At Least We Finished Strongly

For what was a torrid year on so many fronts, all APC Classic Core Portfolios recovered over the course of the last quarter in 2020.  All portfolios showed a positive return against their ‘benchmark’ (or the market) over the minimum recommended investment time frame with the lone exception being the APC Classic 100 portfolio.

Global investment markets found optimism finishing 2020 very strongly (up nearly 6% for the quarter) on the back of news regarding vaccine breakthroughs and (eventual) certainty around US Presidential Election results.  The Australian share market was actually one of the strongest performing lifting by ~14% in the quarter thanks to strong results in ‘Small Cap’ and ‘Value’ companies – both of which are targeted premiums in APC’s Classic Core Portfolios.

The Australian economy expanded with Gross Domestic Product (GDP) rising 3.3% and the Aussie dollar rallied against the US finishing just south of US$0.77. However, this was more about a weakening ‘greenback’ which fell ~7% across a broad range of currencies.

Property investments also showed strong signs of recovery (up over 13% for the quarter) after what has been a very challenging period (still down ~4% for the 2020 calendar year) with some pivoting their focus towards regional areas as opposed to CBDs.

With global interest rates remaining low (and probably staying such for some time to come yet) the cash and fixed interest investment environment continues to be challenging however there was a noticeable ‘term premium’ evident and ‘credit spreads’ returned to pre-Covid type levels.

2020 has once again reminded us to ‘stay the course’ and not ‘panic selling’ during times of significant market volatility as the ‘upside’ that so often follows the ‘downs’ assists in a swifter recovery from shocks.

Building Resilience

By Jim Parker Vice President, Jan 12, 2021

In media forecasts for 2020, a global pandemic and the worst recession since the 1930s weren’t high on everyone’s list of threats. But even had these events been foreseen, who would have tipped global equities to reach record highs a year later?

Yes, it’s a cliché to compare the ups and downs of the share market to a rollercoaster, but for once the metaphor has rung true. After many markets hit record highs in February, they suffered a gut-wrenching slide of more than 30% in five weeks.

The recovery from April was just as dramatic. By late November, the MSCI World index had surpassed February’s pre-pandemic records. Investors began to anticipate an economic recovery and were cheered by news that three different vaccines, promoted by their makers as highly effective, would soon be available. By 31 December, the Australian equity market, as measured by the S&P/ASX 300 index (total return) was up 1.7% for the calendar year, while the MSCI World-ex Australia index was 5.7% higher.

The sheer volatility in prices mirrored our emotional swings. After all, this was a health crisis first and foremost. As of 31 December, 1.8 million people had died from COVID-19, while more than 83 million cases had been reported worldwide.1

On top of the medical anxieties were threats to livelihoods. With entire industries and economies severely disrupted by the pandemic, governments and central banks announced unprecedented levels of policy stimulus. Even so, the International Monetary Fund in October projected a historic global GDP contraction of 4.4% in 2020, the worst annual plunge in activity since the Great Depression.2

COVID-19 also changed the way we lived and worked. Our homes became offices and classrooms. Time formerly spent commuting was now absorbed with work and study. For some, the working day started much earlier. For others, it ended later. Old schedules were discarded.

Perhaps what was most striking is how well we adapted in the face of significant economic and social disruption. Previously un-thought of travel restrictions, social distancing, mask wearing, and contact tracing apps are now facts of life.

The urge to protect ourselves and our loved ones from an external health hazard was such we were prepared to give up some freedoms. Granted, not everyone accepted these without complaint, but compliance was the rule rather than the exception.

The rules around good investment practice were reinforced as well. When volatility turned so extreme in late March that even the US Treasury market became unsettled3, there was a temptation among many to retreat to cash. But those who listened to their advisors would no doubt be thanking them now.

The first rule we were reminded of is that markets work. That doesn’t mean they’re perfect or that they go only in one direction. When there is a lot of uncertainty, there will be a lot of volatility. But trying to second-guess prices is futile. Even if you could forecast news events like a pandemic, you still have to work out how markets will react.

Given the impossibility of outguessing markets, the second rule is to rebalance to maintain one’s chosen asset allocation. Amid the sharp decline in shares in the first quarter this year, bonds – like shock absorbers in a motor vehicle – continued to play a key role in preserving capital, lessening portfolio volatility and making for a less bumpy ride. Those who used this opportunity to rebalance their portfolios back toward their desired allocation reaped the benefits.

