Portfolio Quarterly Update - September 2019

Contents

InvestSMART Conservative Portfolio

Quarterly Highlights

• The InvestSMART Conservative Portfolio produced a return of 1.87% (after fees) during the September quarter
• No changes were made to the portfolio during the quarter
• Estimated yield on the portfolio is currently 3.01%
• All holdings of the portfolio attributed to the quarter’s performance

FY19 was an interesting year for the Conservative Portfolio, as the capital performance of both sides of the portfolio was strong. The defensive side of the portfolio was particularly interesting considering fixed interest and treasuries produced capital returns one would normally associate with growth assets.

It’s been a slow start to FY20. However, there certainly hasn’t been any major outflow and the defensive side of the portfolio remained solid. But, as forecasted at the end of FY19 we did not expect the kind of capital performance seen last financial year to flow through into this financial year and so far, that expectation is becoming fact as the premium price and low yield on offer slows investor appetite.

With central banks the world over beginning their new accommodation cycle, the other major theme of FY19 had been the differential between bond and equity markets in that; bonds have been forecasting global malaise, while equities, the possible ‘cure’ to this malaise in the form of more accommodation from central banks.

Q1 FY20 saw this in spades with 4 of the 8 major central banks the world over doing some form of accommodation in the quarter. We also saw 5 of the 23 MSCI developed equity markets making new record all-time highs and closing highs in the quarter while another 6 were with in 2% of their respective all-time highs.

However, as the monetary policy accommodation began the level of disappointment from the market ramped up, something that is likely to hold true in the remainder of FY20.

Equities are also moving into what is traditionally the most volatile quarter of the financial year, with October being the most volatile month of the calendar year. The US has started Q2 with its worst start to a quarter since the March quarter of 2009 and its worst start to an October since 2014. We would also point out that on average since 1900 the US experiences one correction (10% decline or more) a year. This hasn’t happened in 2019 yet.

The ASX too has started the quarter with a 2.4% decline despite the RBA cutting rates for the 3^rd time in 5 months as it looks to take pre-emptive measures.

We highlight this for constructive reasons – when investing, even in a conservative portfolio, your time horizon is key, and you should always be thinking in 2 year timeframes. Pull backs are opportunities not impediments.

Your opportunity to average down your cost base as you look to your investment time horizon gives you the ability to look through the intra-day, week, month and even yearly fluctuations with a resolve that will minimise making an investment mistake.

InvestSMART Growth Portfolio

Quarterly Highlights

• The InvestSMART Growth Portfolio produced a return of 2.95% (after fees) during the September quarter
• No changes were made to the portfolio during the quarter
• Estimated yield on the portfolio is currently 3.75%
• All holdings of the portfolio attributed to the quarter’s performance

FY19 was an interesting year for the Growth Portfolio, as the capital performance of both sides of the portfolio was very strong. The defensive side of the portfolio was particularly interesting considering fixed interest and treasuries produced capital returns one would normally associate with growth assets. This meant the portfolio produced above average returns in FY19.

However, it’s been a slow start to FY20, and this is despite the fact that July saw 5 of the 23 MSCI developed equity markets making new record all-time highs and closing highs while another 6 were with in 2% of their respective all-time highs. As we forecasted at the end of FY19 we did not expect the kind of capital performance seen last year to flow through into this financial year. So far, that expectation is becoming fact as the premium price in markets, low yields on offer and global risks impact investor appetite.

With central banks the world over beginning their new accommodation cycle the other major theme of FY19 had been the differential between bond and equity markets in that; bonds have been forecasting global malaise, while equities the possible ‘cure’ to this malaise in the form of more accommodation from central banks. This is now reality, however, as the monetary policy accommodation cycle began the level of disappointment from the market ramped up, something that is likely to hold true in the remainder of FY20.

Equities are also moving into what is traditionally the most volatile quarter of the financial year, with October being the most volatile month of a calendar year.

