Model Portfolios – March

 

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 SMA commentary

“This is not 2008, the economy is on more solid footing and, importantly, the financial system is much more robust today than going into the crisis of 2008. We don’t see this as an expansion-ending event-provided that a pre-emptive and co-ordinated policy response is delivered.”  BlackRock Asset Manager.

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. As the above graph illustrates market corrections are a frequent phenomenon, while unnerving at the time, present investors the opportunity to purchase high quality companies at more favourable prices.

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 conservativism 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 in the coming months.

Blackmore Capital has deployed a modest level of capital after the market entered correction territory (> than a 10% fall from recent peak). Importantly, we had built up cash levels to c.15% before the recent correction occurred in equity markets, providing the opportunity to not only reduce portfolio volatility, but also provide the ability to invest counter-cyclically when opportunities arise.

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.

Blended Australian Equity Portfolio  |  Australian Equities Income Portfolio

The Blended Australian Equity Portfolio finished the month of February down 5.21% compared to the ASX 200 Accumulation Index down 7.69%. Positive contribution for the Blended Australian Equity Portfolio was driven by Cleanaway Waste Management (CWY), Healius Ltd (HLS), and Northern Star (NST). Whereas, BHP Group (BHP), Ramsay Health Care (RHC), and News Corporation (NWS) weighed on attribution.

The Australian Income Portfolio finished the month of February down 5.53% compared to the ASX 200 Accumulation Index down 7.69%. Positive contribution for the Australian Income Portfolio was driven by Cleanaway Waste Management (CWY), Healius Ltd (HLS), and Northern Star (NST). Whereas, BHP Group (BHP), and Macquarie Group (MQG), and Ramsay Health Care (RHC) weighed on attribution.

Blended Australian Equities Portfolio

The Blended Australian Equities Portfolio commenced investing in Feb 2014. Since its inception, the portfolio has achieved a compound annual return of 11.3% compared to the ASX 200 Accumulation Index of 7.6%.

Australian Equities Income Portfolio

The Australian Equities Income Portfolio commenced investing in May 2014. Since its inception, the portfolio has achieved a compound annual return of 9.8% compared to the ASX 200 Accumulation Index of 7.4%.

 

Legg Mason Commentary

 

Investors Mutual Limited (IML) – Commentary

The sell off in equity markets that began in the last week of February 2020 continues into March, despite rate cuts in both the US and in Australia. The fear of the coronavirus’ impact on global GDP and corporate profits continues to cloud the outlook for many sectors of stockmarkets around the world. Talk of the possibility of fiscal packages to boost GDP in various countries has also failed to stop the selling at this stage.

As the sell down increases, the valuation of many stocks is becoming more appealing and if past crises are anything to go by, hopefully in 6 to 12 months’ time we will be looking back wondering why this virus had such a big impact.

It’s important for investors to remember that much of the rise in the stockmarket in the last year or two appears to have been driven by quant/momentum type strategies which bought on every upgrade to push many stocks to very high valuations. Clearly as many companies are now downgrading earnings – based on the coronavirus’ potential impact on world growth – many of these strategies are now unwinding positions in stocks whose short-term earnings are affected by this epidemic.

Our thoughts are as follows:

