So far, 2020 has been incredibly eventful for financial markets. European and U.S markets had their worst days since Black Monday in 1987, credit markets seized up with U.S 10 year treasury yields reaching all-time lows, and oil futures went negative for the first time in history.

Portfolio

With 263% Returns YTD What Has Driven My Portfolio’s Success?

Portfolio

With 263% Returns YTD What Has Driven My Portfolio’s Success?

So far, 2020 has been incredibly eventful for financial markets. European and U.S markets had their worst days since Black Monday in 1987, credit markets seized up with U.S 10 year treasury yields reaching all-time lows, and oil futures went negative for the first time in history.

During this time, my investment portfolio both preformed very profitably and with little volatility given the size of the increase. The portfolio focuses on technology investments and is adjusted on at least a monthly basis to reflect changes in sentiment. These adjustments aim to move funds towards the highest growth segments of the technology sector. Before the COVID 19 outbreak, big tech was significantly outperforming the market as such a large percentage of funds wherein FAANG stocks. After the outbreak of COVID 19, the cloud and online services sector has seen significant growth so moving towards providers of these services be it cloud providers such as Microsoft or Amazon or online service providers such as Shopify or Cloudflare has shown rapid growth. Below is shown my investment portfolios percentage gains and risk measures vs that of the Nasdaq 100.

Focus on high quality and avoiding firms with questionable futures.

A quality company has low debt ratios, strong profitability, stable earnings growth and a healthy outlook to future expansion of the business. High-quality stocks are known for delivering above-average returns in the late stages of the cycle and especially during downturns. A current downside to such stocks is that before the crisis, and still today these stocks have inflated valuations. Picking stocks from this group with the ability to produce excess growth over the coming years is critical to maintaining growth for these positions when risk appetites return to the market over the coming year.

Looking to apply this theory, Amazon has been my best-performing quality stock YTD providing 32% of the entire portfolios 267% return. Amazon (NASDAQ:AMZN) fits the description of a quality stock with incredibly strong growth, stable profitability, a healthy outlook for growth of its cloud AWS sector and has significantly benefited in both major business sectors from COVID 19. A stock on the other end of the spectrum, for example, is Uber. Uber is a company I recently covered in articles for SeekingAlpha and has significant leverage issues, negative profitability in multiple business sectors and has been dramatically impacted by reduced travel from COVID 19. In comparison to Amazon’s colossal 65% gain YTD, Uber’s 4% gain tells the whole story.

Am I saying that Uber is going to underperform Amazon in the future? No, I wouldn’t know. However, as an investor looking to maximise risk to reward Amazon represents a much better-known outcome with solid fundamental backing precisely what is needed during times of such volatility and uncertainty.

Dynamic Asset Allocation is Key

Dynamic asset allocation requires frequent adjustment of asset class mix to take full advantage of varying returns of each asset class given market conditions. Not having a target asset mix to adhere to allows for positions based on market conditions and trends of the time and not a one size fits all strategy. Dynamic asset allocation allows for greater diversification of asset classes within the portfolio. It allows for better movement towards higher growth assets during bull markets and defensive positions during a downturn.

Take for example a classic 60/40 equity/bond portfolio, during a downturn, the manager of this portfolio may choose to move a large portion of their equity positions to cash or money market funds to reduce risk. However, in a dynamically managed portfolio, the manager may decide to move capital from equities to bonds, commodities (such as gold), currency, real estate or, even crypto.

This flexibility was vital for my portfolio during this market volatility moving capital from equities to safe-haven assets such as gold and bonds whos values shot up during the move down and then back to equities, futures and options for the move again bullish. This allowed for profiting from both market moves and limiting exposure to either market during their volatile downturns.

Being flexible around asset allocation will remain a strong strategy as markets remain volatile, opportunities often arise overnight, and market sentiment shifts weekly. If we see a vaccine over the coming months, we will likely have a significant increase in risk appetite leading a move away from haven assets with downtrodden stocks (airlines, travel, gaming, and hospitality) seeing considerable swings to the upside. While, if conditions remain as is with COVID cases continuing to climb in the U.S., we are expecting to see another period of risk-off with havens claiming the top spot again.

Focus on future growth themes and not the current climate

The cloud is my number 1 growth sector coming out of COVID 19. Firms are moving to online offices, e-commerce, big data, and greater reliance on cloud supply chain management combined with the adoption of 5G boosting online app demand, cloud providers look to be the largest beneficiaries from this historical change in consumer, business and governmental behaviour.

Automatisation is becoming ever more prevalent, especially given the new risk associated with human capital which COVID has brought. The cost of making workplaces safe from COVID 19 is pushing many companies especially those in the industrial and production sectors to automate processes which it either had put off due to cost or was in the past economically unviable.

ESG investing has been gathering pace for multiple years now seeing exponential growth over the last five. ESG factors have been thrust into the limelight given the COVID 19 outbreak, a newfound focus on the well being of both people and the planet has risen from a need to live healthier lives and diversity issues at the forefront of the public interest. ESG investments will direct significant capital flows into assets fulfilling these targets and driving continued valuation growth.

Low rate environment carrying growth in capital expenditure over the coming five years is my final key theme. Given the Fed’s target rate at 0-0.25 with money markets pricing in little chance of a rates increase in the next ten years, we can expect a low rates environment for several years to come. Firms taking advantage of cheap money to grow revenue organically will be a significant driver of growth, although excessive levels of borrowing could raise red flags.

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