- One of the most volatile six months in share market history came to a close with markets here and overseas recovering much of the dramatic falls of February-March.
- The turnaround was nothing short of breathtaking, with the Aussie S&P/ASX200 index posting a 16.5% rise between April and June, while the US S&P 500 index rose 20.5%.
- While not erasing the Feb-March falls in full, the rebound in equity markets has helped diversified portfolios to close out the financial year in reasonable shape.
- Equity markets continue to be supported by policies implemented by many countries to limit the economic fallout from the COVID-19 pandemic.
- If there is one investing lesson to take away from the madness of 2020 so far it is this: the less you play with your portfolio, the less likely you are to get played by it.
Another financial year comes to a close. It’s a safe bet, however, that history won’t judge 2019/20 as ‘just another financial year’. It could not have been more atypical. At least not the second half of it, where COVID-19 completely overtook any and all plans for 2020.
Yet even amid the chaos and confusion of the past six months there remains reason for optimism. For the preservation of hopes and dreams. For a future beyond the current coronavirus-induced malaise.
A Fast Fall, a Fast Rebound
Share markets are by their very nature volatile systems. Every minute of every trading day, thousands of investors continuously assess the prospects of the companies they either own shares in, or are contemplating owning shares in.
Their collective decisions and future forecasts set share prices in the moment, and as these forecasts shift with each piece of breaking news, so do prices.
Much of that forecasting ability went out the window in mid-February, as COVID-19 started dictating terms. The result, as we outlined in our previous investment update, was a fall of some 35% in the US S&P 500 share index between late February and late March, and an even larger 39% fall in the S&P/ASX 200 index here.
As governments scrambled in late March to implement both lockdown and economic rescue measures, share markets stabilised. Then, in what can only be described as a remarkable turnaround, market confidence rebounded as the size of various government rescue packages worldwide became apparent.
In the last three months of the financial year most global markets turned strongly positive, recovering much of what was lost through the February-March drawdown. The S&P 500 index rose 20.54% for the quarter, while here the S&P/ASX200 index rose by 16.48%.
Those who had panicked and sold into the March madness were left stranded as share prices rebounded, including one billionaire Hedge Fund manager who generated 3% while the market roared back to life by 40%.
Clover Core Portfolio Option Net Returns to 30 June 2020
The table below shows the model portfolio* after-fee returns for Clover’s core options for various periods to 30 June 2020.
Clover Core Portfolios:
|Periods to |
30 June 2020
|Jan – Jun 20||-0.5%||-1.4%||-4.0%||-5.8%||-7.9%|
|3 Years |
** Since inception portfolio returns are calculated as from 1 February 2016.
With share markets, both here and abroad, falling heavily through February and March more than they rebounded in April and May, returns for 2020 so far have, unsurprisingly, been challenging.
For the six months to 30 June 2020 all Clover’s Core model portfolios recorded negative returns, ranging from -0.5% for the Conservative option to -7.9% for the Aggressive option.
At the one year time frame the strong second half of 2019 becomes apparent, with returns positive for the Conservative and Moderate model portfolios, and mildly negative for the others.
The three year returns are pleasingly positive across the board, as the benefit of holding steadfast through various market dummy spits starts to assert its influence on returns.
The vindication of Clover’s approach, however, comes when viewing the returns for all Core model portfolios since they commenced in February 2016, an issue we expand on a little further in this review.
Clover SRI Portfolio Option Net Returns to 30 June 2020
Turning now to Clover’s ethical portfolios, the table below shows the model portfolio* after-fee returns for Clover’s Socially Responsible Investing (SRI) model portfolios for various periods to 30 June 2020.
Clover SRI Portfolios:
|Periods to |
30 June 2020
|Jan – Jun 20||-0.1%||-0.4%||-2.9%||-4.2%||-6.2%|
|3 Years (p.a.)||3.9%||5.9%||6.2%||6.7%||6.6%|
** Since inception portfolio returns are calculated as from 1 January 2017.
Over the course of the six months to 30 June Clover’s SRI (ethical) model portfolios performed slightly better than the Core options, with returns ranging from -0.1% for the SRI Conservative option to -6.2% for the SRI Aggressive option.
The difference in short-term returns is largely attributable to the allocation to Australian real estate (A-REIT) ETFs in the Core model portfolios, which fell harder than the broader share market, and have not recovered as robustly to date.
Looking beyond the (noisy and unpredictable) short-term, the three year returns line up quite similarly between the Core and SRI model portfolios, with SRI returns ranging from 3.9% per year for the SRI Convervative portfolio to 6.6% per year for the SRI Aggressive portfolio.