The US has started Q2 in with its worst start to a quarter since the March quarter of 2009 and its worst start to an October since 2014. We would also point out that on average since 1900 the US experiences one correction (10% decline or more) a year. This hasn’t happened in 2019 yet.

The ASX too has started the quarter with a 2.4% decline despite the RBA cutting rates for the 3^rd time in 5 months in October as the RBA looks to take pre-emptive measures.

We highlight this for a constructive reason – and that is your investment time horizon is key, and you should always be thinking in a 5 year timeframes when you have a growth profile. Pull backs should be seen as opportunities not impediments.

Your opportunity to average down your cost base as you look to your investment time horizon gives you the ability to look through the intra-day, week, month and even yearly fluctuations with a resolve that will minimise making an investment mistake.

InvestSMART High Growth Portfolio

Quarterly Highlights

• The InvestSMART High Growth Portfolio produced a return of 3.20% (after fees) during the September quarter
• No changes were made to the portfolio during the quarter
• Estimated yield on the portfolio is currently 4.17%
• All holdings of the portfolio attributed to the quarter’s performance

FY19 was an interesting year for the High Growth Portfolio, as the capital performance of both sides of the portfolio was very strong. The defensive side of the portfolio was particularly interesting considering fixed interest and treasuries produced capital returns one would normally associate with growth asset. This meant the portfolio produced above average returns. 

However, it’s been a slow start to FY20, and this is despite the fact that July saw 5 of the 23 MSCI developed equity markets making new record all-time highs and closing highs while another 6 were within 2% of their respective all-time highs. As we forecasted at the end of FY19 we did not expect the kind of capital performance seen last year to flow through into this financial year. So far, that expectation is becoming fact as the premium price in markets, low yields on offer and global risks impact investor appetite.

With central banks the world over beginning their new accommodation cycle the other major theme of FY19 had been the differential between bond and equity markets in that; bonds have been forecasting global malaise, while equities the possible ‘cure’ to this malaise in the form of more accommodation from central banks. This is now reality, however, as the monetary policy accommodation cycle began the level of disappointment from the market ramped up, something that is likely to hold true in the remainder of FY20.

Equities are also moving into what is traditionally the most volatile quarter of the financial year, with October being the most volatile month of the calendar year.

The US has started Q2 in with its worst start to a quarter since the March quarter of 2009 and its worst start to an October since 2014. We would also point out that on average since 1900 the US experiences one correction (10% decline or more) a year. This hasn’t happened in 2019 yet.

The ASX too has started the quarter with a 2.4% decline despite the RBA cutting rates for the 3^rd time in 5 months in October as the RBA looks to take pre-emptive measures.

We highlight this for a constructive reason – and that is that your investment time horizon is key, and you should always be thinking in 7 year timeframe. Pull backs are opportunities not impediments.

Your opportunity to average down your cost base as you look to your investment time horizon gives you the ability to look through the intra-day, week, month and even yearly fluctuations with a resolve that will minimise making an investment mistake.

InvestSMART Balanced Portfolio

Quarterly Highlights

• The InvestSMART Balanced Portfolio produced a return of 2.52% (after fees) during the September quarter
• No changes were made to the portfolio during the quarter
• Estimated yield on the portfolio is currently 3.42%
• All holdings of the portfolio attributed to the quarter’s performance

FY19 was an interesting year for the Balanced Portfolio, as the capital performance of both sides of the portfolio was strong. The defensive side of the portfolio was particularly interesting considering fixed interest and treasuries produced capital returns one would normally associate with growth assets.

It’s been a slow start to FY20. However, there certainly hasn’t been any major outflow and the defensive side of the portfolio remained solid. But, as forecasted at the end of FY19 we did not expect the kind of capital performance seen last financial year to flow through into this financial year and so far, that expectation is becoming fact as the premium price and low yield on offer slows investor appetite.