Third, diversification was again shown to be critical in improving the reliability of outcomes. Obviously some stocks and sectors were more exposed to a pandemic that brought travel to a virtual halt and reduced human contact. Airlines, cruise ships and tourism-related stocks were all hard hit, as were traditional bricks-and-mortar retailers.

On the other side, home entertainment stocks like Netflix, digital media companies like Facebook and Google, online retailers, and some healthcare stocks did remarkably well. In Australia, gold and iron ore miners bucked the overall downtrend. Being broadly diversified matters because it reduces risks associated with individual companies or sectors and is a critical tool in reliably capturing the premiums you are targeting.

Fourth, rarely has the value of discipline been demonstrated so vividly. While there was no denying the anxiety we felt, trying to get off the rollercoaster in the middle of the ride was only likely to make matters worse. Well-advised investors instead learnt to hold on tight and stay focused on their destinations.

Of course, there inevitably will be further challenges ahead. Markets may become volatile again, as is their nature. The pandemic is still with us. While there has been encouraging news on vaccines, hurdles have still to be overcome in manufacture, storage, distribution and compliance. While many economies, including Australia and New Zealand, have bounced back from the initial shock, scars remain.

But the philosophy underlying effective personal responses to external health and wealth threats is similar. In both cases, we do best by focusing on what we can control. In health, this includes frequent hand-washing, mask-wearing and social distancing. In wealth, it is asset allocation and rebalancing, diversification, discipline, and accepting that markets will do what they do, absorbing news instantaneously and looking forward.

None of this can ever make the uncertainty go away. But it can make us feel less anxious and more resilient in the face of whatever comes our way in the future.

That’s the best lesson 2020 gave us.


  1. 1World Health Organisation COVID-19 Dashboard.
  2. 2World Economic Outlook, IMF, Oct 2020.
  3. 3Monetary Policy Report, US Federal Reserve, June 2020.


AUSTRALIA and NEW ZEALAND: This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.

No Free Lunch, No Free Investing

An article by Rick Kahler, MS, CFP®, CFT-I™, ChFC, CCIM

“There’s no such thing as a free lunch”. The adage suggesting you can’t get something for nothing seems to have bitten millions of unwitting investors who used a popular trading platform in the USA, Robinhood.

This summer, my 19-year-old son proudly informed me he was a Tesla owner – the company, not the car. Knowing Tesla was selling around $200 a share, I asked how many shares he purchased. He said “$15 worth. I don’t know how many shares that is. I found an app called Robinhood that allowed me to buy any amount I wanted.”

In the ensuing weeks, he checked the price of his purchase daily, watching his $15 run up to $22 and then slowly fall back to $14. Prior to this experience, his investments were diversified index funds that tended to be far less volatile. The daily volatility turned out to be too much for his young stomach to handle. He sold out his position in Tesla at $14.53 to realise a $0.43 loss and concluded, “I am not doing that again.”

Robinhood revolutionised the way small and younger investors can buy and sell shares, options, and cryptocurrency by eliminating minimum purchases and trading fees. The app, with its name implying it takes from the rich and gives to the poor, makes it easy and fun for anyone to invest.

How does a free app make money? Saloons of the 1890s gave away a lunch with every drink purchased. The free food was heavily salted, which resulted in the patrons buying a lot more high-priced beer than they planned.

Similarly, Robinhood used the concept of a heavily salted “free lunch” by using gaming-type experiences that encouraged their customers to trade more frequently and invest in higher-risk investments like bitcoin and options, all of which made the company more money.

Robinhood made much of their money by auctioning off their customer’s trading orders to the firm that would pay them the most money, resulting in the worst deal on pricing for their customers. The Securities and Exchange Commission (SEC) said Robinhood’s customers paid over $34 million (USD) more than they would have paid with other brokerage firms that charged fees.

What got Robinhood into trouble with the SEC was misleading consumers by not disclosing that customers paid the highest possible prices for the shares they purchased and received the lowest price for those they sold. The company agreed to pay a $65 million fine to settle the charges in December 2020.

