As we find ourselves at the end of November, who would have expected the performance that we have seen in financial markets over recent months?
Our local equity market is up roughly around about 13%, month to date. Meanwhile, global markets are up a similar amount, with the S&P 500 up close to 12.5%.
When we consider the performance of financial markets through the course of 2020 – particularly equity markets – this leads us back to reflecting on how we are positioning our portfolios, and how we have been engaged with our clients in regards to those portfolio positions.
The below charts highlight the work we’ve done in this area, and why we believe that when it comes to managing and positioning a portfolio, it’s critical to focus on the opportunities that present themselves. Both charts reflect this in the context of our balanced investment portfolio, and the asset allocation tilts we’ve made in terms of growth versus defensive assets.
This chart highlights the over- and underweight positions we’ve held in growth and defensive assets, relative to the neutral or strategic asset allocation framework.
In the months leading into 2020, we certainly did have a growth bias across our portfolio. We were predominantly overweight equities, and underweight fixed income.
However, we made some significant changes as a result of COVID-19 as we progressed through the first quarter. At the end of March, the US Federal Reserve began to buy treasuries, corporate debt and ETFs – and we anticipated that this was going to put a floor under financial markets. With the fiscal responses that we saw from governments around the world – including Australia – as well as further interest rate easing by central banks around the world, we felt that this would benefit financial assets – and growth assets particularly, compared to defensive assets like bonds and treasuries.
While we didn’t know the timing, we felt confident that this was going to play out through the course of the year, ultimately leading to a revaluation of equity assets.
As you can see, we’ve been selectively adding to our growth assets through the course of 2020. By adding to these – not always confined to one asset class – through the course of this year, we’ve been able to continually add value to our portfolios. Most importantly, we have also been able to earn back that the value lost during the downturns of February and March.
The chart below demonstrates this further by highlighting the value-add that we can generate from an active asset allocation – that active overlay that we bring to our portfolios. We have added just a little over 3.5% throughout the course of our journey of managing these portfolios, thanks to active asset allocation decisioning – a dynamic approach. Following the worst of the financial market underperformance that we saw in March, we have added a little over 1.3%.
The ability to reposition the portfolios on a continual basis – and do it in a timely manner – has allowed us to live up above performance and get us back to where we were before the crisis hit.
In addition to this, we believe that it’s always important to keep one eye focused on the future. Despite the poor financial market performance and economic lockdown that we saw through that first quarter, governments, central banks and communities have responded. Clearly, we’re not ‘out of the woods’ when it comes to COVID-19, and 2021 is going to continue to be a very challenging year. However, with the information that we’ve got available to us today, we think the outlook for growth assets is continuing to look positive – and we remain constructive on incorporating growth assets relative to defensive assets within our portfolios.
Of course, it’s important to note that we don’t completely flip the portfolios and get out of defensive assets such as bonds and treasuries. These assets do perform an important role in providing a buffer. We believe that the strategy that we have going into 2021 and the ability for us to be able to manage that strategy on an ongoing basis has really added value to our portfolios and ultimately, to our clients.
As always, we look forward to speaking with you. If you have any queries or concerns about your portfolio, please feel free to reach out to your advisor.
Finally, I’ll be holding a live webinar on Tuesday 15 December with my colleague, Dominic Mlcek, to provide an overview of how we’ve managed 2020 from a portfolio standpoint. We’ll also share some of our thoughts on the outlook for 2021.
We hope you can join us for what promises to be an interactive session. More information – including how to register – will be available in the coming days.
Piers Bolger is Chief Investment Officer at Viridian Advisory
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