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InvestSMART Portfolios Monthly Update - January 2021

InvestSMART Capped Fee Portfolio review Monthly Musings - price perfection and probing for weakness
By · 17 Feb 2021
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17 Feb 2021 · 5 min read
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January 25th 2021 marked one year since the first COVID-19 case was diagnosed in Australia. In that time our lives have changed so significantly it’s hard to remember life before.

However, over the same period what has not changed is the power of diversification. To illustrate this point, here is the consensus balanced fund versus the All Ordinaries over the same 12-month period on a total returns basis.

As you can see, the performance over that period is nearly the same – the consensus balanced fund is outperforming by 0.7 per cent. But what we want to highlight is the fall (and gain) in value over the comparison period is chalk and cheese.

The performance of the All Ords and international equity markets for the matter, in the past four months has been astonishing considering the effects of the pandemic, but there is also something else to read into this chart – volatility. Volatility is not just about markets falling, it’s about them moving outside of the norm which includes moving up.

Which brings me to January’s performance – for the first time in four months, some equity markets went backwards. We also started to see investors question if equity markets in particular have ‘gotten ahead of themselves’ and are ‘priced to perfection’ as they say in market lingo terms.

It’s a valid point. When you see markets and stocks moving double digit percentages in a month, and in some cases weeks and days, the questions have to be asked: has an equity market become overvalued? Have we moved to a speculation stage over a growth stage?

At InvestSMART, we don’t think in ‘short term cycles’ but we are mindful of them and we do like to forewarn that volatility might be approaching and January was a possible forewarning.

Markets do like to test for weakness and for possible future changes to the economic and market environment. The most notable of these tests was the market’s belief that inflation in the US is building.

As more and more Americans return to work and the COVID-19 affected regions of the US start to reopen, price increases should be expected. Why the market is interested in this point is that as prices rise, we should expect the US Federal Reserve to slow down its stimulus programs and possibly raise interest rates – it’s a point that was also being asked of the Reserve Bank of Australia as Australia goes through a similar economic change.

Less money handouts and higher interest rates would slow growth and that would slow asset prices. It is this point that the market is testing – are central banks going to raise interest rates and cut stimulus programs?

In short – no. the Federal Reserve went out of its way in January to explain that it will not be moving from its current stance for at least a year. The RBA, too, in its February communications stated it believes rates are going to stay at current levels until 2024. This is designed to give us, the population, confidence that we will be supported through the COVID-19 crisis. But remember, the goal of this policy is to see inflation rise.

So although rates may not rise in 2021 or even until 2024, they will rise one day, and that idea is what probably caused some volatility in interest rate-sensitive markets in January i.e. equities and property.

With central banks leaving policy untouched, the other question the market wanted to test was ‘priced to perfection’.

If we look at the January US earnings season results, over 89 per cent of companies beat analysts’ expectations, yet the majority fell. The ASX is about to go through its earnings season this month, and we expect a similar outcome to its US peers.

So yes, there has been and may be a bit of volatility in the interim but short-term moves are just that – short. And like 2020, if we were to change strategy based on short-term changes, we would have underperformed which is why we remain steadfast in our view that diversification is core to any investment strategy as longer term, this setup has shown time after time, event after event that it will increase your total returns and reduce your immediate exposure to asset specific volatility.

 

Diversified Portfolios

Conservative

  • With fixed interest under some pressure, the portfolio declined for the first time in four months, down -0.53 per cent after fees in January. 
  • All equity aspects of the portfolio attributed to performance with international equities ( 0.05 per cent) and Australian equities ( 0.03 per cent) finishing slightly positive. This was offset by all other parts of the portfolio with domestic fixed interest (-0.15 per cent) and domestic property (-0.24 per cent) the biggest detractors.
  • The yield on the Conservative Portfolio at the close of January was 2.40 per cent.

Balanced

  • With fixed interest under some pressure, the portfolio declined for the first time in four months, down -0.39 per cent after fees in January. 
  • All equity aspects of the portfolio attributed to performance with international equities ( 0.09 per cent) and Australian equities ( 0.06 per cent) finishing slightly positive. This was offset by all other parts of the portfolio with domestic fixed interest (-0.11 per cent) and domestic property (-0.23 per cent) the biggest detractors.
  • The yield on the Balanced Portfolio at the close of January was 2.42 per cent.

Growth

  • With fixed interest under some pressure, the portfolio declined for the first time in four months, down -0.31 per cent after fees in January. 
  • All equity aspects of the portfolio attributed to performance with international equities ( 0.12 per cent) and Australian equities ( 0.07 per cent) finishing slightly positive. This was offset by all other parts of the portfolio with domestic fixed interest (-0.07 per cent) and domestic property (-0.25 per cent) the biggest detractors.
  • The yield on the Growth Portfolio at the close of January was 2.44 per cent.

High Growth

  • With fixed interest under some pressure, the portfolio declined for the first time in four months, down -0.11 per cent after fees in January. 
  • All equity aspects of the portfolio attributed to performance with international equities ( 0.15 per cent) and Australian equities ( 0.09 per cent) finishing slightly positive. This was offset by all other parts of the portfolio with infrastructure (-0.07 per cent) and domestic property (-0.20 per cent) the biggest detractors.
  • The yield on the High Growth Portfolio at the close of January was 2.35 per cent.

 

Satellite Portfolios

International Equities

  • The portfolio expanded 0.96 per cent after fees in January on mixed results in Europe and the US.
  • S&P 500 (IVV) attributed 0.39 per cent, European equities (VEQ) detracted -0.10 per cent while the global holding VGS attributed 0.15 per cent.

Interest Income

  • Declined -0.53 per cent after fees in January as fixed interest was sold off.
  • Treasuries detracted -0.5 per cent while corporate fixed interest was flat.
  • The yield on the Interest Income Portfolio sits at 2.55 per cent.

Property and Infrastructure

  • The portfolio contracted -2.67 per cent after fees in January as the bond-proxy trade got caught up with the decline in fixed interest.
  • All bar APA Group detracted from performance. The biggest detractors were domestic property detracting -1.18 per cent, international infrastructure detracted -0.42 per cent and SYD detracting -0.54 per cent.
  • The yield on the Property and Infrastructure Portfolio sits at 3.91 per cent.

 

For more information on our Diversified Portfolios, click here.

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Evan Lucas
Evan Lucas
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