Clover Core versus Reference Portfolios
In our May portfolio review (the COVID edition) we decided that, having established a track record in excess of four years for the Core portfolios, we would take the opportunity to compare Clover’s Core model portfolio returns with that of famed passive investing giant Vanguard.
The premise was simple; Vanguard’s four diversified managed funds are remarkably similar to four of Clover’s Core model portfolio (the difference being our Conservative model portfolio’s 20 per cent allocation to Growth assets is not available in Vanguard).
We also decided to compare our Core model portfolios on an after-fee basis (based on a fee tier for a $50,000 portfolio) with that of Vanguard’s wholesale diversified portfolios, with their $500,000 minimum requirement and lower management fees.
In the three years to 30 June 2020 the four comparable Clover Core model portfolios essentially split the difference with Vanguard, with Clover’s Core Moderate and Balanced portfolios slightly outperforming Vanguard, while Growth and High Growth (Aggressive) slightly underperformed.
The after-fee results are outlined in the chart below.
We continue to use Vanguard’s Wholesale diversified managed funds as the yardstick by which we measure our longer-term outcomes, primarily because these are similar alternatives (provided of course you have the $500,000 minimum needed to invest in the wholesale pool).
Clover Core – Actual versus Long-Term Expected Returns
As an investor there are two aspects that you should see occur if rigorous investment discipline and diligent portfolio management is being undertaken on your behalf.
First, that there are appropriate return differences between investment options, indicative of portfolios that are truly graduated along the risk/return spectrum.
Second, that the returns actually delivered do not deviate too greatly from what should be expected over the longer-term.
Before Clover managed a single dollar of client monies, we spent months modelling both the risk and return outcomes of our different model portfolios. Various quantitative methods were deployed for all this time-consuming analysis, the details of which are probably best left for its own post.
The result of all that work went into determining the final composition of our model portfolios; from the asset classes used, to the weights of each asset class to the final selection of Exchange-Traded Funds that make up each model portfolio.
All that is fine and well, but at the end of the day the question any client is quite within their rights to ask is this: how well have your portfolios performed since they were set up, relative to your return expectations at that time?
Our Core portfolio options now have a track record of four years and five months. While we are hesitant to call this a long-term outcome, it is sufficiently long enough to now take a look at actual returns generated versus what we thought we’d deliver when creating these model portfolios in 2015 and 2016.
The after-fee results are outlined below.
The blue bars are the annualised returns (i.e. per annum) for each Clover Core model portfolio since inception on 1 February 2016. The orange bars are our long-term expected returns for each model portfolio.
As the chart indicates all model portfolios delivered actual returns since inception within 1% p.a. of our expectations. Pleasingly, the returns on all but the Core Conservative model portfolio have exceeded our expectations to date.
While past performance in no way is predictive of future performance, it is hugely gratifying to us that our Core model portfolios have, since inception, performed very much in alignment with our longer-term expectations, despite the volatility of the past six months.
Of course the true long-term for our higher risk model portfolios should be measured in five to seven year cycles, but it is nonetheless reassuring to see that since their inception they have delivered, on an after-fee basis, what we set out to do way back in 2014.
Inactivity as an Investment Superpower
If there are any lessons to be had from 2020, from an investment perspective at least, it is that to gain the benefit of decent long-term returns you will have to sit tight through the occasional market tumble.
They may not all be as crazy as the falls witnessed through February and March, but occasional declines are a feature, not a bug, of investing. Always have been. Always will be.
Financial markets are remarkably generous to those who can control both their short-term emotions and long-term expenses, and merciless to those who try too hard, act too often and trade too much.
As Jason Zweig, the highly regarded investment columnist for the Wall Street Journal, says
“The less you fool with your portfolio, the less you’ll play the fool.”
If you’ve survived the first half of 2020, congratulations.
May you never have to face the same level of market turmoil during the rest of your investing life. If however you do, know that what worked this year; portfolio simplicity, low turnover and low fees, will almost certainly still be the best course of action then. Of that we have little doubt.
This material is intended to provide background information only and does not purport to make any recommendation upon which you may reasonably rely without further and more specific advice. To the extent that this material contains advice: (i) this is limited to general advice only; (ii) has been prepared without considering your objectives, financial situation or needs; and (iii) because of this you should therefore consider the appropriateness in light of your objectives, financial situation or needs, before following the advice.
To the extent that this material contains any advice, we recommend that you do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs.
Past performance is not a reliable indicator of future performance, and no representation or warranty, express or implied, is made regarding future performance.