Investment Matters

Seeing through sectors

The Australian share market (All Ordinaries Accumulation) finished April 9% higher. Your Australian Equities portfolio finished about 14% higher – outperforming by 5% (before fees and taxes).

The market continued its recovery this week, posting a gain of 1.9%.  However, this single number tells us little about how the individual companies within the index performed. 

The COVID-19 sell-off has accelerated our rebalancing of your portfolio.   Part of this has been on an individual stock level – through adding larger, more liquid companies, with more exposure to broader movements in the market.

Importantly, the portfolio’s sector diversification has also been improved.

Seeing the world through sectors, we can get a better understanding of the market’s composition, a portfolio’s underlying exposure to the economy and performance.

On a sector basis, we look at how COVID-19 has impacted the market and how we have repositioned your portfolio during this period.

Taking a sector view:

There are many broad ways in which the market can be “sliced and diced” to analyse its performance.

One broad, but informative way is on a sector basis.

Under the Global Industry Classification Standard (or its abbreviation GICS) the market can be broken up into 11 sectors:

  • Consumer Discretionary
  • Consumer Staples
  • Energy
  • Financials
  • Health Care
  • Industrials
  • Information Technology
  • Materials
  • Real Estate
  • Telecommunication Services
  • Utilities

For more on these definitions please see a breakdown on the ASX website here 

By looking at performance by sector, we can better understand performance and exposure on a macro-economic level.

COVID 19 sell-off: A sector view

A sector view also provides us with another way of making sense of the COVID-19 sell-off.

As we can see below, companies hardest hit were in the Real Estate, Financials, Consumer Discretionary, Information Technology and Energy sectors.

Sector Performance Week 15

Some of these should be no surprise, as these sectors have been the most impacted by lockdown measures:

  • Real Estate – rent abatements and concessions, the prospect of lower occupancy and other impacts to rents in the future.
  • Financials – fear around the vulnerability of the financial system overall, a slowdown in the economy as well as the potential for bad debts.
  • Consumer Discretionary – fewer purchases of big-ticket items such as cars, household goods as well as clothing, apparel and leisure.
  • Energy – reduced demand for fuel and other refined products due to limited mobility (petrol, diesel, jet fuel etc).
  • Information Technology - had become too expensive.
Your portfolio: a sector view

How were we positioned leading into the sell-off?

Entering the COVID-19 crisis, your portfolio was underweight four of the five most impacted sectors.

As we highlighted in our communications, we saw these sectors as particularly vulnerable, given valuations:

  • Financials (or banks) - were trading at incredibly high prices given their prospects.
  • Consumer discretionary stocks - were pre-emptively pricing in a housing-led consumption boom.
  • Technology stocks - had broadly become detached from any sense of value.
  • Real Estate & Utilities - valuations were underpinned by the assumption that “nothing will change” – particularly, that interest rates would stay lower for longer.

Importantly, a large proportion of the portfolio was also held in cash (approximately 26%). Cash reduced the overall risk of the portfolio and some of the need to position in more defensive sectors such as Health Care and Consumer Staples. It also provided us with the opportunity to buy as prices started to fall.

im238

We did, however, hold and continue to hold an above-market exposure to the Energy sector.

The Energy sector was heavily impacted by the drop in oil prices we saw in March - a result of the ongoing OPEC dispute and a sudden fall in demand (COVID-19 related).

 
Your portfolio: rebalancing on a sector basis

As the market became cheaper, we took the opportunity to purchase companies in sectors that were previously too expensive and were heavily sold off.

While not all investments were timed perfectly (nor can be), companies were purchased well below what we see they are worth.

This included increasing our exposure to the Information Technology (Appen, Pushpay), Financial (ANZ, NAB, Platinum) and Consumer Discretionary (Lovisa, Webjet) sectors.

Furthermore, we increased our Materials exposure. This partly reflects our view that there will be a stronger recovery in economic activity than expected in the short to medium term (an environment that is “reflationary”) – something we will touch on in later weeks.

For those with a Property sub-portfolio allocation, we also added several Real Estate securities.

The result is a portfolio that is more balanced on a sector level while leveraged to sectors we see as recovering strongly in the near term.

 im438

Pleasingly, many of these sectors and companies within them have rebounded strongly from their lows – particularly Information Technology and Consumer Discretionary.

IM538

Performance during the recovery has been strong, however, not all companies or sectors have rallied to the same degree.

 

Conclusion

We can gain further insight into the market by viewing performance on a sector level.

During the COVID-19 sell-off, we took the opportunity to rebalance your portfolio on both an individual company and sector basis.

We have added to companies in sectors that were previously too expensive, and sectors that simply became far too cheap.

While performance during the recovery has been strong, we see that the portfolio still has a significant amount of performance potential.