Before you sign on for financial products or services that are “free”, first clarify how the company or person is making their money. If the answer is not clear and understandable, move on. The chances are that you’ll end up with the lowest overall cost by paying a fully transparent and disclosed fee.

Because the old adage is right! There is no such thing as a free lunch.

Client Briefing Video

Given the obvious difficulties associated with large gatherings at present, the APC team has put together a video client briefing which we hope you will find informative and of value.  There are five separate videos located in the Resources section of our website which can be found at the following link;

Once you land on the page please scroll down to the section headed Client Briefings where the following videos will be available for you to review.  They are designed for you to review them in order however you are of course free to view them in whatever order you wish.

Video 1: Introduction and economic updateRobert Sarafov: Director and Senior Adviser

Rob will take you through the agenda for the briefing along with an economic update. Watching this video will hopefully assist you to gain a better understanding of current key economic themes and explain what APC is keenly observing in the current environment and likely effects on markets.

Time: 12:20

Video 2: Portfolio and market performance   Hayden Windsor: Director and Senior Adviser

Hayden will briefly cover how difficult it is to predict future market movement and how COVID and particular investment themes have impacted the Classic portfolios over 2020.  This video will illustrate that even during a tough year the Classic portfolio suite has broadly held it’s own.

Time: 6:11

Video 3: APC’s CORE + Satellite investment approach   Carol Tawfik: Senior Adviser

Over the past few eNews communiques, APC has introduced you to our evolved investment methodology called our CORE + Satellite Approach.  Carol delves a little deeper into this concept for you and explains how it works.  Watch this video to better understand its benefits to you as an investor.

Time: 10:22

Video 4: Get to know our newest shareholder   Robert Sarafov / Hayden Windsor/ Carol Tawfik

Recently Carol joined APC’s share registry as our third shareholder!  Rob, Hayden and Carol casually chat about the journey APC has been on since March 1988 when our founding partner, Michael Tratt, started the company.  Watch this video to get to know Carol a little better as well as to understand the direction and focus for APC in the years to come.

Time: 8:51

Video 5: NGV and closing remarks   Robert Sarafov and Carol Tawfik

As you will know, APC has had for many years a very close partnership with the National Gallery of Victoria (NGV). In this video Rob briefly introduces the NGV’s 3D tours and invites you to take a ‘deep dive’ into their dedicated website.  Carol then offers some closing remarks to bring the briefing to a close.

Time: 2:18

On behalf of the entire APC Team, we hope you find the briefing of interest and value!

APC News November 2020

APC Foundation Client Service Benefits

As a Private Client of Australian Private Capital you have the opportunity to extend certain valuable services to your children via the Foundation Client Service which is our service specifically tailored for young adults.  The following are available right now;

Debt Review: If you have any children who have existing loans then allow APC the opportunity to facilitate  a review and market comparison by a debt specialist to make sure your child’s loan is as competitive as possible.  There is no fee for this review and if a new loan is put in place you can help your child lower their ongoing repayment and with APC’s Commission Rebate Policy this can mean hundreds if not thousands of dollars in commission returned to them!

Insurance Review: If you have a working child, chances are they will have personal insurances such as Life, Total & Permanent Disability, Income Protection or Trauma. These can be expensive.  What many people do not realise is that the commission paid to insurance advisers by the insurance companies to sell their products is between 25% and 30% of the annual premium!  You can help your child lower the cost of insurance by allowing APC to review their existing insurances.  Not only can we ensure they have the right levels of cover in place but with APC’s Commission Rebate Policy we will return to them annually the 25% – 30% of premium commission rebate!

What should you do?

Talk to your kids and let them know of these services that are available to them by virtue of your APC Private Client Service.  If you have working children with either a loan or personal insurance you can help them lower the cost of both or at least give them peace-of-mind that their current circumstances are as optimal as possible!

What financial services could we offer that we don’t?

In our most recent client survey, which we provided feedback to you on in our last E-News, we scored highly across the board although our lowest score (still a high 4.59 out of 5.00) was Range of Financial Services.  We believe APC provides our clients a comprehensive range of services however we are always very interested to receive your feedback of services that you would like us to provide you, which we currently do not.

What should you do?

If there is a financial service you would like us to consider including in our Private Client Service please email to [email protected] with the subject RANGE OF FINANCIAL SERVICES FEEDBACK your suggestion and we will investigate and personally respond back to you with our findings and the outcome.

