Before I launch into this week’s discussion of the week that was, I wanted to use this platform to address PRIME’s Separately Managed Accounts – what they are, how they work, how they perform and how they might prove worthy of your consideration in the future.
For the past three years, PRIME has operated three separately managed accounts (SMA’s) – two Australian equity portfolios & one defensive-income portfolio (focused on cash, fixed & variable income securities).
In PRIME’s instance, a separately managed account is effectively a master-portfolio, professionally managed by the 4-man PRIME investment committee, not unlike a managed fund.
The big difference between an SMA and managed fund is that investors retain beneficial ownership of all the portfolio holdings in their name, an individual cost base and get the benefit of complete transparency in that they can see each individual holding and portfolio change as it happens.
In laymen’s terms, it’s your portfolio but we are the puppeteer and make the changes on your behalf.
As a guide, the portfolios have understandably reflected the recommendations you have received from us this past 2+ years – Magellan Financial (MFG), RESMED (RMD), Cochlear (COH), Computershare (CPU), Adelaide Brighton (ABC), IOOF (IFL) and latterly Oil Search (OSH) & Insurance Australia Group (IAG).
The portfolios all have explicit mandates to ensure we, PRIME, as the SMA portfolio-managers, stick to our knitting. The SMA’s are held in custody and attract ZERO BROKERAGE.
Below I have included the performance of our two Australian Equity managed accounts, but I would specifically draw attention to the PRIME Australian Equity Growth portfolio since this account has a broader mandate for investment, and is the portfolio on which we can be most accurately judged against the benchmark and our peers.
Past performance cannot be relied upon for the future, but we do think we have demonstrated our process has merit.
For those of you who find the market a chore, or are too busy to deal with the day-to-day management of positions, or lastly and most constructively, feel like we can do a good job in our management, do please raise this as a point of discussion with your advisor or me directly – Jon Bayes (03) 8825 4744
So when I wrote the note you all received on Tuesday morning, the ASX200 was over 5% lower than where we are now.
The ASX200 is actually up this week. Would you believe it?
But this isn’t remotely the most remarkable aspect of the week. After China’s sharemarket plunged 9%+ on Monday, the US Dow Jones Index opened trading Monday night down 6.5% and the NASDAQ Composite was down 11%.
That is insane.
As worthy of a head-scratch, is the subsequent rally during the week, meaning the NASDAQ and Dow Jones Index are up 13% and 11% from their low points.
THE CAUSE OF RECENT MARKET VOLATILITY
The volatility we have seen in markets this week is a truly terrifying thing, and has not been seen in quite some time.
Sadly, it is my belief that there will be increasing bouts of volatility in the coming months as we move closer towards a US interest-rate increase and as corporate profit margins adjust to the slower demand emanating from China.
Please understand that volatility doesn’t have to mean shares end up lower – as this week demonstrates. What it does mean though, is that investors need to be nimble, resilient, willing to ignore the noise and lastly, and most poignantly given this week’s moves, able to look past the immediate and to see the wood for the trees.
Whilst concerns for Chinese growth and the implications for the rest of us are cited as the triggers for the initial heavy selling, the real reason markets behaved as they did is because there is actually too much money invested on a short term basis.
There, I said it.
What I am referring to mostly, is the enormity of financial positioning in assets beyond cash.
That’s about as simple as I can make it.
Because cash offers such a minimal return (its negative in Europe as we have discussed, and only 0.1% in the US), investors have aggressively chased returns in all manner of asset classes in the hope of making better returns – and for 6 years, give or take a few moments, it has worked.
The trouble investors now find themselves facing however, is that US interest rates are set to rise, alongside a reduction in the Federal Reserve balance sheet (which has facilitated this easy money).
The punch-bowl is about to get taken from the party, and it has consequences.
Moreover, with China slowing more dramatically, we arguably have two changes to the status quo of recent years.
