InvestSMART Diversified Income Portfolio Update - December 2018
The Portfolio produced a return of -2.49% (after fees) during the December quarter and no changes were made.
The InvestSMART Diversified Income Portfolio, although ‘defensive’ in nature, was still affected by the correction all major equity markets experienced in the final quarter of 2018. The Vanguard MSCI Index International Shares ETF (VGS) was the largest detractor, detracting -1.42% from the performance of the fund as international markets experienced their worst quarter’s trading in ten years in some instances. The outlook for international equities remains clouded as we travel through the early stages of 2019. The US-China trade war is likely to roll on, Brexit negotiations remain in a stalemate and European growth is stuttering.
The iShares Core S&P/ASX 200 (IOZ) detracted -1.11% over the quarter as Australian equities were impacted by the global sell-off as well as the Banking Royal Commission. This continued to place ‘regulation risk’ on the Financial sector; a sector that makes up over 40% of the ASX 200. This quarter the Australian market will see H1FY19 reporting season. We will keep a keen eye on those firms with Chinese exposure as international and domestic firms are suggesting Chinese demand slipped in the final quarter of calendar year 2018 and this could hurt returns.
The risk events in the ‘Growth’ side of the portfolio were countered by a flight to the defensive side in the quarter. The iShares Core Composite Bond ETF (IAF) attributed 0.41% while the Vanguard Global Aggregate Bond Index (Hedge) ETF (VBND) added 0.15% in the final quarter as both the domestic and international bonds markets saw solid inflows. The dialling back of ‘risk exposure’ by investors is likely to continue in the interim and will be supportive of defensive assets.
With the US and Australian earnings seasons due in first quarter of 2019, the news from Apple that Chinese demand has become an issue is likely to filter into other China-facing earnings. This presents potential for further downside risk on the growth side of the portfolio. This suggests the defensive side of the portfolio is likely to contribute more to the portfolio over this period as investors look to protect wealth. With a 66% weighting to defensive assets, the Diversified Income Portfolio should navigate the current period in a solid fashion.