Clients may notice we trimmed their BHP holding in late April. This was after purchasing additional shares in early to mid-March.
This principally reflects:
- The market – Stock prices have shifted quickly, as volatility has been elevated over the last few months. BHP’s share price has traded between a level of $25 (at its mid-March low) and $32 in late April – a difference of almost 30%. Over the purchase and subsequent sale period, BHP return 10% and outperformed by the market by almost 20% - it was an incredibly strong performer. We sold BHP in order to purchase shares in companies that have not performed as strongly (and therefore are cheaper - have higher potential returns). This is part of portfolio management (below).
- Portfolio management - We rebalance portfolios as individual stock prices change. This reflects how cheap companies are (relative to our valuation) but also how cheap they are relative to the broader market. This is in addition to how they interact with other companies in the portfolio (their size and contribution to risk). As companies’ approach what we see they are worth, we may trim their size or reduce their weight. Why? Their size increases in the portfolio and so to the level of risk they contribute. Emeco was an example of this in the past – changes in its share price had a large impact on the overall value of portfolio.
Furthermore, the return on offer (price vs what they are worth) becomes lower relative to returns available from other stocks.
Conversely, as companies become cheaper, we may buy more. They become a smaller part of the portfolio at the same time as the return on offer becomes higher relative to other stocks (relative to the risk they contribute to the portfolio).
The banks (NAB and ANZ) (neutral impact) announced their results for the first half of FY-20.
As expected, their results were muted.
This mostly reflected an increase in provisions - in anticipation of potential future bad and doubtful debts. These provisions impact accounting profits and reflect a bank’s assessment of the bad and doubtful debts they may incur in the future. These were more pronounced in the half, given the uncertainty that surrounds the economy. However, both banks had already been discounted based on this.
In being conservative, NAB raised capital to strengthen its regulatory capital buffer. We participated on clients’ behalf. NAB also reduced its dividend, however at current prices this still implies an annual dividend yield of around 4%. ANZ has deferred a decision on its dividend, pending further clarity around economic conditions.
Newcrest Mining (neutral impact)announced a capital raising. The raising is to fund future growth - it has a strong balance sheet. The capital raised will be used to increase its exposure to a mine that it is part owner in. We participated in the raise on clients’ behalf.
Woolworths (neutral impact)announced its sales for the third quarter. As expected, sales in Australian Food (supermarkets) rose significantly due to COVID-19 related buying (+10% on a comparable period basis). Furthermore, sales performance of Big W and in Liquor (ex-Hotels) were better than expected.
Longer lasting effects from COVID-19 remain to be seen. The period has accelerated Woolworths’ home delivery and logistic capabilities, with home delivery capacity doubling over the period. It is, however, too early to tell if there will be a longer-lasting change in preferences as a result of COVID-19 (such as a more permanent shift to online sales or prefer to eat at home vs consume takeaway food).