APC’s new Resources section

APC has now included in our website a new Resources library, which contains short videos explaining various wealth management strategies which we implement with our clients. This Resources section has been deliberately located in the public area of our website so you may share them with family or friends.

You can locate this new Resources section here.

APC’s office operations – including Christmas and New Years

Currently APC is not able to operate in our offices due to Victorian Government COVID restrictions however it is our intention to return to our office as soon as we are able to do so.

Christmas and New Years

Our offices will be closing for a 2 week Christmas break at 3pm on Thursday December 24th and re-opening at 9am on Monday January 11th  2021.

Large and In Charge

A top-heavy stock market with the largest 10 stocks accounting for over 20% of market capitalization and a marquee technology firm perched at No. 1? This sounds like a description of the current US stock market, dominated by Apple and the other FAANG stocks,1 but it is actually a reference to 1967, when IBM represented a larger portion of the market than Apple at the end of 2019 (5.8% vs. 4.1%).

As we see in Exhibit 1, it is not particularly unusual for the market to be concentrated in a handful of stocks. The combined market capitalization weight of the 10 largest stocks, just over 20% at the end of last year, has been higher in the past.

EXHIBIT 1 – Same Old Story

Weight of largest stocks by market capitalization in US stock market, 1927–2019


A breakdown of the largest US stocks by decade in Exhibit 2 shows some companies have stayed on top for a long time. AT&T was among the largest two for six straight decades beginning in 1930. General Motors and General Electric ranked in the top 10 at the start of multiple decades. IBM and Exxon were also mainstays in the second half of the 20th century. Hence, concentration of the stock market in a few large companies such as the FAANG stocks in recent years is not a new normal; it is old normal.

EXHIBIT 2 – Big Board

Largest 10 US stocks at the start of each decade

Moreover, while the definition of “high-tech” is constantly evolving, firms dominating the market have often been on the cutting edge of technology. AT&T offered the first mobile telephone service in 1946. General Motors pioneered such innovations as the electric car starter, airbags, and the automatic transmission. General Electric built upon the original Edison light bulb invention, contributing to further breakthroughs in lighting technology, such as the fluorescent bulb, halogen bulb, and the LED. So technological innovation dominating the stock market is not a new normal; it is an old normal too.

Another trend attributed to a new normal is the extraordinary performance of FAANG stocks over the past decade, leading some to wonder if we should expect these stocks to continue such strong performance going forward. Investors should remember that any expectations about the future operational performance of a firm are already reflected in its current price. While positive developments for the company that exceed current expectations may lead to further appreciation of its stock price, those unexpected changes are not predictable.

To this point, charting the performance of stocks following the year they joined the list of the 10 largest firms shows decidedly less stratospheric results. On average, these stocks outperformed the market by an annualized 0.7% in the subsequent three-year period. Over five- and 10-year periods, these stocks underperformed the market on average.

EXHIBIT 3 – Power Down

Annualized return in excess of market for stocks after joining list of 10 largest US stocks, 1927–2019


Past performance is not a guarantee of future results.

The only constant is change, and the more things change the more they stay the same. This seems an apt description of the dominant stocks atop the market. While the types of businesses most prominent in the market vary through time, the fact that a small subset of companies’ stocks account for an outsized portion of the stock market is not new. And it remains impossible to systematically predict which large companies will outperform the stock market and which will underperform it. This underscores the importance of having a broadly diversified equity portfolio that provides exposure to a vast array of companies and sectors.

Market Returns Through a Century of Recessions

What does a century of economic cycles teach investors about investing? Our interactive exhibit examines how stocks have behaved during US economic downturns. Markets around the world have often rewarded investors even when economic activity has slowed. This is an important lesson on the forward-looking nature of markets, highlighting how current market prices reflect market participants’ collective expectations for the future.

Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.


  • In US dollars. Stock returns represented by Fama/French Total US Market Research Index, provided by Ken French and available at This value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.
  • Growth of wealth shows the growth of a hypothetical investment of $100 in the securities in the Fama/French US Total Market Research Index from July 1926 through December 2019.
  • Gross Domestic Product (GDP) based on quarterly data from the US Bureau of Economic Analysis; quarterly data not available prior to 1947. Percentage change in GDP based on business cycle peak to trough quarter as reported by National Bureau of Economic Research (NBER).
  • Industrial Production, Inflation, and Unemployment based on monthly data from Federal Reserve Bank of St. Louis (FRED); Unemployment data not reported prior to 1929.
  • All calculations are cumulative.