What this environment is likely to require is more patience and less greed. The returns on offer are lessening and require greater judgement – US share prices are double what they were only 4-years ago, Australian 10-year bond yields are UNDER term deposit rates, and property yields have compressed materially.
Effectively, where investors have eschewed cash for its lack of return, increasingly investors should remind themselves that cash (absent inflation) doesn’t lose its value.
What I am really trying to say here is no different to what I say most weeks – make sure we box clever. By this I mean, don’t get carried away with assets, don’t fall in love with them because they won’t love you back, be sure to sell when valuation is high, and most of all ensure that the returns on offer are commensurate with the risk assumed.
And there end-eth the lesson!
AUSTRALIAN SHARE ACTION THIS WEEK
The reality is such that during weeks of volatility like this, the single stock moves and stories really count for very little. All the same, there is some semblance of normality creeping back in today.
Miners led the charge this week, rising 3%. The move to cut Chinese interest rates was seen as being mildly stimulatory for Chinese economic demand, and hence a positive for the likes of Rio Tinto (RIO) & BHP (BHP).
The BHP profit results were released and were indifferent. Like RIO, the big feature was a dramatic reduction in capital-expenditures and a continued focus on cost reduction. Nothing new here.
The mining stocks are fair value, perhaps a touch cheap here (as we have said a lot of late), but still not quite compelling enough for me/us to pull the pin.
Oil stocks continued their ridiculous volatility, and actually had an up-week in large part due to today’s gains.
The 10% jump in crude oil prices on Thursday night was the largest rise in 6 years and helped relieve some selling pressure. As to did the report in today’s Australian Financial Review suggesting that Woodside (WPL) could be interested in either bidding for Oil Search (OSH) or in acquiring the 13.5% PNGLNG stake from SANTOS (STO).
We think any activity by WPL would be timely and well regarded by investors, and it is our belief that WPL are genuinely interested in acquiring an interest in the PNGLNG project operated by Exxon Mobil (XOM) with Oil Search as significant minority partner. We think the SANTOS stake is the most likely means for them to do this.
IOOF (IFL) reported their profit figures this week and we were encouraged to see them beat expectation across the board. Furthermore we were reservedly happy to see the report from PwC into the groups corporate governance show few glaring inadequacies.
Woolworths (WOW) were another to announce their profit figures, and again, there was little surprise. The company had already pre-guided the market. Both the groups General Merchandise and Food & Liquor divisions continue to go backwards in like-for-like sales terms, and this is the major concern precluding us from being more optimistic on WOW.
The appointment of Gordon Cairns as the new WOW Chairman is a step in the right direction, but one of many that still need to be taken, most pressing being the appointment of a new Chief Executive.
Until the new CEO is appointed and a new pricing strategy in food particularly is implemented to bring back the customer base lost to Coles & Aldi, we will sit on the sidelines for WOW.
In the property sector, two eminent executives were both published in the AFR commenting that they felt ‘commercial property had peaked’. Both the CEO’s of Cromwell Property Group (CMW) and 360 Capital Industrial Fund (TIX) warned that prices had gotten peaky.
These comments are interesting for the Australian REIT sector particularly since the sector currently trades at a very heft premium to its net asset value (and offers an accordingly indifferent yield). Moreover, the Australian REIT sector has been a major outperformer for the last 2 years and is ripe for profit taking.
For now I will leave it at that.
Have a great weekend, and do please call us for anything we can help with.
Key Dates: Australian Companies
Mon 31st Aug
Ex-dividend: Worley Parsons (WOR)
Tues 1st Sept
Earnings: BHP (BHP)
Ex-dividend: Beta-shares High Interest ETF (AAA)
Wed 2nd Sept
Ex-dividend: ASX (ASX), Treasury Wine (TWE), Spotless (SPO)
Thu 3rd Sept
Ex-dividend: Adelaide Brighton (ABC), Fortescue (FMG)
Fri 4th Sept
Ex-dividend: Oil Search (OSH), CALTEX (CTX)
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.