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 – Tuesday
ASX to fall, confession season begins and tech takes a breather
The ASX 200 (ASX:XJO) gained another 1%, taking a positive lead from US markets, with over 60% of the rally coming from the Big Four Banks, Commonwealth Bank of Australia Ltd (ASX:CBA) up 2.2%, and miners, BHP Group Ltd (ASX:BHP) up 2.2% after the iron ore price exceeding US$118 per tonne.
The IT sector suffered rare weakness, falling 1.0%, as Technology One Ltd (ASX:TNE) suffered a second short attack, falling 7.7%. Stronger than expected Chinese vehicle sales, increasing 11.6% along with another $50 billion in monetary stimulus pushed both the Shanghai Composite and Nikkei 225 close to 2% higher, the likes of Mazda Motors (TYO:7261) and Honda Motor Co Ltd (TYO:7267), adding 8.8% and 5.8% respectively.
US markets couldn’t continue the rally on Monday, the Nasdaq falling 2.1% and the S&P500 down 0.9% into the close, as signs that COVID-19 outbreaks may result in shutdowns across California and the Florida, hitting the hopes for a quick recovery. The ASX 200 will fall at the open.
Home grown talent
One thing that stands out from the swift recovery is Australia’s lack of self-reliance and the resultant dearth of leading global companies. It has been those companies, like Microsoft Ltd (NASDAQ:MSFT) and Amazon Inc. (NASDAQ:AMZN) leading sharemarkets, employment markets and the economy into the future.
In my view, any Australian investor with less than 50% of their equity exposure offshore should be closely considering their approach; something my James Dunn recently commented on here. Rumours abound that Wesfarmer’s Ltd (ASX:WES) is considering selling off its 25% stake in the Bunnings Warehouse Property Trust (ASX:BWP), placing the company in a strong position for a major acquisition.
WES has consistently stood out as an Australian company of global quality. Recent sharemarket rallies are placing incredible pressure on this month’s reporting season, with strong results required to justify lofty valuations; PepsiCo Inc. (NASDAQ:PEP) was the first in line, reporting stronger than expected snack sales and revenue above expectations; the stock was up 0.33% as a result.
Confession season continued
PNG focused oil and gas junior, Oil Search Ltd (ASX:OSH), was the first in line for confession season, announcing a $400 million write-down to the value of their exploration assets following the incredible falls in the price of oil. Beleaguered debt collection agency Credit Corp Group Ltd (ASX:CCP) followed closely behind, cutting the value of recent debt purchased by $50 million and reducing profit to just $10 million for the financial year.
The aged care story continues to worse, with Estia Healthcare (ASX:EHE) announcing both 13 confirmed COVID-19 cases in Victoria along with a reduction in the value of goodwill by as much as $148 million. EHE’s strategy of acquiring multiple operating businesses has been tried before, ABC Learning for example, with a reduction in goodwill, in my view, a sign of worse times to come.
The outlook doesn’t get much better for Australia’s shopping malls, with the e-commerce trend seeing vacancy rates at their highest level in 20 years, at 5.1%, but as high as 11.1% in our cities.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