The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.

Data presented in the Growth of Wealth chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd, Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

AUSTRALIA and NEW ZEALAND: This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

APC Partners – The Lighthouse Foundation

Australian Private Capital was delighted to bring on the Lighthouse Foundation as our most recent APC Partner just before the COVID pandemic arrived.  One of APC’s corporate values is to Give back as we prosper  and the Lighthouse Foundation is a wonderful way for us to do that.

The Lighthouse Foundation provides homeless young people from backgrounds of long-term neglect and abuse, with a home, a sense of family, and around-the-clock therapeutic care that is individually tailored, trauma informed and proven to work. Through their Lighthouse experience, young people can heal, learn again to relate to others and start to rebuild their lives. APC has recently begun our partnership with Lighthouse Foundation. Here is a short two minute sketch video about Lighhouse.

Here is a message from the Foundation which we wanted to share with you.

A message from the Lighthouse Foundation

Right now, there are hundreds of homeless young parents, babies and pregnant women in Australia that desperately need our support.  We’re talking about girls near you, from Coburg to Richmond, and right through to Bonbeach – this is happening on our very own doorstep.

Many of these young parents were forced to flee violent and abusive homes and have been repeatably told throughout their short painful lives “You don’t belong.  You’re useless.  You’re not good enough”.  Sadly, when a young person hears that over and over again, they begin to feel unworthy and invisible – like lone puzzle pieces that don’t ‘fit in’ or belong anywhere in this world.

The support the Foundation receives allows for us to attend to the immediate needs of these little families and gives us the chance to show them that their dreams, hopes and lives truly matter. This support lets us show girls like Bianca, whose story we reflect on below, that they are capable and worthy of being loved and helps us to stop the next generation of homelessness.

Our young people need help more than ever throughout this difficult time.  Just like a puzzle is put together piece by piece, we wouldn’t be able to rebuild these young lives without the vital contributions we receive from our donors.

Bianca’s Story

Lighthouse’s Young Parents and Babies’ program was devised by our Patron, Vicki Vidor OAM, to fulfil the vision to help vulnerable homeless young women and their babies – giving them the therapeutic care & practical support needed to secure a brighter and more sustainable future.  This is the story our young mum, Bianca, who transitioned into independent living.

Imagine being 20-years-old, 38 weeks pregnant and homeless. It seems unimaginable that a young woman in Australia could find herself in such a vulnerable position, but that was true for Bianca.

After years of struggling with substance abuse, Bianca had completed a rehabilitation program to try and prepare herself for motherhood – but with nowhere to call home or social supports available to her, both of their futures were at serious risk.

Thankfully Bianca was referred to Lighthouse and warmly welcomed into our young parents and babies’ program.  It was tough at first, she admits, “learning to live with structure and allowing someone else to care for me was hard”, but for the first time, in a long time, she was safe.

Bianca slowly adapted to her new life at Lighthouse, and after giving birth to her baby boy, Kaylan, embraced the wraparound support provided by her carers and psychologists.  Every single day, their thoughtful and predictable engagement with Bianca helped to repair her shattered world view – proving that genuine, healthy and trustworthy relationships were possible.

After twelve months at Lighthouse, Bianca had developed a strong attachment with baby Kaylan and learnt the vital parenting skills needed to take care of him and most importantly, herself.  Having now left the program and transitioned into independent living, Bianca is hopeful for the future and has plans to complete her VCAL and enroll in a Bachelor of Nursing.

We couldn’t be more proud of this young Mum and what she has achieved over the past year.  Little Kaylan is lucky to have such a strong role-model in his life and both of them will always have a place to call home here at Lighthouse as a part of our ‘On For Life’ promise.

The next step

In a beautiful collaboration, Lighthouse has teamed up with iconic artists Ken Done & Cassie Byrnes to produce ta deluxe two-in-one Jigsaw Puzzle by Journey of Something.

