Investment Portfolio Update – July 2022 Quarter

Kauri Wealth Investment Portfolio Performance – 2022 FY

A turbulent six months for portfolios

An initially strong first half for global share markets was overshadowed by a surge in inflation, which central banks then scrambled to tame by raising rates earlier and sharper than initially anticipated. This slowed the global economy in the second half of the financial year but also triggered fears of an impending ‘hard landing’ or recession.
 
Equities around the world, which posted new record highs in early January, subsequently posted heavy losses in the second half of the financial year, driven by valuation compression due to rising interest rates and then by fears of recession.
 
Following the fall in global equity markets, many major indices such as the US S&P 500 index entered ‘bear market’ territory after falling more than 20% from their peaks in early January.
 
The Australian ASX 200 index posted a return of -10.8% over the 2022 financial year and fell 16% from its all-time high in August 2021, putting it in ‘correction’ rather than ‘bear market’ territory.
 
Growth stocks underperformed, as they were disproportionally impacted by valuation compression. Energy and food stocks outperformed due to sharply higher commodity prices.
 
Rising inflation and central bank hawkishness saw global bond yields jump to multi-year highs, resulting in the worst performance for bonds in decades. Defensive assets failed in providing their traditional role as a safe harbor during equity market volatility.
 
Commodity prices rose 32% over the financial year, although this was dominated by energy related commodities. Excluding energy, commodity prices rose by a more modest 6%.

Market corrections are followed by healthy rebounds. In the meantime, investors should focus on cashflow generation from their portfolio. Dividends and distributions from equities remain at elevated levels and appear resilient despite the market volatility.

Kauri Wealth Investment Portfolio – Performance

The Kauri Wealth Model Investment Portfolio returned -1.3% over the 2022 financial year.

The 2022 financial year witnessed the rare occurrence of both bonds and equities posting large losses, resulting in the worst performance for portfolios since 2009. 

However, the Model Portfolio has recovered the 2022 financial year losses, with a return of +2.6% for the first three weeks of July.

The Australian equities allocation outperformed once again, with a return of +6.7% for the financial year. This compares with the return on the ASX2000 index of -10.2%.

This return for the year compares favourably with data released by Chant West, which reported that the median balanced super fund is on track to record a return of -2.6% for the financial year.

Highlighting the extent of losses in the bond markets over the last six months, the median conservative super fund return was -2.2%. Investors with a more defensive risk profile fared little better than the higher risk categories. Indeed, the performance differential between the median balanced super fund return and the conservative super fund return was only 0.4% over the financial year.   

 
6 months to 30 June 2022
Financial Year 2022
Fixed Interest
-5.4%
-4.6%
Australian Property
-16.7%
-6.8%
Australian Shares
-7.1%
+6.7%
International Shares
-10.9%
-6.8%
Total Portfolio Return
-7.6%
-1.3%

Note: The returns from actual client portfolios will differ depending on the individual stocks held and weightings held in each stock.

Fixed Interest -4.6%

Returns from this asset class were protected to some degree by the Portfolio’s high weighting to quality bank-issued hybrid securities and no exposure to fixed-rate government bonds. The return on the holdings in bank hybrid securities was slightly positive over the period, as the floating rate nature of the income payments protected the capital value.

Australian Property -6.8%

The property sector was not immune from the market correction, as concerns around valuations weighed on the sector. 

Australian Shares +6.7%

Exposure to a well-diversified portfolio of Australian shares sourced from the top 100 stocks ensured this allocation performed strongly compared with the ASX200 Index, which returned -10.2%. 

Well timed stock selection meant this allocation of the model portfolio once again outperformed. The strong performance buffered the portfolio from the volatility seen in other asset classes over the period.

The best performing investments were GrainCorp +109.4% (sold above $10 and now trades at mid-$8), Incitec Pivot +49.9%, National Australia Bank +12.4% and Santos +8.6%.

International Shares -6.8%

This allocation provided exposure to a diversified portfolio of fund managers with different investment styles and mandates, from Environmental and Sustainability (Nanuk New World Fund) and global value stocks (Orbis Global Equity & Platinum International Fund).

US equity markets, particularly US tech and growth stocks led the underperformance globally, with the Dow Jones index down -11% and the tech heavy Nasdaq index down -24% over the financial year.

The best performing investment in this allocation was the Talaria Global Equity Fund, with a return of +9.1%.

Asset Allocation of the Kauri Wealth Model Portfolio

Asset Allocation
Portfolio Weight
Target Weight
Variance
Australian Cash
10.6%
5.0%
5.6%
Australian Fixed Interest
33.6%
25.0%
8.6%
International Fixed Interest
0.0%
5.0%
-5.0%
Total Defensive
44.2%
35.0%
9.2%
Australian Property
5.7%
5.0%
0.7%
Australian Shares
34.1%
30.0%
4.1%
International Shares
16.0%
30.0%
-14.0%
Total Growth
55.8%
65.0%
-9.2%

Equity Market Returns – 2022 Financial Year

Global Share Markets
 
Financial Year 2022
Australia
ASX 200
-10.2%
US
Dow Jones
-10.8
 
Nasdaq
-24.0%
United Kingdom
FTSE
+1.9%
Japan
Nikkei
-8.3%
China
Shanghai Composite
-5.3%

Key takeaways

  • Market corrections are followed by healthy rebounds.
  • In the meantime, investors should focus on cashflow generation from their portfolio.
  • Dividends and distributions from equities remain at elevated levels and appear resilient despite the market volatility.
  • Yields from bonds and other defensive assets are now back to attractive levels.
  • Broad investor fear and uncertainty may not yet have peaked.
  • As I have highlighted in my monthly updates, valuations look attractive for deploying capital for those investors who take a medium to long-term view.
Please don’t hesitate to contact me.

Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.

I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.

Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au

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