22 May 2020
With recent market movements happening so fast, it’s important to keep your focus. In this article we focus on what we know, what we don’t know and how Elston SMAs are being positioned for the future.
What we do know:
- The market sell down has been significant and quick. In an historical context, it’s the 3rd biggest decline since 1988.
- Official correction has already occurred (over -20%) since the February high (at the time of writing).
- The indiscriminate selling indicates fear and uncertainty rather than fundamentals.
- Business models have not been irreparably destroyed.
- Monetary Policy – rate cuts have already occurred
- Fiscal Stimulus in place or coming globally.
- S&P/ASX 200 still above Dec 2018 levels
- Bond yields and cash rate very low, making them unattractive investment alternatives.
- Early indications are that China is heading back to work and the rate of new coronavirus infections is decreasing.
- Potentially USA case numbers will increase dramatically in absolute terms fuelling further media attention.
What we do not know:
- The extent of the decline in economic activity and the duration of any downturn. It is however a temporary setback and not a terminal blow to global growth.
- When vaccines and anti-viral drugs will be widely available. It won’t happen overnight, but it will happen.
Within all the Elston models we are overweight defensive assets relative to our strategic asset allocation bands – https://www.elston.com.au/elston-tactical-asset-allocation-q3-2019/. This places the portfolios in a position where we can potentially take advantage of mispricing opportunities because of the current pull back due to Coronavirus and oil shock concerns. At times like this, we anchor back to our investment philosophy, one of these tenets is ‘long-term focus’.
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We expect to see markets continue to whip-saw back and forth day to day, even intra-day. While this is disconcerting, we must keep our nerve and maintain our long-term approach in the face of short term market and media noise.
You can expect to see short term absolute and relative performance to be volatile, this is due to our concentrated approach to Australian Equities and no index or tracking error approach to portfolio construction, which will mean deviation from index returns. This approach has stood us in good stead as evidenced by our long-term track record.
What you will see us doing over the coming weeks and months, is what we have always done, proactively managing client portfolios. We will be remaining rational and balancing the potential risks with the opportunities. We will be remaining true to our investment philosophy:
- Long term focus.
- Genuine diversity. This is across asset classes, regions and sectors.
- After tax management. This market weakness may offer some opportunities for strategic after-tax portfolio repositioning.
- Value and growth. We will look for opportunities when assets are mispriced
- Capital preservation. While this can be difficult in times like these, our investment universe is conservative and the businesses we own are large companies (ASX 100) with strong balance sheets that can weather the storm
- Liquidity If your clients absolutely require their capital, they will be able to access it, all the assets within the portfolio offer liquidity and daily unit pricing
Focusing on the opportunities
Over the coming months we will look for opportunities not only to gradually utilise our ‘Tactical Cash’ (i.e. cash overweight), but also to critically review our sector allocations and stock positions with a view to repositioning the portfolio as we look to manage relative returns over the next 12 months and buy quality assets at a sale price.
We will be sure to communicate these changes with advisers and investors in a timely manner. Communication is important. That’s why we regularly update our Adviser Resource Centre with fact sheets with new commentary.
As co-investors in the portfolios ourselves, we are standing alongside our partners during this time and remaining accessible, ready to answer any of your questions. If you have a concern, don’t hesitate to give us a call.