This gift is the ‘gift that keeps on giving’, with all proceeds helping Lighthouse to support kids impacted by abuse, neglect and homelessness in Australia.  Australian Private Capital will be purchasing one for each member of our team.

If you would like to enquire or make your order so you too can support the Lighthouse Foundation, simply email [email protected] or call 03 9093 7500.

September Quarter Market Update

Key points

  • Globally, the pace of economic recovery from COVID-19 is uneven, with the US tracking at the optimistic end-of-expectations but economies such as the UK lagging behind fund manager mid-year forecasts.
  • Economic growth in the US has returned at a quicker-than-expected rate partly as a result of less-stringent lockdowns helping to boost the near-term economic outlook. Longer-term, many market commentators continue to expect US economic growth won’t return to pre-COVID levels until the end of 2021.
  • There are signs international trade is picking-up after the lows of May and June with China as a stand-out in global trade. China’s export position has benefited from its dominance in the global production for COVID-related products such as protective gear, pharmaceuticals and office equipment.
  • Global monetary policy is expected to remain loose throughout 2020 and well into 2021, with the risks skewed towards further easing.

Share Market Valuations

Whilst it can be argued that share market valuations are ‘high’ (current PE ratios are at near dotcom levels) relative to Bonds, which have seen officials rates fall significantly, they provide a healthy equities risk premium (the difference between earnings yield and bond yield).  So long as this continues it will underpin the support for shares.

TABLE One: US Share market Equity Premium

Value and Small tilts

The September quarter continued to see the Value (cheap companies) and Size premia under pressure globally as the following table of return (in AUD) attests.  This is largely (but not exclusively) a function of continued low interest rates which supports the current valuation of future cash flows.

TABLE Two: Global Value and Size Premia

Economic growth


The consensus foresees a return to modest growth in the third and fourth quarters following on from a second quarter which saw the country enter its first recession in 29 years. A sharp pullback in GDP of –7.0% in second quarter was the largest fall in quarterly Australian GDP since records were first kept in 1959. Most commentators continue to forecast a contraction in full-year GDP of around –4% with the possibility of regional lockdowns factored into the baseline scenario.


A relatively upbeat growth picture for China was affirmed in August with a monthly gain in retail sales—the first such gain this year. High-frequency data indicators for August paint a relatively upbeat picture for growth in China, making it less likely that policymakers will choose to stimulate the economy, especially as equity and housing prices rise. Retail sales rose by 0.5% in August compared with a year earlier, the first such gain this year, though they’re down by 8.6% for the first eight months of the year. Exports remained resilient, up 9.5% compared with August 2019. A broadening in China’s export goods is expected after a period where exports were concentrated in protective equipment, medical instruments, and work-from-home technology. We’ll watch for whether subdued spending in the developed world may weigh on China’s exports in the months ahead.

United States

A shift-forward in growth expectations is noted for the U.S. economy in 2020 although the longer-term picture hasn’t changed. Despite a second-quarter GDP forecast signalling an economy-wide collapse in activity, areas of the country with less-stringent lockdowns have supported economic activity even as infection trends have worsened in other areas. The overall picture is one of an improved economic growth outlook in 2020, though the long-term picture for U.S. economic growth remains unchanged. GDP returning to pre- COVID levels is not expected until the end of 2021, with the caveat that those forecasts would be subject to change without the fiscal stimulus of around $1 trillion currently forecast.


Japan’s full-year GDP is expected to contract to a range around –3% to –5% with little near-term economic impact from the resignation of Prime Minister Shinzo Abe. A moderate economic rebound is expected in the neighbourhood of 5%, above consensus, in both the third and fourth quarters as industrial indicators point to a manufacturing recovery.

United Kingdom

The early stages of economic recovery in the United Kingdom were weaker than in the euro area as the trajectory of new virus cases continued high for longer. Only a gradual recovery is expected for the rest of the year. Although most supply is back online, demand is likely to return more slowly as households remain reluctant to engage in highly social activities, especially amid a recent uptick in new cases in some areas. U.K. GDP is expected to be around −11% for the full-year, or somewhere between most baseline and downside cases set out in various mid-year updates available.

