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.
Winning streak hits seven weeks
Winning streak hits seven weeks, A2 Milk (ASX:A2M) and Mesoblast (ASX:MSB) battered
The ASX200 (ASX:XJO) managed to overcome a 1.2% fall to cap off the seventh straight week of gains, adding 0.5%.
The IT sector continued to lead the way behind Afterpay (ASX:APT), finishing 5.9% higher, whilst energy lost 2.4% as the US economy appeared to weaken.
The biggest news, however, was company-specific, with A2 Milk (ASX:A2M) falling over 23% on Friday after flagging growing difficulty with these Chinese infant formula sales.
Management guided to a significant cut in revenue to $1.4 billion for the year, despite reiterating their expectations of $1.8 billion in late September.
There is a growing list of companies that became over-reliant on Chinese sales seemingly overnight, with recent events a wake-up call to investors on understanding where their exposures lie.
Mesoblast must be the most volatile stock of 2020, it fell 36.1% on Friday after announcing that its trial into potential stem cell treatments for COVID-19 had been cancelled due to poor results.
The day’s trade saw the company’s market value halve this week with analysts now concerned the US$50 million deal with Novartis may be in jeopardy, which will place incredible pressure on cash flow.
QBE losing $2 billion, Boral asset sales continue, US markets under pressure
I’ve expressed my issue with investing into insurance companies regularly in this column, the combination of insuring against unpredictable events and relying on constantly charging your customers higher premiums simply doesn’t seem sustainable.
This view has been reiterated in 2020 after QBE (ASX:QBE) flagged a US$1.5 billion loss for the full year, on the back of higher than expected claims, weaker crops, and write-downs on their US business.
On the positive side, investment income will hit $140 million from a loss of $90 million in the first half of this year due to the normalisation of bond markets since March.
US markets remain range bound, the Nasdaq and S&P 500 falling 0.1% and 0.4% on Friday, but managing gains of 3.1% and 1.2% respectively for another strong week.
Shoe and apparel maker Nike Inc. (NYSE:NKE) was the highlight, showing the resiliency of a strong brand, with third-quarter sales increasing 8.9% to US$11.2 billion behind a 24% increase in China and a 32% boost in online sales.
Big tech under pressure, indexing is counterintuitive, Australia on the brink
This week saw what appears to be an uprising against global technology giants step up another gear.
Whether it’s the European Union calling for the likes of Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL) to be broken, court action initiated by multiple US states on concerns of anti-competitive behaviour, or the Chinese fining their own companies for similar issues, it is clear that regulation is coming in 2021.
But does it really matter? Such is the dominant position of companies like Microsoft, Amazon, and Google, that regulation will do little to stop their dominating ways, and seeming ability to pivot every few weeks.
Tesla Inc (NASDAQ:TSLA) and Afterpay Ltd (ASX:APT) were the stories of the week, with both set to be included in their respective indices before Christmas.
The result has seen huge trading volume as index funds are forced to buy up these increasingly expensive companies with no regard to valuation of outlook.
This was an issue reiterated by Bloomberg this week when they cited that stock specific option investments, or bets on markets, now heavily outweigh index positions, suggesting professional traders are seeking more active management.
It can be difficult to break out of the negative perception, having lived through incredibly harsh lockdowns, but with this week’s NSW outbreak aside, Australia is truly a global leader.
It took a conversation with Tim Toohey of Yarra Capital to put some numbers around the potential recovery, the outlook for retail spending, and why the AUD may continue to rally.
