May portfolio update

Markets were strong in May, with all major asset classes rising. See below for a video update, and full commentary below that.

Video update

Commentary

Multi-asset market update

Over May risky assets continued to rise and value equities again outperformed the broader market. Unlike prior months, quality equities indices also slightly outperformed the broader benchmark. The returns were more modest than prior months. Fixed interest also posted modest returns, as no new inflation fears disturbed markets. The only sub-asset class that posted a negative return was infrastructure.

The defensive positioning of the portfolios subtracted value, but manager selection delivered superior returns in total, leading the portfolios to deliver higher returns than their composite benchmarks. The main drivers of outperformance were Orbis and Clearbridge RARE Infrastructure. The diversified alternatives funds also did well, delivering returns on par with equity managers.

Diversified portfolio update

The expectations for growth are strong, given the roll out of vaccines and unprecedented economic stimulus. But risks remain: there is the risk of higher inflation and expectations of higher interest rates, and COVID is far from contained in all countries. The high valuations in risky assets globally leave little margin of safety for investors if growth disappoints, so we remain defensively positioned for now. 

We have continued to reduce our equity exposures as markets have marched higher, allocating the proceeds to cash. We are also replacing our core international equities ETFs exposure as the iShares funds we have been using are converting to an ESG themed index that is biased toward the US and technology stocks. Given that these are expensive parts of the market, we have changed to the equivalent Vanguard funds and reduced our exposure to the US by introducing a Europe ETF.

Equities market update

Over May the Australian equity market was driven by financials, with the sector up strongly. Other cyclicals in materials and consumer discretionary sectors also continued to climb, but in the growth sectors there was a reversal of trends with IT stocks giving up some of their recent gains falling and healthcare rising.

Given our more defensive positioning, the portfolio lagged the market. But within sectors our stocks generally outperformed their peers, led by IRESS, QBE, Spark Infrastructure and CBA as the market recognised the value in these companies.

At the start of June, RMD, ALU and the energy stocks all rerated, leading to superior portfolio performance over that period. We have taken profits in ALU and RMD, reinvesting the proceeds in companies with less demanding valuations.

Equities portfolio commentary

We see the surge in iron ore prices and bank lending as unsustainable and have positioned the portfolio in more defensive assets and cyclicals that stand to benefit from the return to normal post-COVID but have reasonable valuations. we prefer to remain invested in a portfolio of companies whose businesses are less at risk if economic growth is weaker than hoped and those whose valuations are low enough that even a return to average conditions over the long term will provide a reasonable return. We believe this is a more prudent way of investing than attempting to ride the trend past reasonable valuations in the hope that we can jump off before it turns.

In early May we removed the last of our holdings in Sonic Healthcare and reduced our positions in Spark Infrastructure and Spark New Zealand, both on valuation grounds. The capital was reinvested in TPG, which had fallen following David Teoh’s retirement but maintained a positive outlook at its AGM, and ADBRI which should be supported by increased construction activity.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

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