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Global Portfolio outperforms benchmark indices in 2020

Asia Analytica
Asia Analytica • 9 min read
Global Portfolio outperforms benchmark indices in 2020
We outperformed all the major benchmark indices, including the MSCI World Net Return index, the Dow Jones Industrial Average.
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As 2020 draws to a close, we thought it apt to take a look at all that has transpired in the world and, in particular, the various strategic changes we made for the Global Portfolio in response to those events.

The Global Portfolio is up 21.8% year to date, up to Dec 16. This means we have outperformed all the major benchmark indices, including the MSCI World Net Return index, the Dow Jones Industrial Average as well as the Standard & Poor’s 500 index.

Last week’s gains boosted total portfolio returns to 43.6% since inception; again, ahead of the MSCI’s 32.7% increase over the same period.

The year 2020 will go down in history as one of the most eventful in recent memory. Countries were forced into lockdowns to contain the Covid-19 pandemic. All economic activities except for essential services were brought to an abrupt halt. And the majority of the world’s population was grounded within the confines of home.

The shock ended the longest US bull market in history, sent stock markets tumbling into the steepest bear market, which then turned into the shortest one on record — markets have since recovered all lost ground, and more, to hit fresh all-time highs.

The wild swings are enough to give any fund manager whiplash in what is, arguably, one of the most challenging years for investing. Against this backdrop, we are happy with the Global Portfolio’s performance.

For more stories about where the money flows, click here for our Capital section

Fully invested at start of 2020 with exposure to cyclicals amid soaring market

We started the year with strong conviction for robust global economic growth, believing that the US would come to a trade settlement with China and that a Brexit deal was imminent. We were upbeat about the economy, on expectations of rising consumer and business confidence, which would, in turn, drive investments higher. Our portfolio of stocks was biased towards cyclicals to ride this growth momentum. To maximise our exposure, the portfolio was also fully invested.

Globally, stock markets started the new year with a bang — but were soon roiled by the sharp spike in geopolitical tension between Iran and the US, after a key commander of the elite Islamic Revolutionary Guard Corps was killed. The event caused a sharp rally in defence stocks, including Northrop Grumman. We acted quickly to capitalise on its share price surge and sold off all of our holdings, netting an 18.4% gain.

In its place, we acquired homebuilder Lennar Corp. We saw emerging signs of strength in the US housing market, underpinned by lower mortgage rates after the Federal Reserve’s interest rate cuts in 2019. After that short bout of volatility, global stocks rallied higher on the back of a string of positive developments on the trade front. We remained positive on the broader market.

Portfolio adjustments in response to pandemic curveball

In February, however, investor sentiment started souring quickly as the coronavirus outbreak spread from China to the rest of the world. The resulting uncertainties sparked a “risk off” sentiment within the global investing community. Haven as sets such as US Treasuries surged while perceived riskier emerging market currencies and stocks were heavily sold down.

More significantly, the yield curve flattened and some segments of the curve inverted. There was rising belief in the market that the Fed would cut rates further — sooner rather than later — to counter any impact from the outbreak, even if recession fears were not yet full blown.

We saw this latest flattening of the yield curve to be negative for bank margins. As such, we decided to pare back our exposure to cyclicals and sold our entire holdings in Comerica, at a loss, as well as JPMorgan Chase & Co, for a 3.7% gain.

The proceeds were reinvested into Qualcomm and Apple, on expectations that 5G would be a major theme for the foreseeable future. We also acquired comparatively defensive tech giant Microsoft. With the viral outbreak resulting in more companies directing their staff to work from home, tech stocks facilitating this trend were expected to do well.

Anxiety over the Covid-19 pandemic, made worse by the sharp slump in oil prices, triggered another huge sell-off in stock markets in March. We sold our entire holdings in Disney as we expected its near-term earnings to be among those hard hit by the worsening outbreak situation. The company had to temporarily close all of its theme parks, resorts and cruise line business worldwide while its studios shut down production.

