The large cap portfolio closed out the quarter ended June 30th, 2020 with a portfolio NAV valued at $341.04 USD per share. This represented a return of 33.8% over the previous quarters closing value of $254.93 USD per share. When compared to the year end 2019 price of $326.45 USD per share, the portfolio is now in the black for the year to date with a return of 4.5%.
The equity market was divided up into what appears, to this author, to be a tale of two economies. Traditional consumer discretionary businesses represent an enormous component of global GDP and do particularly well during economic expansion. These sectors also are abysmal investments during recessions. The various industries and subsectors, which include travel related business, were extremely hard hit by the stay at home orders put forth by the bulk of global governments. The business decline and attendant economic fallout looks to be severe, but the actual financial results from corporations will only be released in the weeks ahead. Companies such as airports; the large cap portfolio holds several, were hurt quite badly in the quarter ended June 30th. In contrast, the unprecedented fiscal stimuli enacted by most national governments served to prop up consumers, at least for a time. Technology based firms and firms that facilitate the transfer of money experienced an acceleration in their traditional growth rates. Certain health care businesses that one would assume, in a rational world, to be hurt quite badly by the expenses associated with providing service during a global pandemic; these firms were, perversely, beneficiaries of the shutdowns and hysteria associated during the worst of the lockdowns as most of their customers paid their regularly monthly insurance fees but did not consume expensive elective and non-elective surgeries. It was certainly the oddest quarter experienced in many years of owning investments.
As indicated in the last quarters report, this portfolio very much stands on the buy and hold policy. The businesses that experienced significant price declines are still held as they were prior to the SARS-COV2 outbreak. The businesses that performed exceptionally well are also being held without change. Dividends will continue to be invested as they are paid.
While the portfolio has returned to positive territory for the first half of the fiscal year, investors should not be complacent. One reason for the increase in overall markets, at least for the interim, is a lack of alternatives to equities for income. Interest bearing deposits and bonds provide uninspired current yields at present. Cash is king in a panic, but the infusion of liquidity into the global system seems, for now, to have staved off the need by investors to hold more cash than they have already amassed.
One explanation put forth, for the present market recovery, is that hope remains of a V shaped economic acceleration from recession. Should this prove out, then the massive stimuli applied to the global systems could push towards an economic boom that we have not seen in years. As a counterpoint, should the recession continue for apace, then the current froth might abate somewhat and stocks could easily pull back.
There are some major geopolitical issues going on at present that have been largely glossed over by the media. A key flashpoint is the potential for armed conflict between India and China over disputed lands on their borders. China has ceased all pretense of being a global partner, the government is provocative and belligerent to the point that armed conflict in Asia could serve the interests of their government and divert attention from the current state of their domestic economy. A hot war could send markets into a fright and would compound anxieties around the world. This investor doesn’t know how things will shake out, so without a strong conviction about whether markets will recover or falter, the course of action remains, inaction.
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