Emerging Markets

The International Monetary Fund (IMF) lowered its forecast for growth in emerging markets for both 2020 and 2021 on June 24, owing to a rapid intensification of COVID-19 infection rates in many countries. The IMF foresees emerging markets contracting by 3.0% before rebounding with positive growth of 5.9% in 2021. The IMF outlook for Latin America is particularly pessimistic with an expected contraction of 9.4% for all of 2020, before rebounding to 3.7% in 2021.

Monetary policy

Given our expectations for a slow recovery in demand, monetary policy is expected to remain loose into 2021, with risks skewed toward further easing.

The US Federal Reserve left its key federal funds rate unchanged at 0%–0.25% on September 16. Policymakers also broadly expect the rate to stay at this level through 2023. The European Central Bank left its main deposit rate unchanged at –0.5% on September 10 and said it would keep rates at current negative levels, or lower them further, until it sees the inflation outlook “robustly converge to a level sufficiently close to, but below, 2%.” The Reserve Bank of Australia (RBA) maintained its cash rate and three-year government bond target at 0.25% on September 1, and extended its Term Funding Facility through June 2021.

TABLE Three: G-6 Central Bank balance sheet size


Leading indices suggest global trade has swung back to an upward trajectory following the steep drops of May and June, with China leading the way thanks to healthy demand for products during COVID lockdowns. China is supported by its position at the centre of global goods products, particularly for those products in demand during COVID lockdowns, and by lower prices for commodity inputs.


Inflation in the United States is expected to remain below 2% by the end of 2021. Potential upside risks to forecasts include virus-related supply shocks, fiscal support and/or monetary stimulus and the willingness of the Federal Reserve to tolerate above-target inflation.

The consumer price index in the United States rose by 0.4% in August compared with July on a seasonally adjusted basis, having risen by 0.6% in July. Compared with a year earlier, inflation rose by 1.3%, while core inflation—which excludes volatile food and energy prices—rose by 1.7%.

Headline inflation was –0.2% in the euro area on an annual basis in August, according to preliminary estimates—the first slide below zero in four years. Core inflation—which excludes energy, food, alcohol and tobacco—rose just 0.4% on an annual basis, which is down from 1.2% in July and is an all-time low. The euro’s recent appreciation against other major currencies is expected to continue to exert further disinflationary pressure as less expensive imports and more expensive exports weigh on GDP. Core rate of inflation to not expected to rise close to the European Central Bank’s 2% target over the next 12 months.

In Australia, consumer prices fell 1.9% in the June 2020 quarter compared with the March 2020 quarter, and by 0.3% compared with a year earlier—the first such contraction since 1997. An update on third-quarter inflation data is expected on October 28.


The unemployment rate in the United States fell for a fourth straight month in August, to 8.4%. Although the pace of job gains has slowed in the last two months, the labour market has surpassed expectations. With growth in the US expected to accelerate over the rest of the year, we believe it will finish 2020 with an unemployment rate of about 7% to 9%, compared with the 8% to 10% previously expected.

Unemployment in the euro area rose to 7.9% in July from a revised 7.7% in June, with the number of unemployed people rising by 344,000. Furlough and other job support schemes have been successful in limiting unemployment rates so far. The recent extension of furlough programmes in Germany and France has been encouraging.

In Australia, unemployment fell for the first time since the start of the pandemic—falling to 6.8% in August from 7.5% in July. An extended virus lockdown in the State of Victoria is expected to result in further job losses in September.


Whilst infection rates are on the increase globally, it is encouraging that death rates are falling.  Of course various vaccines are also in late stage human trials which is encouraging news and sets the state for 2021 to be about ‘getting on top of’ the virus allowing the global economy to start the recovery in earnest!

TABLE Four: Global COVID-19 infection and death rates

APC Core + Satellite Approach (Part 2)

As discussed in our last E-News, APC has introduced an evolution of our investment implementation called our CORE + Satellite approach.

For many years, APC has recommended a suite of low cost portfolios based upon academic research, which are designed to provide efficient access to investment markets together with the capacity to outperform over time.

These portfolios invest in the traditional asset classes: cash, fixed interest, equities and listed property, and into various sub-asset classes such as emerging markets. These are the Classic portfolios and range from the most defensive, Classic 30, to the most growth oriented, Classic 100.

