Portfolio NAV for Q3 climbs 2.7% as USD/AUD strengthens
As another quarter comes to a close, the market rebounded modestly during September. While at the start of the month the key indices were sitting in negative territory for third-quarter performance, the Dow Jones and S&P 500 were able to reverse course. It means the S&P 500 has posted its best (comparable) result since 1997.
Meanwhile, the NASDAQ, which has been the best performing index year-to-date, lagged across both September and the quarter. It was around this time last year where market sentiment took a sharp turn based on interest rates and trade concerns.
Like much of the year, the third quarter was defined by two key themes – the ongoing US-China trade war, and the interest rate outlook.
Discussions between the US and China have swung like a pendulum. From optimism, to fresh tariffs, back to optimism with an October meeting scheduled. But hold the press, US investors may now be limited from investing in Chinese companies. With President Trump also facing a large political fight on his hands amidst potential impeachment, his willingness to win these negotiations we can only presume is emboldened.
As far as interest rates, two cuts were passed during the quarter – first in July, then in September. Nonetheless, from the rhetoric coming out of the Fed Reserve, it is clear there is a split to go down the path of a full-blown easing cycle.
During August the inverted yield curve emerged as a new concern – viewed by some as a possible recession indicator – however this skittishness has since faded. Like we alluded to previously, with rate cuts still in hand, this time does feel ‘different’.
Global economic growth is a watch-point, as a slowdown in China and Europe could impact the US. News of a comprehensive stimulus package from the ECB is very welcoming, especially as US factory activity, hiring, consumer sentiment and business investment all slowed in recent results. Brexit lies ahead too, although we think another delay is likely.
“It is clear there is still a split to go down the path of a full-blown easing cycle”
Another set of quarterlies conclude
Oracle (ORCL) produced an earnings beat, while also pointing to an encouraging outlook. In fact, 2020 revenue is expected to grow faster than previous years, and earnings per share could increase by double-digit growth. It’s certainly an encouraging set of results, so it is little wonder the market favoured it with a 5.7% increase across September.
Meanwhile, although Adobe was able to top earnings forecasts, the company’s outlook fell flat. We were disappointed to hear that revenue from the digital media segment is expected to grow at a slower rate than the last three quarters, since this has been one of the key catalysts in the company’s strong rise. Shares fell 2.9% during September, although it is still a stock we are comfortable to hold on account of the broader cloud theme at play.
Performing much better was one of our key portfolio stocks, Nike (NKE). On the back of new products and investments helping drive sales in America and China, shares have reached a new all-time high after rising 11.2% last month. Our conviction in the stock is still strong at this stage, with trade issues seemingly having no effect on the company’s growth prospects.
Beyond Nike, Apple (APPL) was one of the best performing stocks during the September quarter. Shares rose 13.2% over the period, as the company appears to be transitioning well from declining iPhone sales. Instead, wearables and services are growing strongly. A recent upgrade to iPhone volumes however, was icing on the cake, and when we consider the outlook for 5G in early 2020, this could be a catalyst to grow revenue.
Other standout stocks from the quarter, which we have in our portfolio, include Northrop Grumman (NOC) up 16%, Google (GOOGL) up 12.8%, and CME (CME) up 8.9%. All three remain well-positioned and favoured in our eyes after strong results.
The standouts were weighed down by various tech stocks that struggled over the quarter, the most prolific of which was Netflix (NFLX). The stock lost 27.1%, its results showing the effects of competition inhibiting growth. We made a decision in late August to sell out of the stock, which helped to mitigate the extent of this decline.
Elsewhere, PayPal (PYPL) lost 9.5% and Amazon (AMZN) declined 8.3% as both missed earnings and set subdued guidance. Facebook (FB) fell 7.7% on its higher investment outlook. Concerns in each are perhaps overstated at this time, and all three seem to have found a floor in their share price, at least for the time being.
Portfolio Net Asset Value (NAV) decreased by 1.7% across September, after taking into account advisory fees. The cause of this underperformance was attributable to an above-average number of equity positions in the portfolio declining during the month.
More specifically, the equities component of the portfolio was down by 1.2%. Although Nike and Apple performed very well, those gains were offset by a sharp fall in Roku (ROKU) among other key stocks. As it turns out, our initial entry into Roku was too early, as like Netflix it faces the increasing prospect of competition from Apple, Comcast and even Facebook. We think the sell-off is overdone on account of its unique positioning in the market and some of the competitor threats being overblown.
With negligible trading activity during the month there was no realised income, however unrealised income is tracking at 7% of NAV from the start of September.
Since the USD/AUD forex rate fell from 1.4846 to 1.4811, there was a negative impact of 0.2% on the portfolio NAV. By the end of the month, cash represented 1.6% of all assets.
For the third quarter, portfolio NAV was higher by 2.7%. Despite August and September posting their own respective decline, the headline result was underpinned by July’s strong performance, where NAV increased by 5%. The result includes dividends and advisory fees.
The equities component of the portfolio reported a drop of 0.2% across the quarter, with September’s equity performance weighing on the result. Zillow Group (ZG) was a particular drag on performance, having dropped 35.4% across the quarter on a muted outlook.
There were no equity and index options, or futures contracts taken out across the quarter.
We sold out of Netflix, which resulted in a realised loss of 0.2% compared with the NAV at the start of Q3. Unrealised income was consistent with the September result, at 7.2% of NAV from the beginning of the quarter.
The bulk of the increase in NAV came from forex gains, which amounted to 4.2% of all opening assets. As new positions were taken in Roku and Resmed (RMD), cash reduced to 1.6% of all assets by the end of September, compared with 4.5% in early July.