CHRIS BURRELL ’ S BLOG
Farewell to 2020
The common catch cry is that most are happy to bid farewell to calendar 2020 as a year and to look forward to 2021 . This reaction is easily understood as 2020 brought us Covid-19 in March 2020 , a Black Swan event from left field that sent the ten pins flying . There have been significant disruptions to lifestyles , with consequent impact on families and workplaces . The major burden has been borne by those who contracted the virus and suffered severe health effects and in some cases are deceased . At this time of year , we also think of all the doctors and health workers who put their lives on the line to help those around the world who were severely impacted .
In Australia , we were fortunate on the health front to close the international borders and quarantine those who tested positive . By separating the sick from the well , Australia was one of the most successful nations globally in minimising the spread .
From the financial viewpoint , client portfolios also received favourable treatment . Following a month long fall , the Australian share market bottomed on March 23 some 30 % below the previous level . The good news is that the majority of portfolios have recovered now to be a little above the 1 July 2019 value i . e . portfolios have generally recovered all of the Covid fall . This is a great outcome .
Let us firstly look back at the pluses and minuses in managing portfolio returns during 2020 .
2020 Positives 2020 Minuses
� Staying invested and holding ones positions once the Covid correction occurred allowed the portfolios to benefit from the subsequent nine month recovery which has largely restored portfolio value back to 1 July 2019 .
� Those who were brave enough to buy further stocks during the Covid downturn have been well rewarded with such purchases adding to returns .
� Rotating stocks based on independent research and proactive discussions with advisors relying on the Burrell focus list , a list of initially more defensive stocks such as share registries and other companies whose earnings would be maintained during the pandemic proved a useful strategy . This resulted in a number of portfolios achieving market returns , recovering their value , and doing so with lower risk companies in the portfolio .
� Separating stocks into five categories was useful : value , cyclicals , growth at reasonable prices ( GARP ), growth at realistic prices and other growth stocks . The last category should be viewed as speculative .
� Banks suffered dramatically during the March downturn falling by some 40 % i . e . three of the majors fell from $ 25 to $ 15 . Our firm took the view that this was an overcorrection and it was important to hold one ’ s positions . Most clients were on board and have seen a steady recovery in bank stock prices , particularly in the last two months of the year . The strong stimulus packages from the Australian and State Governments together with significant monetary injection from the Reserve Bank of Australia ( RBA ) have all reduced the probability of business failure in 2020 . Listed companies requiring funds to bolster their balance sheets were almost without exception able to raise funds on the market . This has reduced the
‐ A number of client portfolios underperformed in the January / February 2020 rally because the portfolios were overweight value stocks and underweight growth . In hindsight , those portfolios that held GARP and growth at realistic price stocks such as CSL , Carsales and OverTheWire achieved portfolio returns in the first two months of the 2020 calendar year closer to the index . Fast forward to the last few months of the 2020 year when growth stocks have underperformed , there is an opportunity emerging for older style portfolios to tilt towards growth by adding GARP and growth at realistic prices .
‐ The Burrell focus list was initially comprised of stocks with defensive earnings . However , the growth stocks , particularly those benefitting from working-from-home ( WFH ) had also fallen and then became the beneficiary of dramatic market recoveries . This was particularly so for some of the USA stocks such as Zoom . While a number of client portfolios had overseas exposure and these exposures were generally maintained , across the board portfolios were underweight growth stocks . Some rebalancing has occurred in a number of portfolios in the period since March and is ongoing .
‐ Institutional investors initially took the view that the markets would bottom at the point that the rate of change of new Covid cases started to decrease . This is known as the double derivative of new Covid cases . This occurred in Australia on March 23 , but surprisingly this was also the low point generally overseas . It is somewhat anomalous that the second wave of new cases outside Australia continues to grow , but
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