To re-iterate the key tenants of our Classic Portfolio investment philosophy;

  • risk and return are related
  • diversification is essential
  • markets work (that is to say, they are efficient when it comes to interpreting information and translating this in prices)
  • structure explains performance

These portfolios and the underlying investment principles they employ, have served our clients well over many years and will continue to do so for many years to come.

Introducing the Core + Satellite Investment Approach

The objective of a ‘core and satellite’ approach is to harness the return provided by the broad market through a low cost ‘core’, and to include where appropriate, opportunities to diversify and achieve specific portfolio objectives or outcomes through selective sources. Examples of these individual portfolio objectives may be to reduce market related volatility, to enhance passive income or increase return opportunity (and risk profile).

The Classic Portfolio Suite

At the Core of this approach is one of the Classic portfolios.

From conservative through to high growth, this suite of portfolios provides a sound investment foundation.  APC reduces risk by applying significant levels of diversification at the asset class, sub-sector asset class and direct security level.  They are low cost, fully liquid (ie easily converted to cash) and aim to limit unnecessary trading costs.  The Classic portfolios are market linked which means they are not immune from market volatility risk and would be highly ‘correlated’ with broad market movement, both up and down.

Their aim is to moderately outperform the market after fees in the long run and for many the Classic portfolio will remain completely appropriate to their needs.

Satellite investments

With one of the Classic portfolios at its core, APC may now consider the addition of other investments.  These investments are viewed in bands which have varying liquidity characteristics (this relates to the ability to cash out an investment if needed) and portfolio objectives;

Band One: Targeted Strategies

Investments of this type tend to be fully liquid and may provide the opportunity to target or ‘tilt’ specific market segments in much the same way as we have tilted our portfolios to small companies and value’ companies for nearly 20 years and continue to do so in the Classic portfolios.

The current investments in this band are;

  • ESG: Environmental, Social and Governance (SRI – Socially Responsible Investing)
  • Global Healthcare
  • Equity Style Diversifiers: Investments that implement an investment style to allow the further diversification of the overall portfolio

There are six specific investments in this band currently however this may evolve and change over time.

Band Two: Low Correlation Strategies

Band two investments may be those with different correlation profiles to the traditional asset classes. Correlation explains the extent that one investment’s performance behaves when compared to another investment’s performance over the same time period. The addition of a less or uncorrelated investment into a portfolio can improve diversification and lower volatility.  Examples may include private or unlisted company funds, or income strategies, which have less reliance on the listed bond market.  Investments in this band may be priced monthly and have monthly accessibility windows (ie be less liquid).

The types of investments that are planned for this band are;

  • Income: Higher income focus with less reliance on the listed bond market
  • Property: Reliable income and stable capital preservation with no or little exposure to the listed Real Estate Investment Trust (REIT) market
  • Shares: growth only investments which provide access to the unlisted companies market

There is currently one investment in this band (Shares) with an additional two (Income and Property) planned for inclusion in November.

Band Three: Opportunistic Strategies

At the outer band of potential ‘satellite‘ investment exposure would include investments which are opportunistic in nature.  By this we mean either they have been able to be purchased at a below market rate or they are performing well however require further capital and expertise to accelerate growth. These types of investments include – for example – exposure to niche unlisted companies (via a professionally managed fund structure).

 Investments of this type are typically priced monthly or quarterly and have no liquidity.  This can mean the investment must be held for a fixed term before investment capital becomes accessible.

Currently there are two types of investments that would be included in this band.

  • Property: Assets which are purchased at below market value where a capital improvement program leads to increased rental yield and improved capital value
  • Companies: Unlisted companies that are usually #1 or #2 in their niche market and are profitable however require additional capital and operational expertise to accelerate growth and prepare them for either an IPO or trade sale

There is currently one investment (Companies) in this band

Next Step

APC’s Investment Committee regularly considers and reviews high quality investments, which may be considered for inclusion in the above bands, with this an evolutionary and ongoing process.

It is important to note that reducing diversification or access to capital through alternative or ‘satellite’ investments can increase portfolio risk and will not be appropriate for all investors.  As such, it is important to fully understand an investment’s characteristics before a decision is made to include it in your portfolio.  APC would consider various factors with you – including your individual needs and objectives – to determine whether any of these satellite investments would be an appropriate consideration for you.

If you wish to discuss this in relation to your own portfolio please feel free to make contact with any member of the APC Advice team.