Markets around the world have experienced significant devaluations, with prices falling over 10% in many parts of the wold over the last week. The fall in equity markets has been largely – but not entirely – created by the increased concern around the outbreak of the novel Coronavirus (COVID-19) as governments and health organisations globally attempt to control the spread of the virus. As governments heighten precautions, restricting global travel and enforce procedures set for dealing with a pandemic, markets will continue to be extremely volatile and highly overreactive to any news regarding government response or new cases. We at Value Investment Partners have been working hard to ensure that the portfolio is in a defensive position in order to minimise losses while also not totally removing investor capital from the market, reducing the upside potential when fears of a global viral pandemic dissipate. Below outlines how the portfolio’s are positioned currently to protect investors from the current market volatility and losses.
In early February, the Value Investment Partners investment team repositioned the Australian equities allocation to increasing the portfolio weights towards defensive companies. Hence, we have overweight allocations in the consumer staples, healthcare, and utilities sector and underweight the sectors of consumer discretionary, materials, information technology, and energy sectors. Overall, the allocation to Australian equities in the blend portfolios is significantly underweight in order to reduce our exposure to the current market volatility.
There has been an overall selloff of all companies in the ASX 200 and this has extended to all corners of the market. That said, the fundamentals of our holdings in real estate trusts should be largely unaffected by the economic consequences of the coronavirus given our selections of holdings are targeted towards areas that are unlikely to be directly influenced by such an event. Given the Australian property space is characterized by long leases and our holdings selections are significantly influenced by ensuring the AREITs we invest in have a history of low vacancies, we believe the real estate sector to be a fundamentally defensive are of the market.
On the 11th of February during the monthly investment committee meeting we decided to materially reduce your exposure to Asia by removing the allocation to Fidelity Asia Fund. This has removed a significant amount of risk from the portfolio with international exposure being weighted heavily to the USA. The US dollar is considered the safest currency in the world, with the effective allocation of most of the international exposure being denoted in US dollars means that you have increased downside protection as the Australian dollar falls in value relative to the US dollar.
As equity prices fall there is a typical ‘flight to safety’ that is being observed in the bond market during this market correction increasing the market value of high-grade bonds. Our allocation to global G7 sovereign bonds and domestic Australian government bonds has created downside protection against falling equity prices with these positions delivering strong performance for the month to date. The allocation to G7 sovereign bonds also exposes the portfolio to foreign exchange changes. With the Australian dollar falling to an 11-year low the relative value of your global bond has increased creating a ‘double-return effect’ on your bond investments.