR:BMW) finished 4.4% and 1.6% higher.
UK’s FTSE 100 also added 0.6% as the Government mandated face masks amid a broad reopening of the economy. Futures are pointing to a weaker opening for the week.
Strides apart
US asset manager Blackrock Inc. (NYSE:BLK) provided a quarterly update on Friday, announcing $100 billion in cash flows, taking assets under management to $7.32 trillion. The company saw revenue increase 4% despite a slowdown in ETF flows during the pandemic and a 22% increase in earnings for the quarter; the stock finished 3.7% higher.
FANG member Netflix Inc. reported another 10.1 million net new subscribers to its platform, ahead of its own 7.5 million forecast, but below the 12 million anticipated by analysts. Revenue increased 25% to $6.15 billion but management are suggested that COVID-19 has brought forward signups, with just 2.5 million expected this quarter.
In my view, NFLX is the most challenged of the FANG’s by virtue of its reliance on creating increasingly expensive new content and adjusting to each new region it enters; shares finished the session down 6.5%.
Closer to home both Rio Tinto Ltd (ASX:RIO) and BlueScope Steel Ltd (ASX:BSL) reported on Friday, the former reporting a 4% increase on 2019 production and a 19% increase in shipments from the first quarter of 2020.
BSL on the other hand, finished 1.3% lower, after writing down $200 million on the NZ operations despite second half steel volumes being in line with the first half.
Generalisation
The technology sector was once again the talking point of the week with a procession of articles either highlighting the opportunities or warning of inflated valuations. As is always the case, this sort of content must be taken with a grain of salt, any type of generalising or broad-based assumptions in financial markets is fraught with risk.
Let’s be clear, there are no simple rules to successful investing and no business is the same. Adding technology to your portfolio does not guarantee higher return, in fact it may do the opposite; identifying and supporting quality, growing business with large addressable markets is a far more powerful strategy.
Generalisation and the chase for technology exposure has been behind the incredible run of the latest Betashares Australian Technology ETF, (ASX:ATEC), yet the index holds 28% in just two stocks; Afterpay Ltd (ASX:APT) and Xero Ltd (ASX:XRO).
Now more than ever, investors should be focused on risk-adjusted returns that account for volatility, rather than investing solely on hope or momentum. This requires a selective and flexible approach to identifying high quality global, not local businesses.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
