February 2016 Review & Comments
Written by Tony Gray   
Wednesday, 16 March 2016 15:15

Portfolio Report – March 2016

Thus far in March there has been a significant rally in local and international share prices, so valuations have recovered to a degree. Whether the rally carries through or if in fact markets revert to down-trend is far from clear.

I spent time at a Portfolio Construction Conference in Sydney during February, with two dozen speakers from around the world providing a range of opinions within their respective fields of expertise (be it economics, emerging markets, global shares, fixed interest markets and so on). The diversity of opinion was nothing new – ranging from positive to uber bearish.

A few key take-aways were:

We are in a low growth, low return world – the best case scenario across all asset classes seemed to be lower than average returns for some time;

Nobody quite knows what the consequences of more and more central banks introducing negative interest rate policies will be (put simply, investors are being charged interest to lend money to countries running deficits);

All portfolio managers continue to run base case assumptions when structuring, but what struck me was that they all had a bear market scenario – and assets to hold/not hold in that situation. This is not normal presenter behavior.

Talking to some of the managers behind the scenes was illuminating – they can only go so far with their official views – but personally some were far more worried than you would gather from their presentations.

Areas of focus at the conference ranged from the risks of a Euro break-up, to recession risks in the US to alternately a rising US interest rate risk; a soft or hard landing in China; risks in emerging markets; commodity markets and especially the impact of low oil prices on energy stocks in the US and impact on high yield (junk bonds).

Interestingly, although Australian banks were a discussion point, there seemed a distinct lack of concern (or even joining of the dots) about high property prices, flat personal incomes, rising and high personal debt levels, rising mortgage interest rates and a highly geared banking sector dominated by lending for residential property. Indeed there was a collective gasp through the audience when the hard landing scenario for China coupled with the APRA (Australian banking regulator) model laid out a potential 40% fall in house prices. Timing, well that’s another matter…

TG Financial Positioning/View

Currency & International Shares

It seems to us that with the rally in oil and commodity prices in early March and the introduction of negative interest rate policies in countries such as Japan and Switzerland that the recent strength in the $A is rational. There is a ‘risk’ that the $A rallies if Australia is treated as a safe haven – with attendant impacts on international shares and equities with overseas denominated earnings.

For this reason we are considering currency hedged international shares (where the underlying asset rises are captured, but with no benefit from a falling $A/cost from a rising $A). Given international shares are generally not cheap, the return potential is lower than average and the dollar is rising, we are not looking at boosting international share exposure too aggressively – although they do provide diversification away from Australian risks.

Australian Shares

We are seeing opportunities in micro-cap, smaller and mid-cap stocks more than large blue chip stocks. Some of these may be too small in size for some portfolios/approaches (due to added complexity and diversification issues). Perpetual’s Pure Microcap Fund is something we have been using (only available directly, not through wrap structures) for a diversified exposure to very small companies.

One way we are adding large company exposure for portfolios that are too underweight local equities is through the Market Vectors Australia Equal Weight ETF (MVW). This adds diversification through presently 73 large stocks in equal weights (the portfolio is rebalanced each quarter to maintain weighting). This, in our opinion, is a much more diversified (safer) manner than an index weighted exposure – where more than half the investment is in perhaps 10 stocks – many of which would be already owned directly).

There were a few stock specific disappointments during reporting season, with an overly severe market reaction – but with prices recovering we have a number of assets we would exit should the rally/recovery follow through. We have been working hard to talk through individual portfolios, but I do welcome contact (phone or email) to touch base – as brief but frequent conversations result in a better outcome than infrequent but lengthy meetings.


I circulated an update on the market in early February that highlighted the negative correlation between gold (and in particular Newcrest Mining) and the All Ordinaries index. That has held true to an extent in the past month – but I have noted that gold steps ahead when markets are negative, but pulls back to a lesser extent when markets are positive.

We have identified a range of assets that benefit from the higher gold price – whether they be $A or $US direct gold exposures, individual gold miners, an exchange traded fund exposure to global gold mining stocks, or to suppliers to the sector that benefit. Not all exposure will suit portfolios and we are tending to spread smaller holdings.

Apart from the direct cash-flow and profit benefit from an expanding price, there is the hedge value – where gold will most likely do well if panic sets in. The expansion of fiat money (paper money, or more accurately electronic money) is expanding at a dramatic rate globally – but the supply of new gold is very limited and cannot expand materially – perfect for an alternate store of value.

The opportunity cost of holding gold is low, given interest rates are so low (even negative). Should gold drop in price, then most likely the growth assets in portfolios are doing better.


We remain cautious but are applying funds to select growth asset exposures. Holding some form of gold is worth considering as a hedge. Growth asset valuations are certainly more attractive than a year ago, but we can’t shake the sense that the explosion in global debt and move into negative interest rate territory will end badly. Overall we are generally positioned too conservatively to generate average long-term returns and this is a risk to consider – balanced against the reduced impact if markets revert to down-trend.

As always, I welcome contact. We are still actively talking through investment positioning, but also financial planning structuring prior to the May budget where possible – as it does seem the government are intent on messing about with the superannuation and tax system yet again.

Best wishes,

A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin

Principal, TG Financial

Please treat the above comments as General Advice or general information, with no action to occur until we have considered with reference to your financial position, needs and goals.

Last Updated on Wednesday, 16 March 2016 15:31

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