In response to some additional queries from some of our investors, we wanted to provide everyone with an additional update, focusing more specifically on the current portfolios we manage.
To begin, all of our equity portfolios, being the Australian and Global Equity Funds, and Local Balanced, have a 15-20% allocation to defensive assets. In the case of the two funds, this is via a credit macro strategy that has considerably less volatility than equities, while through Local Balanced, this is via the Low Volatility strategy, which is partly comprised of gold and bonds. We appreciate this has done little to shield the portfolios, considering the speed and depth of the recent declines.
In addition, all of the above portfolios have the ability to build a 40% cash weighting, as the pool of momentum stocks shrink. This process has already begun with the Global Equity Fund, which built a 10% cash position last Monday. What has been a little different and unprecedented this time is the speed of the decline. As a reminder, our momentum models run on a monthly ranking schedule, which means we assess the portfolio on a monthly basis. As this decline has occurred over a mere three week period, we have been given little time for our systematic process to build cash up until this point.
Nevertheless, as of this week, we have shortened the assessment period for all momentum models to weekly, to increase the speed of the responsiveness. As such, we would expect cash levels to begin to rise over the weeks ahead. This is a move we think will make a big difference once things start to return to normal as we are wary of missing out on the recovery when it comes, and more regular re-balances will allow us to re-enter the market more quickly.
Additionally, we have made discretionary decisions to avoid certain stocks we feel may not be able to ride out this particular downturn, and will continue to monitor the portfolio to ensure we are comfortable with the individual holdings.
We do want to stress however, that it is important to not panic in such situations. Market declines such as this tend to find a bottom when a large amount of investors panic and all capitulate, selling their shares after a large decline has already occurred. Given the size of the declines to date, we believe that making a discretionary call to go to cash at this point would ultimately be detrimental. So while cash levels in the portfolios will begin to rise based on our systematic process, we will not be arbitrarily selling stocks from the portfolio.
Please don’t hesitate to call us on 02 8302 3605 if you wish to discuss further.