Surge in retail investor money floods stock markets amid widespread lockdown

To everyone’s surprise, global markets rebounded sharply between April and June — from the Covid-19 pandemic-induced freefall in late-February through to the better part of March — driven by the massive influx of retail money. Widespread restrictive movements kept people at home, with time on their hands and little else to do. Trading stocks became a form of entertainment and an outlet for gamblers.

At this point, we were unsure of how long restrictive movements would persist or the impact on the economy, business profitability and cash flows and jobs. However, judging from developments in countries that were affected by the outbreak earlier, including Japan and Singapore, we believed restrictive movements could drag on for far longer than many had previously anticipated.

As yet, there was no clarity on when the outbreak would be contained or an accurate timeframe for the phased reopening of economies. There were also questions with regard to the impact on the global supply chain and the pace of eventual jobs recovery.

Given all the uncertainties at that time, we thought it prudent to shift the portfolio to a more defensive stance and pivot towards larger-cap stocks with high-quality earnings and strong balance sheets.

This was why we sold our holdings in homebuilder Lennar and part of our holdings in building material stocks BMC and Builders FirstSource. Most homebuilder and building material companies have relatively high leverage. We also disposed of all our shares in The Boeing Co, at a big loss. The stock, already buffeted by the grounding of the 737 MAX, was further beaten down by the sharp drop in air travel, which battered airlines and caused many airlines to delay or cancel outright new plane orders.

We reinvested part of the proceeds into relatively defensive healthcare giant Johnson & Johnson and biotech company Vertex Pharmaceuticals. In July, global stocks were on track to register their fourth straight months of gains — extending the remarkable, sharp and quick recovery from March’s nadir. The biggest gainers were tech and healthcare stocks. We decided to lock in gains on Apple, which had enjoyed a massive rally, and recycled proceeds into Taiwan Semiconductor Manufacturing Co (TSMC).

We also sold our entire holdings in Starbucks Corp, in view of the resurgence in Covid-19 cases that would delay the coffeehouse giant’s anticipated earnings recovery.

For more stories about where the money flows, click here for our Capital section

Early positioning in connectivity, cloud, 5G plus cyclicals and commodities

Moving into August — six months after the World Health Organization officially declared Covid-19 a pandemic — the evidence was increasingly clear that certain secular trends were being accelerated. That included migration to cloud, e-commerce, digital and contactless payments, telehealth and distance learning, all of which require stable, high-speed internet connections.

As such, we saw increased and accelerated spending on infrastructure and digitalisation to be priorities in fiscal stimulus packages around the world. We expected 5G wireless network rollouts to quickly pick up pace, after the delay owing to the pandemic. On the back of this belief, we acquired shares in Ericsson, one of the three leading suppliers of telecommunications equipment and services to fixed and mobile telcos.

Additionally, we foresaw that news of a successful vaccine would trigger a rotation into cyclicals, including battered airlines and travel-related stocks as well as those in the most-affected industrial, energy and banking sectors — and out of stay-at-home proxies and, to a certain extent, technology stocks, whose valuations were stretched, having led the rally thus far.

Therefore, we took an early position in this theme, paring our stakes in Adobe, Alibaba Group Holding and ServiceNow — all of which had performed remarkably well — and added shares in Bank of America and Singapore Airlines to the Global Portfolio.

We also acquired Rio Tinto Group, on expectations of strong demand for iron ore once governments rolled out their infrastructure spending as part of massive fiscal stimulus packages. Coupled with expectations of US dollar weakness, we thought commodity prices would trend higher, especially if there were signs of inflation further down the road. All the three stocks did very well, chalking up double-digit gains in just a few months.

In the final weeks of the year, we disposed of almost all our holdings in Alibaba, on rising regulatory risks, and bought back Disney as well as Chinese carmaker Geely Automobile. With more approvals for Covid-19 vaccines on the cards and with countries starting inoculations of their populace, it is only a matter of time before normalisation returns to the world.

Heading into 2021, we are bullish on the outlook for stocks, on the back of growth in both demand and supply as countries move from pandemic containment to mitigation and recovery modes. Note that the Global Portfolio remains fully invested as it was through the volatility of 2020.

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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