With central banks the world over beginning their new accommodation cycle the other major theme of FY19 had been the differential between bond and equity markets in that; bonds have been forecasting global malaise, while equities the possible ‘cure’ to this malaise in the form of more accommodation from central banks.

Q1 FY20 saw this in spades with 4 of the 8 major central banks around the world doing some form of accommodation in the quarter. We also saw 5 of the 23 MSCI developed equity markets making new record all-time highs and closing highs in the quarter while another 6 were within 2% of their respective all-time highs.

However, as the monetary policy accommodation began the level of disappointment from the market ramped up something that is likely to hold true in the remainder of FY20. Equities are also moving into what is traditionally the most volatile quarter of the financial year, with October being the most volatile month of the calendar year. The US has started Q2 with its worst start to a quarter since the March quarter of 2009 and its worst start to an October since 2014. We would also point out that on average since 1900 the US experiences one correction (10% decline or more) a year. This hasn’t happened in 2019 yet.

The ASX too has started the quarter with a 2.4% decline despite the RBA cutting rates for the 3^rd time in 5 months as it looks to take pre-emptive measures.

We highlight this for constructive reasons – when investing in equities your time horizon is key and you should always be thinking in 4 year timeframe. Pull backs are opportunities not impediments. Your opportunity to average down your cost base as you look to your investment time horizon gives you the ability to look through the intra-day, week, month even year fluctuations. 

InvestSMART Interest Income Portfolio

Quarterly Highlights

• The InvestSMART Interest Income Portfolio produced a return of 1.76% (after fees) during the September quarter
• No changes were made to the portfolio during the quarter
• Estimated yield on the portfolio is currently 1.97%
• All facets of the portfolio attributed to the quarter’s performance

The surge in treasuries that began last December has slowed significantly in the first quarter of FY20.

We had foreseen this as the capital performance of the Interest Income portfolio over the previous 7 months had been astonishing and was clearly an abnormality rather than the norm.

The capital return over the 7 months to June 30 was 8.6% for treasuries and over 4.5% for corporate debt. That kind of capital appreciation hasn’t been seen in fixed income since 2013 when there were fears of a slow down in Asia prompting a flight to safety for risk capital.

What has impacted the total return of the portfolio in the last quarter was the changes to monetary policy and the impact this has had on treasuries yields. The Australian 10-year bond fell 38 basis points to 0.96% to September 30. The US 10 year also saw yields falling on changes from the Federal Reserve which is making yield investing all that more difficult.

With the portfolio holding a blend corporate bonds and treasuries the overall yield of the portfolio has had a slight buffer from the individual falls seen in treasuries. But, we do understand there has been no escaping the falling yields in fixed income.

We continue to argue the bond market is a very crowded, narrow trade, one that has bordered on irrational, but one that will likely hold its support as global risks increase.

We don’t expect high levels of outflows with returns to revert to the yearly average since inception of approximately 3.5%.

InvestSMART International Equities Portfolio

Quarterly Highlights

• The InvestSMART International Equities Portfolio produced a return of 4.50% (after fees) during the September quarter.
• No changes were made to the portfolio during the quarter
• Estimated yield on the portfolio is currently 2.27%
• All holding of the portfolio attributed to the quarter’s performance

Since last December, when US markets experienced there biggest pull back since the end of the GFC ended; equities have been trading on the theory that the malaise in global growth that had riled up bond markets would be countered by the great ‘white knight’ of money policy which would ‘cure’ these issues.

The first quarter of the new financial year saw that expectation becoming a reality as central banks the world over begun their much anticipated new easing cycle.

The European Central Bank (ECB) cut rates for the first time since 2016 sending its interest rate further into negative territory while also announcing it will start its quantitative easing programs again.

The Reserve Bank of New Zealand threw the kitchen sink at its policy, slashing rates by 50 basis points in August.

This all culminated in the most anticipated move from the world of central banks, the US Federal Reserve cutting the Federal Funds rate for the first time since the GFC.

