Investment Matters

Good outcome, bad day

Last week represented what was a torrid week for the market. On Tuesday (3/12/19) and Wednesday (3/12/19) we saw two of the worst days in the year for the All Ordinaries Index, as China vowed to retaliate against pro-democratic legislature passed in the US with respect to Hong Kong.

With both days came a sea of red and some buying opportunities.

However, what also came with them was an opportunity to assess the construction of the Australian Equities Portfolio, particularly how it performs in periods of market stress and downturns.

The results can be seen below.

IM graph

On days where there has been a significant sell off, the Australian Equities Portfolio maintained its value remarkably well, relative to the market.  This is not simply a function of our cash holdings, the stocks themselves are better value, have less momentum, and are better backed by cash flows not blue sky.

The same can be observed on days where a similar sell offs were experienced (21/11/19 and 20/11/19).

This provided some confirmation to us that the defensive aspects of the portfolio are performing.

IM graph2

Of particular note was the impact our cash holding had on these days. On the worst of these days (03/12/19), our cash holding was responsible for a significant (approximately 40%) of our out-performance.

Last Tuesday – a true “risk off” event

What was unique about last Tuesday (3/12/19) was that selling was ubiquitous across all asset classes: including bonds, property, shares and (even) gold.

The day was interesting on two fronts, the first was that it provided an abrupt sign of market capitulation. The second is that it provided a data point as to how the portfolio behaves during a “risk-off” event.

As can be seen in the chart above, the portfolio’s outperformed the market by 1.72%.

IM grpah3

This highlights the importance of cash as a true diversifier, particularly during extreme risk off events or downturns.

During the period where selling is ubiquitous and all asset classes fall at the same time, cash provides guaranteed diversification and a valuable source of liquidity.

Viewed as an option to invest, cash also becomes most valuable during these times.

The days where there is high volatility and weak performance will therefore also the days we are looking to buy stocks that are “on-sale”.