A VIEW FROM THE TOP END

MARKETS:

In the last two weeks a lot has changed on the geopolitical and market landscape. First and foremost, the US presidency has changed hands, the results are not official, but government officials are slowly starting the transition to President-Elect Biden. Markets reacted positively to the newfound certainty and rose.

Unbelievably the close election result has been outshone by the release of data from the Pfizer covid19 vaccine trials. One of the leading candidates to provide an effective vaccine, the Pfizer product was shown to have 90%+ effectiveness. Traditional vaccines must reach greater than 50% effectiveness to be approved, so the result is promising. Pfizer's vaccine is also an RNA based vaccine, which means it can be produced quickly, and at lower cost than traditional vaccines. It will be the first commercial RNA vaccine to be used in humans, and notwithstanding the immediate benefits, is a step forward for humankind.

Summarising the market movements for the last two weeks, the S&P 500 returned 4.4%, the ASX 200 returned 2.3% and the NASDAQ 100 finished the period up 2.8%.

MELBOURNE CUP: OBITUARY

Unfortunately, we fell to a record of 1-1 the past two years with a miss on the trifecta. We were able to have an enjoyable day still and picked the 4th, 8th, and 10th horse. Under modern trifecta rules that combination does not pay much. We are not deterred though, and our published piece got quite a bit of attention from seasoned track goers. They have fed back some data to put into next years model where we will be adding categories around owners, meters trained and upweighting our jockey categories. We are already looking forward to Melbourne Cup 2021, and we hope that you are too.

INSIDE LOOK AT TFM, OUR PORTFOLIOS AND FRAMEWORK:

Over the past few months that we have been providing our updates, we have gained several new followers, so we thought it a good time to catch people up on how our strategies and investing framework is constructed.

Territory Funds Management (TFM) is a specialist arm within the Praescius Financial family. Our 4 person in-house team actively manages the portfolio on a daily basis, within a proprietary framework. TFM is overseen by an Investment Committee comprising 3 external investment professionals, an experienced business expert who represents our client perspective; and a team of sector specialist managers and analysts with whom we regularly collaborate to inform of our positions in specific markets and assets.

TIMEFRAME AND PURPOSE

At TFM we run three separate strategies, Low Volatility (LV), Mid Term (MT), and Long Term (LT).

Each of these strategies are part of a goals-based investing platform where investment allocation, in conjunction with a Financial Advisor, is constructed on the basis of the different time horizons that an investor actually requires the money to meet their needs.

In contrast, a traditional strategic asset allocation model builds asset positions around specific asset class benchmarks that are set relative to an aggregate defensive/growth weighting ratio that has its origins in a traditional bonds versus equities portfolio allocation. The traditional approach is not wrong, but a goals based methodology better aligns an individual’s future expenditure against their asset profile and particular circumstances.

In both, cash is considered the risk free asset that provides for expenditure needs within a 1 year timeframe (funds you want to take no risk on).

• The Low Volatility Portfolio: Designed for 1-5yr time horizons, this portfolio provides a cash+ return for holdings not needed by investors within the next 12 months, and with a timeframe of up to 5 years.


• The Mid Term Portfolio: Aimed at 6-14yr investment time frames, this portfolio provides above average portfolio income and moderate growth over the medium term. The portfolio is designed for income to top-up cash and will be more volatile.


• The Long Term Portfolio: As the name suggests, is our portfolio with the longest time horizon, of 15+ years, it is designed to provide long term capital growth for accumulators, or the later years of investors in the drawdown phase. Investments in this portfolio may have higher volatility and a lower income profile as profits are reinvested by companies into growing their business.

BUILDING THE PORTFOLIOS:

When we build the portfolios within each strategy, we are abiding by a framework that we have put in place. The execution of ideas from this framework has core tenets which are key.

The first and second rules are “portfolio purpose” and “investment liquidity” (time to convert to cash). They go hand in hand and one informs the other. The third rule is diversification or put another way, our budget for risk in a portfolio. The fourth rule is “what does the framework say”. This last rule is the most important on a day to day basis. It is the final hurdle that an investment idea has to pass in the inevitable noise, excitement, fear and possibility that make up markets and economies.

Cataclysmic events like the GFC or Covid will affect all asset classes at the same time and there are few places to hide in those circumstances. The way markets react during quick downturns means we need to employ defence by sticking with good companies, but we also must counter punch and use our framework to pivot to assets that will recover quickly. Proper portfolio construction is all about reminding each other of these rules and abiding by them fiercely.

