InvestSMART Portfolios Monthly Update - October 2020

October’s performance was always going to be a little messy being the lead-in month to the US Presidential election – a major geopolitical risk event.

It was further complicated by second waves of COVID-19 which are starting to rise to infection levels not seen since the start of the pandemic in the Northern Hemisphere.

October also had to deal with another US earnings season along with earnings from Europe and Asia.

All this can explain the disruptive and disjointed performance of our funds, yet all except one grew. But as we know, one month’s performance does not make an investment strategy.

What was interesting from a performance perspective in October was the ASX, it actually outperformed several global peers for the first time in months.

This got us thinking, what was the possible reasoning for this outperformance, and could it be a sustained trend into 2021? 

To answer this question, we again looked at certain performance metrics in October, specifically economic performance. What the economic data shows is that the US joined China in October in entering the ‘expansion phase’ of the economic cycle (we should mention that Europe and Australia are on the cusp of economic expansion and will probably join their counter-parts in the not too distant future).

According to the latest OECD forward looking economic data, four of the seven major pieces are in expansion, those being house starts, manufacturing, stock prices and income yields. The other three – new orders, consumer confidence and hours worked – are nearing expansion, impressive when you think about what is happening in the US right now. Why this matters for your portfolio is because history shows some interesting trends when the US and the world enter economic expansion.

Since 1994 to 2020, each time the US entered economic expansion:

• The ASX averaged 20 per cent total returns on a per annum basis.
• 72% of the months in an ‘expansion period’ produced positive total returns.
• The average time in ‘expansion’ was approximately six months.

A positive outlook for possible positive performance in the coming period which is why we are unfazed by the performance of the past month. 

This possible medium-term upside in the ASX is where our diversified portfolios come to the fore. With weightings across each major asset class and geography, it means your portfolio can take full advantage of future upswings in certain markets but also smooth out market issues that arise in one market or sector like that seen in some European markets with COVID-19 returning.

We know that your risk tolerance is also part of your thinking. 2020 has been a volatile year and performance has been variable month to month. Yet, if we take 2020 as a whole and look at the year-to-date performance, overall, 2020 has been solid considering COVID-19 and even those with the lowest risk profile and a three-year investment time horizon have not seen their overall total returns eroded. This confirms that our portfolio designs continue to work, providing you solid and reliable growth but with the buffers in place to give you piece of mind.

Diversified Portfolios

Conservative

• With equities mixed in October, the portfolio expanded 0.1 per cent after fees for the month.
• Domestic equities attributed, adding 0.21 per cent to performance as did domestic fixed income 0.09 per cent. But international equities and property contracted in October, taking 0.09 per cent and 0.04 per cent out of performance respectively.
• The yield on the Conservative Portfolio at the close of October was 2.37 per cent.

Balanced

• With equities mixed in October, the portfolio expanded 0.21 per cent after fees for the month.
• Domestic equities attributed, adding 0.4 per cent to performance as did domestic fixed income 0.06 per cent. But international equities and property contracted in October, taking 0.16 per cent and 0.03 per cent out of performance respectively.
• The yield on the Balanced Portfolio at the close of October was 2.43 per cent.

Growth

• With equities mixed in October, the portfolio expanded 0.19 per cent after fees for the month.
• Domestic equities attributed, adding 0.49 per cent to performance as did domestic fixed income 0.04 per cent. But international equities and property contracted in October, taking 0.23 per cent and 0.03 per cent out of performance respectively.
• The yield on the Growth Portfolio at the close of October was 2.5 per cent.

High Growth

• With equities mixed in October, the portfolio expanded 0.23 per cent after fees for the month.
• Domestic equities attributed, adding 0.64 per cent to performance as did domestic fixed income 0.01 per cent. But international equities and property contracted in October, taking 0.32 per cent and 0.03 per cent out of performance respectively.
• The yield on the Growth Portfolio at the close of October was 2.5 per cent.

Satellite Portfolios

International Equities

• Volatility in international equities saw the International Portfolio contracting -0.27 per cent in October.
• The Global and European listings contracted the most with the Global listing VGS contracting -0.29 per cent and European equities (VEQ) contracting -0.5 per cent.
• The US and Asia listings of IVV and IAA contributed to performance 0.05 per cent and 0.54 per cent respectively.
• The yield on the International Equities Portfolio sits at 2.2 per cent.

Interest Income

• The portfolio rose 0.25 per cent after fees in October as investors rotated back into fixed income.
• All facets of the portfolio contributed to performance with Treasuries adding 0.21 per cent while corporate fixed interest attributed 0.1 per cent, cash was flat.
• The yield on the Interest Income Portfolio sits at 2.8 per cent.

 Property and Infrastructure

• The portfolio contracted -2.02 per cent after fees in October and COVID continues to drag on these two sectors.
• All bar APA Group detracted from performance with domestic and international property detracting -0.18 per cent and -0.42 per cent respectively, while TCL detracted -0.53 per cent and SYD detracted -0.33 per cent.
• The yield on the Property and Infrastructure Portfolio sits at 0.6 per cent.

Hybrid Income

Commentary by Portfolio Manager Alastair Davidson

• The total portfolio return was 0.50% for the month including franking credits. The estimated running yield is approximately 4.50%, and estimated yield to call/maturity is 4.50% including franking credits.
• The total portfolio return was 2.25% and 2.82% for the quarter and 12-month periods respectively. Since inception the total portfolio return is 4.04% including franking credits, which is 0.14% under its return objective of the RBA Cash rate plus 3%.
• There were no transactions in the portfolio during the month
• After reaching 3.04%, average trading margins for major bank hybrids with approximately 5 years to call thereafter widened to close the week at 3.22%
• 2 new hybrids were launched from BOQ and BEN in October and Westpac announced a new issue at the start of November.
• The RBA maintained the cash rate at 0.25% at its October meeting, and lowered the cash rate to 0.10% at it November meeting.
• One security in the portfolio paid a distribution in October.
• At 31 October the portfolio had a 3.70% allocation to cash.

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