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 – Wednesday
Bears, bulls and kangaroos?
CNBC reportedly coined the phrase ‘Kangaroo’ market today with commentators giving on predicting its direction. The term best describes the daily experience of investors as the market ‘bounces’ around. The ASX 200 (ASX:XJO) experienced its strongest day in 10 weeks, adding 3.9%, pushed higher by energy (5.8%) consumer discretionary, where Webjet Ltd (ASX:WEB) improved another 11%.
The S&P 500 (IND:SPX) and NASDAQ (NASDAQ:NDAQ) rallied 1.9% and 1.8% respectively supported by a stronger than expected US retail sales result, growing a record 17.7% in May. It seems those who remain employed are now cashed up and seeking to renovate, build pools or travel more domestically. Caterpillar Inc (NYSE:CAT) was a primary beneficiary, up 5%, as was London’s Ashtead Group plc (LON:AHT) +9%, both of which lease machinery and materials to the construction industry.
Picking the trend
As reports of retail investors outperforming professional hedge fund managers spread around the global, it’s becoming increasing difficult to predict how this rally ends. Markets are seemingly as predictable as ever, but more volatile than at any time in decades. It is times like this where investors, experienced and new, need to focus on the importance of asset allocation and diversification; in fact, it has never been more important.
Questions like, how much are you willing to lose? Or do you know where your greatest risks are tends to go unanswered. According to FN Area, some 50% of all companies covered now have Buy ratings by the broking fraternity, this hasn’t happened since the depths of the GFC. Onto more positive news, despite most experts predicting Australian leader Seek Ltd (ASX:SEK) would struggle to recovery from the spike in unemployment, the share price is now up nearly 100% since march lows, rallying 7% alone on Tuesday; it is still 20% below its high.
Diversification is key
Tuesday saw updates from two very different companies, Adobe Inc. (NASDAQ:ADBE) and Orora Ltd (ASX:ORA); the former providing a ubiquitous document software service and the latter a leader in aluminium dans, glass and wine bottle product in Australia and New Zealand. ADBE reported a 78% increase in sales over the 12 months to May, with management noting April and May spending exceeding traditional Christmas levels.
ORA on the other hand reported it had return $600 million from the sale of its Fibre Packaging business to shareholders, using the remainder to effectively become debt free; the share price rallying 5% as a result. Despite being different businesses, both offer unique growth opportunities for investors. Finally, Viva Energy Ltd (ASX:VEA), owner of Geelong’s refining plant rallied 15% after reinstated its on-market buy back as they seek to return profits from the property sales to shareholders; a rare capital return amid a sea of cancelled dividends.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
