Portfolio update November 2021

November was a very mixed month for markets worldwide, but unusually the dispersion between growth and value equities was more pronounced than the difference between asset classes.

In general the positioning of the portfolios was neutral or positive, but the tilt to value in investment selection dominated, leading our portfolios to lag benchmarks. But given the extreme valuation levels that many growth stocks have reached we remain comfortable that our focus on value is correct: the stocks in our portfolio need to provide much less earnings growth over the long term to deliver a good return to investors than the richly valued growth stocks.

The video below summarises our performance and positioning for the month, with commentary below.

November 2021

Multi-asset market update

Markets were mixed in November, with international equities up strongly, Australian equities falling, Australian property rising while international property fell, and bonds posting good returns. But the biggest dispersions were within equities, where high priced growth stocks continued to widen the gap with more cyclical value stocks. This gap was highly pronounced in the Australian equity market where the gap between the quality and value index benchmarks was over 9%.

Our defensive positioning was neutral for performance in this environment, but the tilt in equities away from high priced sectors and markets meant the portfolio lagged benchmarks as growth fears rose and expectations of near term interest rate rises abated.  

Multi-asset portfolio update

The growth outlook remains robust, but the increasing likelihood of higher interest rates as central banks seek to end extraordinarily accommodative interest rate policies and the high premium attached to high quality growth assets means we remain underweight equities and fixed interest, and favour value equities and less expensive sectors over high priced technology stocks. 

The strong returns in investment markets mean that even with the defensive tilt our portfolio is comfortably above its strategic return target.

Equities market update

There was high dispersion in the Australian equity market in November, although the market fell overall. Materials stocks continued to perform well as iron ore prices recovered and there was a surge in the price of lithium related names. Financials fell but many technology companies that are unrelated to finance posted double digit returns. And energy stocks were down as the oil price fell on fears that the new COVID variant will lead to lockdowns and again suppress oil demand.

Our portfolio finished under the index for the month. Our sector allocation added value, particularly our underweight to financials, but within sectors we are positioned in more reasonably priced stocks which lagged the market as high growth stocks were pushed to higher valuations.

Equities portfolio update

We continue to be negative on the outlook for bank lending as interest rates are likely to rise as the RBA moves to end its extraordinarily accommodative interest rate positions. We also favour low cost producers of commodities that offer good value.

Given the extreme value dispersion in the market we have lower exposures to high quality growth companies than the historical average of our strategy. While these remain excellent companies, the current high valuations will make it difficult for them to deliver acceptable returns to shareholders over the long term.

Concentrated Absolute Return portfolio update

The portfolio gave up some of its recent gains in November, as the market shunned stocks with reasonable valuations and pushed more expensive stocks higher. 

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.

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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