THE FRAMEWORK:

Our TFM framework is a living document. It starts with our view for the next decade on the sectors where we believe growth will be concentrated, growth well above the average growth of the economy and is informed by demographics, politics and generational wealth transfer.

On a 12 - 24 month horizon, we are looking at the cost and availability of money in an economy, the geopolitical events that may influence the sentiment of its participants and their capability to react to opportunity and threat.

The investible outcomes of our framework presently consists of thirteen sectors that branch into numerous subsectors that we follow:

• Payments: Cash use is falling, the way we transact is evolving


• Cyber Security: More devices, means more doors for bad guys, so the world needs more locks


• Robotics: Increased productivity and demand for higher precision is meeting greater nationalist agendas in developed nations to keep manufacturing in country


• AI: Autonomous vehicles to Siri and Alexa, AI will touch all our lives over the next decade


• Infrastructure: Decaying infrastructure assets are at the limits of their useful life, to even replace what we currently have will cost billions


• Materials: Mining and materials development will fuel the next growth leg as the emerging world continues to develop and de-carbonise


• Defence: Defence is an ever-evolving sector, whether it be digital or drone. World governments are constantly upgrading their defence forces with the latest tech. Defence spending as a percentage of GDP is at all time post war highs.


• Energy: Affordable abundant energy will be needed to power the devices of tomorrow even more than today. Greater environmental consciousness will determine the path and the pace.


• Supply Chain: Cheaper, faster, and more productive, synchronising entire businesses in one software package is the way of the future.


• Protein supply and source: Bigger populations mean an ever growing need to produce calories from the same amount of land. Feeding the world is big business.


• Healthcare: An industry on the bleeding edge of technology development, an aging world has more need for health services


• Genomics: The human genome project opened the door, but now you can do what took years in days in your garage, genomics push the limits of medicine this decade.


• Environment: Whether it be properly valuing scarce water; technology to clean up toxic waste or simply measurement and compliance with stricter regulation, the focus on climate makes environment a theme that cannot be ignored.

UPDATING OUR CHECKLIST:

• Valuation: ASX & S&P500 levels : Valuations of the ASX and S&P have risen from the end of October, as US election uncertainty relented, despite the count still being underway. As at print date the S&P (25.5x) and ASX (21.3x) fwd PEs remain near record highs supported by government stimulus and near zero interest rates.


• Global PMIs: Manufacturing PMI data for China was released and it registered at 53.6, above the 53 forecasts by analysts and the highest reading in the last 3yrs. Those results were mirrored in the US, as the manufacturing PMI cam in at 59.3 for October, the highest reading since the end of 2018, and one of the historically largest readings of the last 10yrs. The US consumer was strong
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• Downgrades on guidance: US and Australian tech companies reporting the past two weeks have seen strong revenues and earnings, which has pushed share prices. The sector has seen numerous wins. The big story though is the positive vaccine news from Pfizer. This news triggered a rally in traditional economy shares that have been hit hard by lockdown restrictions. With the change in sentiment a viable vaccine creates it is likely that the last quarter of the year will see guidance released for companies. Any growth projected will be received well by the market.


• Infection rates to slow globally: Europe is seeing fresh lockdowns as winter hits the Northern Hemisphere and drives the population inside. Traditionally this part of the year is when the seasonal flu picks up, so it is not a surprise that Covid cases have risen in the region. What has been a bit of a shock is the return to lock downs. Unfortunately, a vaccine will be too late to service the current virus wave inflicting Europe, but it will change sentiment so that future outbreaks can be halted before they start. Australia remains fortunate and all our capital cities are open again, and new cases are rare as we approach the summer months.


• Monetary and Fiscal stimulus announcements globally: With the US election concluded the winner has been announced as Joe Biden. It was close, but in the end his vote totals look to be insurmountable, despite pending legal challenges from the former president. What that means is that Republicans and Democrats are likely to return to the negotiating table to get a stimulus deal done. In Australia JobSeeker was extended till Mar 2020, although tapered. Timelines between JobKeeper, which was previously extended, and JobSeeker will now match up, providing support into the new year.

Certainty post-election in the US and the Pfizer vaccine news benefited markets this past week. Markets tend to concentrate their returns in a few days, which is why it is important to have a plan and stay invested through these types of events. The markets were not a fun experience at the end of February until mid-March but pivoting to the right investments and sticking with the plan means we get to enjoy weeks like this past one.

Looking ahead, we see many signs of a buoyant economy trading on re-allocated priorities (travel money being spent at home). This will be good for market sentiment and risk assets.

‘Till our next correspondence, take care and we will be in touch in a few weeks.

Regards,