This led to two out of three months in Q1 being a net positive across the quarter and all facets of the portfolio attributing to performance.

However, the International Equities portfolio is heavily invested in US markets and there were some interesting developments forming at the close of the quarter. Over the past 52 weeks to September 30, the S&P 500 on a total returns basis has only added 4.3%. Compare that to the historical one-year total return average in the US of 11.7%. Over the quarter the US only added 1.19%. 

Global equities are also moving into what is traditionally the most volatile quarter of the financial year, with October being the most volatile month of a calendar year. The US has started Q2 with its worst start to a quarter since the March quarter of 2009 and its worst start to an October since 2014. We would also point out that on average since 1900 the US experiences one correction (10% decline or more) a year. This hasn’t happened in 2019 yet.

We highlight this for constructive reasons – when investing in equities your time horizon is key and one should always be thinking in 7 year timeframe. Pull backs are opportunities not impediments.

Your opportunity to average down your cost base as you look to your investment time horizon gives you the ability to look through the intra-day, week, month and even yearly fluctuations with a resolve that will minimise making an investment mistake.

InvestSMART Diversified Property & Infrastructure Portfolio

Quarterly Highlights

• The InvestSMART Diversified Property & Infrastructure Portfolio produced a return of 3.77% (after fees) during the September quarter
• No changes were made to the portfolio during the quarter
• Estimated yield on the portfolio is currently 4.11%
• All holdings of the portfolio attributed to the quarter’s performance

The new financial year saw another 25 basis point rate cut in Q1 and to start Q2 we have seen it cut again. Having not moved the cash rate in 32 months the RBA has now cut the cash rate 3 times in 5 months.

Of the economists surveyed by Reuters, 84% see the cash rate falling to 1% by December 2019. Over 63% believe the cash rate will fall below 1% come the end of FY20. The market has priced in 51 basis points of cuts over the same time to be in line with economists.

This movement in monetary policy has driven fixed income in FY19 which in turn has driven strong flows in the bond proxies. The second half of FY19 saw the Diversified Property and Infrastructure Portfolio registering its strongest year since inception due to its high-yielding non-franking nature.

This second point around franking also partly explains the surge in investment flows in the Q3 FY19 in particular.

The May Federal Election, and the avoidance of a Labor Government at the federal level, saw the portfolio logging its best quarter ever as a clear ‘switching’ trade took hold. Several Australian Real Estate Investment Trusts (REITs) hit record highs at the start of the fourth quarter off the back of the election.

Not surprising, as the combined average non-franked yield on domestic infrastructure is 5.6%, a full 3.6% above the average term deposit and 4.35% above the cash rate. It’s clearly attractive and the FY19 performance of this portfolio reflects this.

What also eventuated in the final quarter of FY19 was the collapse in fixed interest yields globally. The Federal Reserve, the European Central Bank and the Bank of Japan are now changing tact and moving back toward easing their respective monetary policy stances. The portfolio’s global assets in property and infrastructure look set to perform well into FY20 as investors look for higher-yielding assets in this low interest rate world.  

All this is likely to see the Diversified Property & Infrastructure Portfolio continuing to perform well over the coming 12 months of the financial year.

InvestSMART Hybrid Income Portfolio

• The InvestSMART Hybrid Income Portfolio total return was 0.90% and 5.89% for the quarter and 12-month period. Since inception the total portfolio return is 5.27%, which is 0.74% over its return objective.
• Th RBA reduced the cash rate to 0.75% and the outlook is for further rate cuts. Low cash and bond yields continuing to drive investor demand for higher yielding securities and asset classes.
• September was a high-income month with 19 securities trading ex-distribution.
• Commonwealth Bank announce a new hybrid issue – CBA PERLS XII – which is expected to be issued on 14 November. Given the lack of new hybrids recently, we expect this will be a popular issue.
• AXLHA will continue to be held at cost until more detail is received on the timing of the wind up payments.