A note from the CIO

A note from Matt Wacher, Chief Investment Officer, APAC. 

Your clients’ portfolios

After a strong first half of 2021, performance across your clients’ investment portfolios experienced some volatility in July. While your clients’ portfolios remain on track to achieving their objectives, it is important to remember that nothing goes in a straight line. The investment team does not believe that the fundamentals for the companies held in your clients’ portfolios have changed. As a result, the recent volatility has provided the investment team with buying opportunities that have been incrementally added to the positions held within your clients’ portfolios through this weakness.

Investment market context

Since November 2020, there has been a strong shift to value stocks from the market’s long-term preoccupation with growth stocks (think ‘Big Tech’ and Tesla). Since mid-June this reversal has backtracked, meaning your clients’ investment portfolios have given back some of the impressive gains they have made over the last six months.

Research shows that value stocks tend to outperform growth stocks over the long term. The last 10 years have been an anomaly in this sense. Value tends to be particularly effective and deliver outsized returns at reversal points, like post the 2000 tech wreck. The chart below shows the three years post the 2000 tech wreck when value outperformed growth by a massive 82%. Even so, the path to success for value was bumpy. During this period, the style also experienced some large drawdowns relative to growth. If investors had lost faith and exited their positions, they would have missed out on outsized returns.

Source: Factset. Index Russell 1000 Value index minus Russell 1000 Growth Index.

Pullbacks like those currently being experienced are normal. The recent sell-off in value stocks was driven by concerns regarding the delta variant of COVID-19, uncertainty about how central banks will respond to rising inflation, and expectations that the recent OPEC+ deal will detrimentally increase supply. The latter has had the most impact on your clients’ investment portfolios. 

One of the portfolios’ higher conviction valuation positions is energy. You may have noticed that the oil price fell almost $10 in 4 trading days last week. While this is a big price move, it only pulled prices back to levels seen at the end of May and remains well above the assumption in our model.

Source: Factset

The positioning in this sector is deliberate and a function of superior forward-looking return expectations for this sector as determined by the investment team’s valuation-driven investment approach. Embedded in the investment framework is the concept of a “margin of safety” that aims to ensure we are investing or adding to those positions where the intrinsic value is meaningfully higher than current market prices. In other words, your clients’ portfolios are designed to take advantage of market gyrations such as what’s been experienced recently.

The investment team has taken advantage of this short-term price weakness on behalf of your clients’ by adding to positions, where we are finding good value. As a reminder, your clients’ portfolios remain on track to achieving their objectives.

Kind regards

Matt Wacher,

Chief Investment Officer

Morningstar Investment Management



This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 1800 951 999.

How we look after your savings

  • A key focus on risk management, not just the potential for returns
  • Increasing your buying power
  • Today’s best investment opportunities