2020 Investment Year in Review

During a year when there was so much drama, and turbulence in investment markets, 2020 ended much like it started — with most equity markets at or near all time highs!

During the year we saw the sharpest and fastest bear market in history followed by an equally astounding rebound in global equity markets. The pace of the market recovery amidst a global pandemic and lockdowns was a greater surprise than the pandemic induced sell-off. If 2020 isn’t one of the most humbling years for market pundits and forecasters, then it is hard to imagine what would be!

Inactivity as an Investment Superpower

Through the depths of the crisis we wrote about Inactivity as an Investment Superpower — “The less you fool with your portfolio, the less you’ll play the fool.” This couldn’t have been more true for 2020. At the height of the panic, it would have been easy to succumb to fear, sell out and crystalise the losses. Doing so would have very likely meant that one would have missed out on the sharp recovery led by a near 70% rise in S&P 500 from its bottom in March.

A 2019 study by Morningstar found that over 10 years to 2018, the average equity fund investor earned 0.56% less each year than the funds they invested in — the result of buying and selling when they should have just bought and held. The study’s conclusion — A good plan and patience will serve you well!

In a year, where nothing was usual, the same can be said for the economic recession — both the economic downturn and rebound were sharp and short. Nonetheless, the first half of calendar year 2021 can still be considered as the early phase of the recovery in the economic cycle and we are likely to see upticks in volatility.

Clover Portfolio Options — Net Returns to 31 December 2020

The table below shows the model portfolio* after-fee returns for periods to 31 December 2020. Your personal performance will be different based on contributions and other activity you may have had in your account.

Clover Core Model Portfolios:

Periods to
31 Dec 2020 Conservative Moderate Balanced Growth Aggressive 3 Months 2.4% 3.3% 5.4% 7.0% 8.8% 6 Months 3.4% 4.7% 7.3% 9.4% 11.7% 1 Year 2.7% 3.1% 2.9% 3.0% 2.7% 3 Years (p.a.) 3.7% 5.7% 6.6% 7.1% 7.3% Since
inception** (p.a.) 4.1% 6.1% 7.5% 8.6% 9.6% * The above returns are model portfolio returns for Clover’s core investment options, based on each option’s benchmark asset allocation on an assumed $50,000 portfolio with Clover fees incorporated. Individual client portfolio pre-tax returns may differ from the returns depicted above depending on portfolio specific cash-flows over the period, including the timing and size of any additional contributions or partial withdrawals over the period.
** Since inception portfolio returns are calculated as from 1 February 2016.

Clover SRI Model Portfolios:

Periods to
30 June 2020 Conservative Moderate Balanced Growth Aggressive 3 Months 1.9% 3.5% 5.9% 7.4% 9.2% 6 Months 2.7% 5.2% 7.9% 10.0% 12.1% 1 Year 2.5% 4.7% 4.7% 5.2% 5.1% 3 Years (p.a.) 4.0% 6.3% 7.0% 7.7% 7.9% Since
inception** (p.a.) 3.9% 6.2% 7.1% 8.2% 8.8% * The above returns are model portfolio returns for Clover’s SRI investment options, based on each option’s benchmark asset allocation on an assumed $50,000 portfolio with Clover fees incorporated. Individual client portfolio pre-tax returns may differ from the returns depicted above depending on portfolio specific cash-flows over the period, including the timing and size of any additional contributions or partial withdrawals over the period.
** Since inception portfolio returns are calculated as from 1 January 2017.

All of Clover’s model portfolios experienced positive returns over the 2020 calendar year. The strong returns over the second half of 2020 become apparent in the 3-month and 6-months returns to December 2020.

Most importantly, returns over the 3-year period and since our portfolios were first formed are close to each option’s long-term expected returns.

The difference in short-term returns between Core and SRI options is attributable to the higher relative allocation to the technology sector (over industrials and materials sector) in the SRI option. Technology sector was a key beneficiary of the COVID-19 induced lockdowns around the world, both in terms of operating metrics and expected future valuations, which reflected in the sector’s price performance.

