Model Portfolios – April
Every month we provide our readers with an update on a few of Powerwrap’s new and existing Separately Managed Accounts on the Powerwrap platform. Please keep in mind the information disclosed is general in nature and does not take into account your personal situation.
Top 10 Model Portfolios by Funds Under Administration
Blackmore Capital Equity Investors Monthly Portfolio Update
Market & Portfolio Update
It has been a watershed month for financial markets as coronavirus outbreaks have become more widespread. The disruption to global output and the reaction by policy makers have galvanised the attention of investors.
In Australia the ongoing impact of the coronavirus is resulting in further downgrades to FY20 ASX 200 profits, whereby even the modest expectations of 1-2% earnings growth is now looking unrealistically optimistic.
With the prospect of an earnings contraction ahead for the ASX 200, earnings quality and balance sheet conservatism play an increasingly important role in portfolio composition.
In recent days central banks, including the Federal Reserve and the RBA, have announced emergency rate cuts to cushion the economic impact of the coronavirus.
The contraction in China’s economic activity has been unprecedented as authorities measures to contain the coronavirus resulted in its national PMI falling to a record low of 35%.
Encouragingly signs of stabilisation of the virus in China are providing the backdrop to resume normalised economic and social activity. There is growing expectation that China’s resumption of industrial production could be back to normal levels by the end of March.
Signs of value are emerging. The ASX 200 earnings yield at circa. 6% and a dividend yield of 4.5% is heralding long term value for investors. While the path forward remains uncertain, valuation metrics will ultimately normalise.
Blackmore Capital is starting to deploy capital into the consumer staples, healthcare and telecommunications sectors.
It is noteworthy that Blackmore Capital’s equity portfolios have exhibited lower volatility and greater downside protection relative to the ASX 200 Index, a pattern that is consistent for each market downturn since the inception of the portfolios six years ago.
Purchased Chrous Limited (CNU) Chorus Ltd is New Zealand’s major wholesale telecommunications infrastructure provider to telephone and broadband service retailers. It owns most of the country’s telephone lines and exchanges and is responsible for building ~70% of the Ultra-Fast Broadband (UFB) network, due for completion in 2022. In 2011 Chorus was demerged from Spark, the privatised Telecom NZ, to participate in the UFB project. It is now the largest owner and manager of the open access internet network, with more than 1.5m broadband connections. The company’s product portfolio encompasses a range of wholesale broadband, data and voice services across a mix of regulated, contracted, and commercial products. Declining connections for copper services are offset by growing broadband connections and increasing data usage on the UFB network. While there remains an element of regulatory uncertainty for the post 2022 period, the company’s capex will step down considerably and it will transition to a dividend policy based on a pay-out range of free cash flow. This should result in a step up in the annual dividend into FY23-24, with sustainable modest growth beyond. In the current environment of extremely low interest rates and heightened earnings uncertainty, Chorus exhibits a low risk profile and a 4.1% dividend yield with potentially an improving growth profile into the mid-2020’s. Sold GPT Group (GPT) We have sold GPT Limited (GPT) as both earnings quality and balance sheet liquidity will face unprecedented pressure through the economic shock of the temporary closure of many parts of the economy due to the coronavirus. Recent changes to the Blended & Australian Equity Income Portfolios Reduced Macquarie Group (MQG) & National Australia Bank (NAB) We are reducing the portfolios’ direct exposure to credit and financial markets by lowering the holdings of Macquarie Group (capital markets) and National Australia Bank. Until there are clearer signs that financial volatility is subsiding and there is evidence that virus containment measures are beginning to work, our preference is to continue to be defensively positioned. Since we do not think those conditions have been met yet our preference is to hold a higher cash weighting and greater exposure to essential services industries, such as consumer staples, healthcare and telecommunications.
WCM GLOBAL GROWTH LIMITED – INVESTMENT UPDATE AND NTA STATEMENT
The portfolio returned -5.10% for the month of March 2020, compared with the benchmark MSCI All Country World (ex-Australia) Total Return Index return of -7.69%. The portfolio has outperformed its benchmark during the volatile conditions of the last 3-months. The longer-term performance of the portfolio also remains strong with returns exceeding that of the benchmark over 1-year, 2-years and since inception.
The major selloff in global equity markets, which began on 19 February, reached its nadir on 23 March at which point the MSCI World Index had declined by 35%. The rapid worldwide spread of the COVID 19 virus has brought many businesses to a halt and confined employees across multiple ‘non-essential’ industries to their homes. Commentators have quickly moved on from debating if there will be a global recession to how long and how deep it will be.
While all regional indices recorded declines in March, losses were least severe in Asia where there are tentative signs that countries including China and South Korea may have seen the worst of the pandemic. At a sector level the hardest hit were those most sensitive to the pending economic downturn including Industrials, Financials and Energy. The weaker Australian dollar in March reduced the losses for unhedged global portfolios such as WQG.
