Portfolio update October 2021
The portfolios gave up a little bit of September’s outperformance in October. The overall portfolio positioning added value as international equities outperformed domestic and bonds fell, but the tilt to value in equities subtracted value as growth stocks recovered some ground.
Detailed performance reports will be made available on the downloads page soon, and below is a short video giving the highlights of the month.
Multi-asset market update
Risky assets again performed well in October, with international equities and property producing strong returns during the month. The Australian equity market was flat during the period, with quality and value stocks underperforming and higher growth stocks posting strong returns, and emerging market equities fell. Domestic bond markets fell as investors correctly predicted that the RBA would move to a more hawkish stance in November. International bonds also fell slightly.
The positioning of the portfolio added value, due to our overweight to international equities, alternatives and underweight to fixed income. But our tilt to value subtracted from performance overall.
Multi-asset portfolio update
The expectations for growth are strong but moderating as reopening of economies becomes a reality and further economic stimulus becomes less likely. Inflation has increased in many countries but we believe it will be transitory and interest rate rises will be modest. The high valuations in risky assets globally leave little margin of safety for investors if growth disappoints, so we remain defensively positioned and are increasing our positions in investments that offer better value.
The strong returns in investment markets mean that even with the defensive tilt our portfolios are comfortably above their strategic return targets.
Equities market update
The collapse in iron ore prices slowed over October giving materials stocks some respite from the negative sentiment that has dominated markets recently. Financials, healthcare and high growth IT stocks were the biggest contributors to market returns, with other sectors flat or slightly down.
Our portfolio gave up a little bit of last month’s outperformance, finishing slightly below the index over the month. This was driven by our sector allocation, where we are overweight energy and underweight IT, with our stocks generally outperforming their peers within their sectors.
Equities portfolio update
We continue to be negative on iron ore prices and bank lending. We are positioning the portfolio in sectors and companies that have superior quality but have not been driven to extreme valuations. This includes some defensive assets and also cyclicals where the market has not factored in high growth in future earnings.
Toward the end of the month we made some adjustments to the portfolio. We sold our position in ASX due to high valuation and overruns in the company’s CHESS replacement project. In its place we slightly increased our positions in a number of good quality stocks that are trading at depressed multiples.
Concentrated Absolute Return portfolio update
October was another good month for the portfolio, with the portfolio generating a modest positive return while the broader equity market fell.
The portfolio is focussed on companies that are trading at depressed valuations following COVID and which should do well when the equity market recognises that earnings have normalised.
The portfolio’s largest sector allocation is to industrials in a series of discounted companies that will do well if their earnings return to pre-COVID levels. Within the materials sector we have positions in select companies outside of iron ore and coal, whose prices we feel are unsustainable. The portfolio’s largest positions are in TPG and Ramsay Health Care, both of which are quality companies that are trading at deep discounts to historical valuations.
The portfolio has no holdings in the Australian banks, which are trading on elevated multiples of high earnings stoked by an unsustainable growth in mortgage lending, and no direct exposure to iron ore.
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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.
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