Investment update 12 February 2018

Last week in the markets

Over the past week Australian shares were down 4.6% while small company shares were down 5.3%. Shares in developed countries fell 5.6% with the US market down 5.2%. Shares in emerging markets were down 7.1%. The Australian dollar fell 1.5% to 78.13 US cents. The Australian 10 year bond yield increased to 2.86% while the US 10 year bond yield increased slightly to 2.85%. The oil price fell 9.5% to 59.20 US dollars per barrel.
  

What do share investment managers do during a 'market event'?

The recent market pullback has been sharp and created many headlines. So far, the size of the pullback has been small. While market commentators in the media consider what people should do with the mix of assets (or asset allocation) in their portfolios, not many fund managers can make large asset allocation calls.

Take share fund managers for instance, such as the ones who manage money in our portfolios. We appoint these managers to pick Australian shares for us; we own the decision to allocate to Australian shares. What do these managers do when there is a ‘market event’?

Most of our managers are allowed a small variation in their exposure to cash, so this is something they need to consider. They may also receive withdrawal requests on the various accounts they manage so they need to be prepared to work out the best way to generate liquidity or convert these shares to cash. They need to be prepared for inquiries from their investors, just like us from our members.

But the largest consideration is what is happening in the market and the shares in their portfolios. First, they will reflect on the themes in their portfolios: for instance, the current sell-off appears to have been triggered by fears of interest rate hikes. How exposed are shares in their portfolios to this risk factor?

Second, market turbulence can provide a great opportunity for astute active share pickers with a longer-term focus to go bargain hunting and buy good quality companies at discounted prices. Even though the market is down, there will be some shares which have fallen further. If our managers know these companies very well and can’t see any reason for the outsized fall, then there is the potential to invest at a good price with the expectation of future outperformance. This will ultimately flow through to our members through investment returns. 

Signing off

Susan Chau and David Bell

 

Past performance isn't necessarily an indicator of future performance.

Data sourced from Bloomberg.