Model Portfolio Update

What a month for markets. As you can see from the table above, the entire economy has been but, but with energy and property the most heavily impacted. Energy for obvious reasons, being the huge supply increase from the Saudi’s and Russian’s as they seek to destroy the US shale industry once and for all. On the other hand, Australian property dropped nearly 40% across the board as tenants like Solomon Lew simply decided they would no longer be paying rent. Outside the property owners, consumer discretionary, leisure, travel and technology companies were worst hit, with a stream of capital raisings expected as many companies simply run out of cash to operate. The last few weeks of March alone saw some 50 companies remove guidance.

As usual, the highlights came from gold bullion and key actively managed fund holdings like Munro. It is in times like these that the support of professionals, whether in the form of advisers or experienced portfolio managers truly comes to the fore. Consider for instance, Invesco, a global fund manager, who have that many analysts they are able to cover every stock in the ASX to determine COVID-19’s impact in just a few weeks.

Times like this offer incredible opportunities for long-term investors. For those patient enough to retain capital in lower risk assets, you are afforded an incredible opportunity to purchase great assets are bargain basement prices. The recovery is likely to be a drawn out affair, but disciplined investment and averaging into markets will no doubt pay off. In our work we are seeing two camps on the eventual recovery. The traditional media and pessimists who are talking about long-term depression era events and the overly optimistic fund managers (many of whom underperformed) suggesting this will all turnaround quickly. We believe it lies somewhere in the middle. What is clear though, given the c10% daily rise in markets that has occurred on several occasions, is that timing the bottom is impossible and missing out on just a few days of trading can mean substantially lower returns.

For this reason, our approach in the coming weeks and months will be threefold. Firstly, we will be stress testing the debt and cash flow position of any consumer focused companies, which fortunately we have few of. Secondly, we will be seeking to add high quality growth businesses (and asset classes) that have historically been far too expensive to justify purchasing. And finally, we will be transitioning from the successful Targeted Return Bucket and ensuring we have sufficient cash to fund expected capital raisings, a strategy adopted by the great Warren Buffet.

Woolworths: After shooting the lights out during reporting season, delivering 6% sales growth and a 33% increase in earnings to $1.89bn, Woolies was a key beneficiary of the unfortunate hoarding that precluding the COVID-19 lockdowns. The company reached an all-time high during the quarter before retreating as volatility ensued but has managed to hold its value.  Management have placed the demerger of the liquor and hotels group on hold, as they queried the ability to receive a fair price in a disrupted market. On the positive side, BIG W improved earnings by 155% in 2019, and is likely to have seen greater benefits in the first quarter, whilst grocery margins are nearing 29%, well ahead of Coles Group. The company delivered a 2.2% increase in the dividend and announced they would be employing thousands more people to cover the surge in demand.

ICAM Duxton Port Infrastructure Trust: The TSV arrived in Lucky Bay in March, after an extended period at Australian Customs and has been put to work immediately. The Port itself achieved practical completion on 10 February. Unfortunately, the wheat crop on the Eyre Peninsula was one of the worst in over a decade, that being said Lucky Bay received 38% of wheat in the catchment area from 190 growers, totalling 141k tonnes, which is being processed now.  The poor crop has resulted in a cash flow shortage, however, short-term funding has already been negotiated with the existing lenders and the retail share offer has seen $24m in subscriptions thus far. As the asset has moved from a greenfield construction site to an operational port, KPMG has been asked to deliver a new valuation, seeing the unit price increase to $1.38. 

Munro Global Growth Fund: We have long been proponents of engaging active managers for investments in overseas sharemarkets, on the basis that their experience and flexibility can deliver better returns during period of volatility. After years of hearing the passive vs. active debate, the current bear market has once again reiterated why investors should not rely solely on low cost passive funds. The Munro Fund delivered a positive return of 8% at the same time its benchmark fell over 9%. The strategy benefitting from an exposure to the USD, shorts on a number of oil and gas companies and a short position on the entire US sharemarket. Whilst we would prefer outperformance in both good and bad markets, in our mind outperformance when markets fall is substantially more valuable.

JP Morgan Global Macro Opportunities Fund: The Global Macro Opportunities Fund was built for times like these. In 2020, the fund is up over 3% and fallen just -0.8% in March thus far. The go anywhere strategy, which means there team of hundreds of researchers can find the best investment opportunities in the world, made the decision to increase their short positions on the US sharemarket which rewarded investors by protecting their capital.

Gold bullion was far and away the strongest performing asset in portfolios, delivering excellent returns on the weakness of the AUD. The Investment Committee originally recommended gold bullion in AUD, rather than USD, on the basis it would provide a natural hedge against a weaker global or Chinese economy; which in this case has come to fruition; the AUD fell to a multi-decade low of $0.55c. In USD terms the gold price has not benefitted as heavily, having been impacted by the broad sell of in risk assets that occurred in mid-March as investors sought liquidity amid the beginning of the COVID outbreak. This unexpected fall has quickly been recovered and gold remains a core part of portfolios as cash rates near zero and central bank policy increases the threat of inflation in the coming years.

Invesco Global Targeted Returns Fund: Invesco delivered on its most important objective, being to protect your capital when sharemarkets collapse. The fund finished the quarterly around where it started, a testament to the diversification and risk management focus the fund was included in your portfolio to provide. As the COVID-19 pandemic was announced management took a more bearish view on their central economic outlook, resulting in higher allocations to bond markets. The key ideas driving outperformance in 2020 were the ‘Yield Compression’ position, which benefitted from the reinstatement and effective doubling down on quantitative easing around the world, and a long position in the Japanese Yen vs. the Korean Won as investors once again flocked to safe haven assets. Finally, the Commodity Short position was a key beneficiary of the breakdown in OPEC supply negotiations.