Quarterly Portfolio Update - March 2020
The Blended Australian Equity Portfolio finished the March quarter down 17.94% compared to the ASX Accumulation Index down 23.10%. Positive attribution for the Blended Australian Equity Portfolio was driven by CSL Limited (CSL), Coles Group (COL), and Spark NZ (SPK). Whereas, Macquarie Group (MQG), Caltex (CTX), and BHP Group (BHP) weighed negatively on attribution.
It was merely six weeks ago that equity markets were reaching new highs, but just as the market was reaching for its penultimate note the stage unforeseeably collapsed. With equity markets experiencing the fastest bear market (a 20% decline) in history.
The Australian equity market has endured 22 bear markets over the last hundred years. Historically bear markets can be classified into 3 categories: cyclical (1987 crash); structural (Global financial crisis 2008/09); and event-based (current). Event-driven bear markets tend to fall at quicker speed due to an exogenous shock (i.e. coronavirus) but recover faster as the cause of shock subsides.
The coronavirus pandemic has unleashed a fearsome maelstrom that has led to the sudden stopping of the world economy. The magnitude of the decline in global gross domestic product and subsequent impact of corporate earnings in the coming quarters is expected to be unprecedented in peacetime. Markets are struggling to re-establish an even keel, as navigation of such an unforeseen seismic shock is straining the fabric of every government and institution. As custodians of our client’s capital our experience of almost 30 years highlights more than ever the critical importance of earnings quality and balance sheet strength.
In recent months, your portfolio managers had built up more dependable companies as markets reached new highs as value was becoming more difficult to find and earnings growth was already showing signs of slowing. Our portfolios were tilted to overweight sector positions in consumer staples, solid industrials and healthcare. The portfolios also held sector exposures to some cyclicals and a modest position in banks. Clearly, the sudden shock experienced by the coronavirus illustrated that our defences needed further fortification, so within days of the outbreak in Australia we either sold or heavily down weighted our exposure to cyclically exposed sectors. The only exception has been holding our position in BHP Group which remains well placed to a beneficiary of the nascent recovery taking place in China.
In a further move to bolster our portfolio defences we have added to the telecommunications sectors primarily through exposures in Chorus, Telstra and Spark NZ, as social distancing has promoted the use of greater data usage.
Our final defence line of insuring against a deep downturn has been holding cash levels at approximately 15 per cent. Cash, which had been out of favour, will now prove to be an asset as we wait patiently to buy quality companies at very reasonable prices.
It will take time for equity markets to find a degree of stability as the depth and duration of the pandemic is unknown. Most importantly, therefore, we need to see persistent signs of a flattening out of the global infection rate. Stabilisation of the pandemic will provide the starting point for global economies to recover.
Undoubtedly, the swiftness and magnitude of central bank and government stimulus has helped ameliorate the most urgent consequences of the downturn. As investors our goal is to hold companies that can survive the deepest economic shocks and prosper when the world finally recovers.