Over the three years and since inception, returns between our Core and SRI options are closer as the impact of the shorter-term valuation differences start to diffuse.

Overview of Asset Class Returns

Clover portfolios are created from building blocks at the asset class level, with each Exchange-Traded Fund (ETF) deployed in client portfolios aiming to track as closely as possible the performance of a particular asset class index.

2020 calendar year returns for the broad asset classes are shown below.

Australian Shares

Australian shares like the rest of the equity markets were caught in the sharp weakness in global investor sentiment as the world grappled with COVID-19 and the impact of lockdowns. Australian government was proactive in implementing significant stimulus measures, which coupled with removal of restrictions saw business and consumer sentiment surge. Business confidence reached its highest level since 2018. Retail sales also increased sharply up 13% year-over-year.

Global Developed Markets Shares

US shares (S&P500) were the standout performer amongst the major developed markets returning 18.4% in US dollar terms and 7.3% in AUD. Overseas returns on an unhedged basis were impacted by the strong appreciation of the AUD. The Aussie dropped from USD0.72 at the end of 2019,to a low of 0.57 against the USD in March, but then ended the year at 0.77. Hedged to AUD, global developed market shares returned 10.6%. AUD appreciated 9.8% against the USD over the year. On a trade weighted basis, AUD appreciated 5.1% over the year.

Emerging Markets

What was good for the global equity markets over the second half of 2020 was even better for emerging markets. Emerging market shares registered a robust return, outperforming developed markets equities as vaccine news was positive and the US election outcome boosted risk appetite. China, the largest country in the MSCI Emerging Markets Index, was the third-best-performing market this year (behind South Korea and Taiwan). Though China’s recovery since the bottom has not been as large as the broader index, its equity market fell significantly less in the first quarter as the government was able to effectively manage the spread of the virus.

Listed Property

Listed property (Real Estate Investment Trusts) sold off heavily in March ( down 35%) with worries around lockdowns, implications of social distancing, working from home and online shopping for office buildings and shopping malls. Offsetting the sharp occupancy declines in office buildings and foot traffic through shopping malls was the demand profile for industrial property — warehouses and logistics to support online sales. By October, physical occupancy in CBDs (except Melbourne) showed improvement. Foot traffic across retail centres (excluding Victoria) also started converging towards pre-COVID levels.

Australian Fixed Income

Fixed income acted as a ballast to the sharp declines in equities and other risk assets over the first half of 2020. Coordinated policy action by major central banks around the world in slashing policy rates and implementing large bond purchasing programs have led to historically low bond yields (lower bond yields mean higher bond prices) more than offsetting the rise in credit spreads for corporate credit in sectors most affected by the pandemic and the lockdowns.

Letting Time Do The Heavy Lifting

Successful investing, as with much in life, is really about sustained effort and discipline. The bedrock of long term-investment success remains diversification, keeping costs low and adhering to a strategy one can understand and relate to in light of one’s longer term objectives.

Concerns over the economy and the pandemic will undoubtedly be with us for some time and there is bound to be more market volatility ahead. Share market valuations are high by historical standards and so we recommend our clients have reasonable expectations for modest returns ahead…and be prepared for periods of volatility occurring from time to time. It’s in years like 2020 where we can see the true value and merit of not reacting to market gyrations and the news cycle.

Clover News

Our transition to become part of SuperEd went without a hitch in December 2020. Thank you for acting on the transition documents.

Clover has a bigger team with an expanded Investment Committee overseeing your investments. The committee includes Sahil Kaura (Clover co-founder), Jeremy Duffield (chair of SuperEd), Hugh Morrow (CEO), as well as Mikhail Tupitsyn (Financial Engineer) , Alison Squire (Head of Advice) and James Coyle (Chief Customer Officer). Clover’s investment philosophy remains unchanged.

Disclaimer

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.