January 2021 Investment report

February 17, 2021
Investment Updates

Accumulation Index of 0.33%, underperforming the market by -0.89% (after fees). An overweight position in Consumer Staples and underweight positions in Materials and Healthcare contributed to relative performance while a position in REITS and an underweight position in Banks and Consumer Discretionary detracted from relative performance. Consumer Discretionary, Information Technology and Banks outperformed into reporting season based on high expectations for earnings growth.

Every market cycle sees new and innovative company valuation methodologies emerge. This market cycle is no different, along with a record number of day traders and large amounts of speculative money chasing unprofitable companies. Loss-making companies are being valued on sales multiples or metrics based on Total Addressable Market (the size of the potential opportunity). As new methodologies are adopted, traditional measures have had less focus. One of those is Beta, a measure of risk. In the current market environment greed has taken precedence over risk.

Ethical Partners investment process focuses on both expected return and risk. It focusses the team on companies that are profitable, have strong cash flows, low debt and good sustainability credentials. This leads us to hold, all else equal, companies where the range of future cash flow outcomes is lower than for concept companies. While not explicitly targeted, the portfolio has a Beta of0.9, primarily as a result of our process, indicating that the portfolio of companies we hold is less volatile than the market. Companies with a Beta of less than one currently make up around 64% of the total portfolio. Seven out of our top ten active positions also have a Beta of less than one.

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