  • At IML we take a long-term view to our investments and our ownership of underlying businesses. We are not rushing in to spend the cash held in our funds. We are carefully watching the market for value to emerge as preferred stocks are being derated.
  • There is no doubt that some stocks – including a few we hold – will be impacted directly by the coronavirus – stocks such as Sky City, Crown and Events. As mentioned in our previous note all these companies have strong balance sheets and they continue to hold very strong positions in their respective markets. While their short-term earnings will be impacted to varying degrees, their long-term position remains sound and at this stage we are maintaining our weightings in these companies. At some stage soon we may start topping up on these sorts of companies as their valuations are beginning to look very attractive from a medium to long term point of view.
  • There are also many companies whose earnings seem unlikely to be greatly affected by the virus. This includes very resilient and strong companies such as Telstra, Coles, Ausnet, Woolworths and Aurizon. Many of these companies’ share prices have pulled back to varying degrees and this is an area we are looking closely for opportunities at the right price to top up our existing holdings. In fact, we are currently topping up on a couple of these types of stocks already.
  • Regarding Financials, given that the recent cut in interest rates will likely put further pressure on net interest margins in the next year or two, we remain cautious on the Banking sector as a whole and we are not inclined to add to our positions at this stage. Insurance stocks such as IAG and Suncorp are starting to look interesting. While this year’s earnings for these insurance companies will be impacted by the fires and floods of a few months ago, their outlook beyond FY 2020 continues to look fairly strong as they recover claims from this year through rising premiums.
  • The Resources sector has also fallen sharply as both the lower oil price and fears over declining demand for iron ore – given what is happening in China – have hit the sector materially. To some degree, the fall in the Australian dollar will offset some of the falls in commodity prices, however it is an area we continue to treat with a degree of caution given the large sensitivity of these companies earnings to global GDP and commodity prices. Having said that we are seeing some value emerge and are looking to buy selectively into the best positioned companies.

Conclusion

While the news around the virus is unlikely to get better in the short term as travel bans are extended and the number of reported cases around the world increases, it pays to take a patient and measured approach.

The fact is that interest rates are likely to stay low for the forseeable future and when the current crisis is over people will be once again looking for good quality shares to help fund their income streams in their retirement.

IML’s portfolios remain skewed towards good solid industrial companies and all our Funds have a long track record of paying solid distributions to investors independent of market conditions.

We continue to remain comfortable with all the holdings in our portfolio and are diligently looking to see what stocks we should be buying in the current market correction.

Global sharemarkets endured a turbulent month as panic set in over the economic impact of the coronavirus

·         The Australian sharemarket fell -7.8% in February after having reached fresh record highs earlier in the month

·         We are adopting a cautious approach to the sharemarket looking to selectively use some of the Fund’s cash

 

BanyanTree Australian SMA Strategy Commentary

After weeks of ‘ongoing monitoring’ and inaction by central bankers in response to the potential financial consequences of the coronavirus, dubbed “COVID-19”, in an unexpected March 3 meeting, the U.S Federal Open Markets Committee (FOMC) slashed the target range for the federal funds rate by 50 basis points, to 1 to 1.25%. This was outside of their scheduled meetings and the first time since the GFC. Further, the Reserve Bank of Australia also decided to cut rates to 0.5%. in our view, with this monetary stimulus (and potential further cuts to come). The debate now is whether cuts to rates are able to stem the tide of lower global growth. In our view, with the recent equities re-rating, investors should begin to consider potential opportunities with solid fundamentals over the medium to long term.

Update on coronavirus spread…  According to tracking by Johns Hopkins University, 98,387 people have been infected with the coronavirus. The vast majority of confirmed cases, 80,555, are from mainland China. However, South Korea and Italy have reported a spike in confirmed cases with 6,284 and 3,858 respectively while there are 233 instances of the virus in the U.S.

Central bankers have responded… The U.S FOMC slashed the target range for the federal funds rate by 50 basis points, to 1 to 1.25%, citing that despite the fundamentals of the U.S. economy remaining strong, “the coronavirus poses evolving risks to economic activity…”. The FOMC noted they are “closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy”. Likewise, the Reserve Bank of Australia (RBA) decided to cut the cash rate by 25 basis points to 0.50%, citing “the global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target”.

Don’t forget to focus on fundamentals… in our view, we expect the coronavirus to become manageable over a short to medium term timeframe. Holding this view, investors should begin to focus on companies which have been sold off (and hence trading on attractive multiples and valuations), but retain solid fundamentals (strong earnings growth, solid balance sheet, strong cashflow generation, strong franchises) over the medium to long term.