As with previous periods of heightened market volatility, the portfolio’s overweight exposure to quality and secular growth companies contributed significantly to relative outperformance in March. These included health care companies Illumina, West Pharmaceuticals and Thermo Fisher Scientific along with the communications infrastructure group, Crown Castle. The economically sensitive holdings in the portfolio and those most directly impacted by the COVID 19 shutdown fared worst. These included contract food service firm Compass Group and McDonalds.
Given WCM’s long-term approach (i.e. a minimum time horizon of 3–5 years) and the belief that the full ramifications of sudden macro-related event, such as the current COVID-19 pandemic, are unknowable, the team remains convinced that the most important investment objective is to own businesses that : i) have solid balance sheets in industries with long-term structural growth drivers; ii) are improving their competitive position; and iii) possess strong, healthy cultures. Such firms are much more likely to navigate macro issues, including the current pandemic, better than their peers and win in the long run.
The positive aspect of market volatility is that it offers outstanding opportunities for bargains on high-quality companies that fit WCM’s investment criteria. Further, these volatile periods tend to refocus markets on structurally high-quality businesses (i.e., growing moats and strong, long-term tailwinds) rather than mediocre businesses benefiting from temporary/cyclical phenomena. That plays to WCM’s strengths. With valuations having been reset, the ultimate return to stability will be accompanied by ample opportunity for strong long-term returns.
IML Australia Share Fund
Share market Commentary
By Daniel Moore
Global share markets endured a turbulent month due to heightened investor concern about the spread of the coronavirus outside of mainland China, and the negative impact on global economic growth. The MSCI World FY15 78.8% Index fell -7.6% over the month, with the losses coming in the final week of the month as all major stock markets sold off heavily.
In a dramatic shift from earlier in the month when investor confidence drove the US market to a new record high, the US S&P500 fell -13% in the final week of February resulting in a monthly loss of -8.2%, with all sectors finishing lower. In similar fashion Europe’s Stoxx50 and Japan’s Nikkei index fell -8.4% and -8.8% respectively. The market’s fear gauge, the VIX volatility index reached an intraday high of 50, its highest reading since 2011. As the concerns and selling in share markets intensified, investors looked for safety in perceived safe haven assets. Thus, the US 10-year yield fell to its lowest level on record, falling 0.4% to 1.1%, whilst its Australian counterpart also fell to a record low of 0.7% over the month. The rally in global bonds was further supported by the US Fed announcing they would “act as appropriate to support the economy” in light of the evolving risks to economic activity. Other Central Banks added to this narrative – namely the Bank of Japan, the European Central Bank and the Bank of England.
The global economic impact from the virus arose from the extensive travel bans and factory closures which have ensued since the outbreak of the virus. China’s factory and non-factory purchasing (PMI) data from February sank to its lowest level on record (from 51 to 35) as the closures took effect. In addition, US manufacturing data pointed to a slowdown as producers reported bottlenecks in their supply chains hampering their ability to get parts.
Domestically, as world growth forecasts were trimmed, our key commodity prices came under sustained pressure. The iron ore price fell -12% over the month on softening Chinese demand, whilst the oil price fell -13%. The AUD shed -3.7% against the USD to its lowest level in over 10 years. In a move to try and shore up investor confidence and domestic economic activity, the RBA cut interest rates by 0.25% in early March to a new record low of 0.5%.
In line with offshore share markets, the Australian share market – as measured by the ASX300 index – endured a difficult month falling -7.8%, after having reached an all time high only a few weeks earlier. No sector was spared the heavy sell off of in the final week of February, as indiscriminate selling took hold regardless of a company’s exposure to the coronavirus. Over the month, companies in the Healthcare and the Utilities sectors proved the most resilient falling -4% given the defensive qualities of their business models, whilst the Resources and Technology sectors fared the worst falling -13% and -16% respectively. The Resources sector fell in sympathy with the sell off in commodity prices, whilst the Technology sector tumbled as a number of previous market darlings such as Wisetech and Altium fell -40% and -22% respectively. The 1H20 reporting season was fairly lack-lustre with earnings growth remaining elusive in many sectors and many companies cutting costs to support margins. Companies with strong franchises that managed to derive scale advantages continue to grow well, these included CSL, Sonic Healthcare, Telstra, Coles, Steadfast, Brambles and Aurizon.
The Investors Mutual Australian Share Fund endured a challenging month falling -7.7%, faring slightly better than the benchmark’s fall of -7.8%. It was a month in which just about every stock in the index finished in negative territory, despite some companies having very little exposure to the coronavirus. Our caution to the Resources sector helped the Fund hold up better than the market, as did our aversion to much of the speculative froth in the Technology sector. Our holdings in gaming stocks such as Crown and SkyCity had a tough month due to fears over attendance levels at these casinos should the virus worsen. Our holdings in good quality companies such as CSL, Ausnet and Brambles all held up better than the overall market. Clearly this is a very painful time for all share market investors, after the gains of recent years. IML has been through corrections several times in our 21 year history and we will remain disciplined in our approach to investing at all times. It is impossible to say exactly when the current volatility will settle down. However, when the share market does stabilise, good quality companies with real businesses and sustainable earnings and dividends – which is where IML’s portfolios have always focused on – should again be sought after by investors and should recover over time.