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
Volatility is settling in, record contraction in Singapore, US rollbacks
The ASX 200 (ASX:XJO) experienced another choppy day, with intra-day likely to be the new normal, finishing 0.6% lower. Consumer staples (+0.2%) offered the only protection as the impacts of Victoria’s widespread shutdowns and a reversal of recently eased restrictions in the US were front and centre once again.
Despite the weakness the S&P 500 pushed 1.4% higher behind a stronger than expected earnings report from JP Morgan Chase & Co. (NYSE:JPM), which saw revenue increase more than 10% to $33.8 billion in the final quarter.
In a sign of things to come, Singapore reported a 41.2% contraction in GDP during the June quarter as construction collapsed along with a 13% quarterly fall in services.
In my view, many investors continue to underestimate the real risk to the businesses, economies and most importantly the people that drive them, with this result a solid reminder that our circumstances are clearly ‘not normal’. The result was a fall in both the Shanghai Composite and Nikkei 225, both down 0.8%.
Standing still, getting creative
Woodside Petroleum Ltd (ASX:WPL) was the latest to announce a write-down, with management reducing the value of their oil and gas assets by US $4.2 billion due to the lower oil price. WPL now trades at the same level it did in 2005, despite raising capital on multiple occasions, clear indication that the greatest opportunities lie in cleaner energy sources.
National Australia Bank Ltd, +0.4%, (ASX:NAB) remains my preferred option in the under pressure sector, highlighted by today’s announcement of a partnership with Microsoft Inc. (NASDAQ:MSFT) to automate and innovate the many thousands of internal processes.
Breville Group Ltd (ASX:BRG) was the latest e-commerce retailer to benefit from the Pacific lockdowns, with analysts sending the share price 5.5% higher as stay at home workers seek to make their homes more ‘comfortable’ with new kettles and toasters.
It would seem this level of growth is short-term and unsustainable, meaning a valuation of 42 times earnings may be a little stretched.
Think global
The Chinese economy continues its strong run of data, with exports increasing 4.3% in the June quarter and imports similar up 2.7%. Is this a return to normality, or is a second wave just beginning? Only time will tell, and investors best stay prepared.
In Australia, concerns that the Federal Government may not be able to fund its extensive stimulus program have been answered, with $50 billion in bids for the latest issue of $17 billion in five-year bonds; the interest payment is just 0.49%.
US reporting season is providing unique insights into what may lay ahead for the ASX, with JP Morgan and Wells Fargo & Co (NYSE:WFC) exhibiting both ends of the spectrum. JPM reported higher revenue but increasing their bad debt provision by $5.8 billion. The mortgage-focused WFC saw interest income fall $1.4 billion, write-downs of $8.4 billion and announced an 80% cut to its dividend.
When considered along with Bloomberg’s expectation of a 40% reduction in dividends from the ASX 200, it’s clear investors need to forget the days of generating 80% of their returns from fully franked dividends.
The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.
