Portfolio Update January 2020: Records from all corners

Putting the markets to one side just for a second, January will unfortunately be remembered for the horrible wildfire season that ravaged the country. It will be a record wildfire season even with the now amazing rainfall the east coast is getting. Over 6.4 million hectares has been burnt and we are still counting, no other season will have seen this amount of environmental damage with the cost from this season also likely to be a record.

We need to highlight this for a very important reason, the kind of season we are seeing now will impact a nation’s thinking. It will impact policy. It will impact private and public investment. And it will impact investment markets long term. This change in thinking is already starting.

January also saw the announcement by BlackRock, the world’s largest investment manager, that it would double its into investment in Environment, Social and Governance (ESG) investments.

Then less than a week later, the Bank of International Settlements (BIS) which is basically the bank for Central Banks, released a major paper stating that climate change will be a ‘Green Swan’ (as in a Blank Swan economic event) event in the coming decades.

From an Australian perspective the biggest take out was its statement that our domestic central bank may, in the future, have to bail out a failing fossil fuel and energy sector along with the regions these industries support – stating that if the economy does not evolve to mitigate the economic risks, the bank might have to step in. So, for a market such as the ASX 200 which has a 15% weighting to mining and an 8% weighting to energy, there will come a time that this possible Green Swan event will impact returns.

Finally, January introduced the world to the coronavirus. It has officially overtaken SARS as the deadliest pandemic virus of the past 40 years and its really just the beginning. The impact economically is unknown, although there has been several that have tried to quantify the current and future impact. We believe that is impossible due to the ‘management’ of its spread by Chinese authorities. However, there is no denying it will have a global economic impact, it’s the size of that impact that can’t be quantified. Coronavirus will be a rolling issue in 2020 – there will be short bursts of ‘negative’ news that might push markets around on an intraday or intraweek level, but not much more than this.

Yet, through all this ‘record’ doom, markets were making record highs – 6 of the 23 MSCI developed markets made new all-time record highs including the ASX 200 in January. The US continues its monumental bull run, now uninterrupted for a record 12^th year, continuing its run as the longest and largest bull market in US history when it passed November 2018.

An interesting statistic about its strength and the ‘belief’ that the bull run in the US will continue, was only 80 CEOs of S&P 500 companies reduced their holdings in their respective companies in 2019. Compare this with the well over half of the CEOs of S&P 500 companies that added to their positions, the majority of which happened in the second half of the calendar year when markets took off again.

January 2020 was also the best January of the new millennium for the ASX 200 and the second-best January the ASX 200 has ever had – you have to go back to January 1994 to see January 2020 beaten.

The records from January whether it’s a market record or a record event, bring us back to several of our core beliefs here at InvestSMART.

These being:

• Time ‘in’ the market will always outperform time ‘out’ of the market
• ‘Timing’ the market is impossible and trying to do so will be detrimental to your overall long-term returns.

With our strongest belief being:

• Know your investment goal(s) and thus, by extension, know your investment time horizon.

January perfectly highlights that risks and records can go hand-in-hand. As investors we need to ignore all this, concentrate on our long-term investment time horizon, regularly top up our investments and reinvest dividends where possible. This will insure a better average price and will allow you to reach your investment goal as your overall investment pool benefits from larger and larger investment balances that then compounds with market yields and capital growth.

Diversified Portfolios

 Individual capital performance of the securities held by the Diversified Portfolios, with weightings varying depending on risk appetite.

Conservative

• Expanded 2.66 per cent after fees in January as equities reached new records
• Domestic equities attributed 0.64 per cent, International Equities 0.70 per cent, fixed interest attributed 0.62 per cent after contracting in December
• All facets of the portfolio contributed to performance.

Balanced

• Expanded 3.52 per cent after fees in January as equities reached new records
• Domestic equities attributed 1.19 per cent, International Equities 1.21 per cent, fixed interest attributed 0.55 per cent after contracting in December
• All facets of the portfolio contributed to performance.

Growth

• Expanded 4.11 per cent after fees in January as equities reached new records
• Domestic equities attributed 1.47 per cent while International Equities attributed 1.74 per cent, fixed interest attributed 0.31 per cent after contracting in December
• All facets of the portfolio contributed to performance.

High Growth

• Expanded 4.78 per cent after fees in January as equities reached new records
• Domestic equities attributed 1.92 per cent while International Equities attributed 2.44 per cent, Property attributed 0.25 per cent
• All facets of the portfolio contributed to performance.

Satellite Portfolios

International Equities

• Added 4.60 per cent after fees in January on the record prints in US and European indices
• S&P 500 (IVV) attributed 2.28 per cent while the global holding VGS attributed 2.30 per cent
• All facets of the portfolio contributed to the portfolio

Interest Income

• Expanded 1.75 per cent after fees in January reversing December’s losses
• Treasuries attributed 1.66 per cent, corporate fixed interest attributed 0.12 per cent while floating rate notes were flat.
• All facets of the portfolio contributed to performance in January

Property and Infrastructure

• Added 1.18 per cent after fees in January as domestic property and infrastructure rallied on bond-proxy set ups
• Domestic property attributed 1.47 per cent, International Property attributed 1.59 per cent, TCL attributed 0.54 per cent while SYD and AGL contracted 0.15 per cent 0.09 per cent respectively.

Hybrid Income Portfolio
Commentary by Portfolio Manager Alastair Davidson

• The total portfolio return was 0.47% for the month including franking credits

• The total portfolio return was 1.03% and 4.73% for the quarter and 12-month period. Since inception the total portfolio return is 4.54% including franking credits, which is 0.09% over its return objective of the RBA Cash rate plus 3%.

• The outlook is for further cuts in the RBA Cash rate in April or May. Low cash and bond yields continuing to drive investor demand for higher yielding securities and asset classes.

• January had no securities trading ex-distribution.

• We purchased more CBAPF and MQGPD and sold out of MBLHB in the portfolio in January.

• At 31 January, the portfolio had 6.5% allocation to cash. The manager may invest some of this in the next few months.

For more information on our Capped Fees Portfolios, click here.