Portfolio update 17 April 2023
Market Update
Since we last wrote to you in mid-March following the collapse of Silicone Valley Bank (SVB) and the takeover of Credit Suisse by UBS, global share markets proven quite resilient as concerns about a full blown banking contagion have eased and focus again turns to expectations on interest rates.
High inflation and interest rates are expected to slow the global economy down, with the International Monetary Fund (IMF) having warned recently that the global economy is “entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner”.
Meanwhile, minutes of the US Federal Reserve’s March meeting revealed that staff members expect that the fallout from the US banking crisis is likely to tilt the US economy into a recession later this year, while Federal Reserve officials stressed more is needed to tame inflation, indicating that further rate hikes are likely.
This uncertain economic backdrop has seen asset classes such as gold and silver rally over recent months as they are seen as a safe haven during times of low growth, with your portfolio holdings in PMGOLD, Vaneck Gold Miners ETF (GDX) and GlobalX Physical Silver (ETPMAG) having benefited.
We continue to expect there to be volatility in coming months, with different asset classes potentially coming under more stress than others. As outlined in our update on 7 March, we have positioned the portfolio for the expected economic slowdown and will adjust accordingly if things change.
Commercial and Retail Property
In recent weeks there has been a renewed focus on the commercial and retail property markets and in particular how investment managers are valuing these investments in their portfolios.
Essentially, valuations are determined by the potential to generate income. When the economy is strong, offices and retail stores are thriving, full of employees and space is at a premium, and landlords rake in the rental income.
However, in the current challenging environment of higher interest rates, more people working from home and a slowing economy in which many firms will lay off staff and some won’t even survive (as we see regularly in the press), then rental income is threatened.
Many unlisted property funds and also Industry Super Funds don’t regularly value their property investments, so the concern is that valuations which are based on economic conditions as they were in the past will have to be re-rated down to reflect current conditions. And this could lead to significant falls.
Portfolio Changes
Sale of Vanguard Australian Property Securities ETF (VAP)
We have already seen listed Australian Property (or AREITs) fall sharply since early February, fuelled largely by investor concerns on the above. And our concern is that there could be further falls ahead, which has led to our decision to completely sell down our holdings in Vanguard Australian Property Securities Index ETF (VAP) in all portfolios.
It is important to note that the portfolios will still retain some exposure to Australian listed property trusts though the investment in A200, which currently includes 6% in real estate.
With the proceeds from the sale, in each of our model portfolios we have deployed these funds to top up the existing holdings in the Realm High Income Fund.
Top Up of Realm High Income Fund
The Fund provides access to a diversified, actively managed fixed income portfolio that invests in cash and domestic issued fixed interest securities. In 2022, in what was the worst year for fixed income in almost a century, Realm was able to deliver a positive return.
The fund has a current running yield (calculated as annual income divided by market value) of 6.32%, whilst its yield to maturity (which includes dividends and capital growth if the investments in the portfolio are held to maturity) is 7.85%.
The investment committee believes that the potential for a 7.85% return, for a low level of risk, is a more attractive investment option than remaining in VAP, for reasons mentioned.
Impact on Asset Allocation in the Model Portfolios
This investment change results in an increase in the weighting to defensive assets and a decrease in the weighting to growth assets in each portfolio. However, overall, each portfolio remains slightly above its neutral allocation to growth assets following the change, a position we are comfortable with given we include alternatives such as gold, silver and infrastructure as growth assets.
Collins House will continue to monitor market conditions closely and make changes if and when necessary.
End of Financial Year Fast Approaching
We are fast approaching the end of another financial year, and we would like to take this opportunity to ensure that you are made aware of end of financial year super and tax strategies.
Please take the time to read through the below and if applicable, please contact your Advisor to discuss well before 30th June, so we can assist you.
Do not forget that the current concessional (tax deductable) contribution limit is $27,500 (less your employer or salary sacrifice contributions) and you may have a gap that you wish to fill prior to 30th June, to reduce your taxable income for this financial year.
Important considerations
- Check that your Superannuation death benefit nomination is up to date.
- Review your existing insurances.
- Ensure that you have an up-to-date Will and Powers of Attorney in place.
- Review your attitude toward investment risk
- Tell your advisor if you have had a significant change to your personal or financial circumstances.
If you have any questions about the above, or would like to discuss your portfolio in more detail, please don’t hesitate to contact your advisor.