How to keep your portfolio primed for 2020

How will you tackle 2020 amid a surging sharemarket and changed environmental attitudes?

Electric car company Tesla had a stellar 2019, its shares up 43 per cent. Picture: The Wall Street Journal

How will you, the investor, tackle 2020?

It’s shaping up already as a remarkable year with two major events set to dictate investment returns: a surging sharemarket coupled with a change of attitude across the nation towards the environment in the wake of our catastrophic bushfire season.

Investment returns invariably reflect broader social trends.

For the active investor, this year will require navigating a strong - potentially volatile - sharemarket while rebalancing portfolios to reflect a new era in which sustainable investing will move from the margins to the mainstream.

This attitude change is both local and global. Indeed, it was typified this week by BlackRock - the world’s biggest investment company, where chief executive Larry Fink, warned that climate change risk meant a “fundamental reshaping of finance”.

As our market passed the benchmark of 7000 points on the S&P/ASX 200, a new generation of investors is set to seek elevated returns from shares: these investors are frustrated with low interest rates and want share price growth as much as dividend income.

Moreover, they won’t have legacy holdings in coal miners such as BHP or oil and gas majors such as Woodside. They will enter a market where a new enthusiasm for so-called ESG (environmental, social and governance issues) will mean a change of the guard.

What to do? Here’s a seven-point investor checklist for the year ahead:

Rebalance

Investors design portfolios that suit their needs and lifestyles. Over the course of a year, the allocations to different assets will drift. Share portfolios will have lifted higher than many expected in 2019, and returns from cash will have been worse than the most conservative predictions. Are your investments still balanced in the fashion you want? Do they reflect the changed attitude towards ESG? Take the time now to get things right and keep the trend towards sustainable investing top of mind.

Make realistic choices

Our market does not present a convincing or deep renewables sector. More likely, investors are going to respond to those companies that line up best in terms of sustainable efforts. In the mining sector, for example, our two biggest diversified miners are BHP and Rio Tinto — BHP mines coal, Rio exited coal in recent times. It is almost certain there will now be a race among corporate Australia’s leading stocks to show their future commitment to sustainability. The proof will be in action rather than words. Rio’s move to exit coal now looks very smart indeed.

A similar race will occur between fund managers. You only have to look at the knockout performance of Australian Ethical Investments — up 184 per cent over the last 12 months — to see there is a fundamental change afoot. Compare that performance with a traditional asset manager such as Platinum Asset Management — up just 6 per cent over the same ­period — and it’s obviously time to review your funds along with individual shares.

Stay in the market

We are at a point in the cycle where new investors can swarm into the market on the back of outsized returns. Seasoned investors will know it took 13 long years for the ASX 200 to move from 6000 to 7000, and many will now see it — correctly — as increasingly risky. Some of these investors may get the urge to sell out, but history suggests this bull market has further to run. What’s more, it is extremely difficult to time a return to the sharemarket. Get your allocation right and stick with it.

Go for growth stocks

A major change spread across our market in 2019 as investors slowly but steadily moved from hunting for income stocks such as banks and utilities to stocks where the emphasis is on rising profits that drive a rising share price. The flagship stock within the growth sector is CSL, which rose more than 50 per cent in the past 12 months, but more typically the sector is dotted with technology stocks. Afterpay, Appen, Xero, WiseTech and many more fit into this category. Growth stocks can get over-priced very quickly. Better returns will come from companies that fit the criteria but are less high-profile. such as selected picks in a similar sector. For example, there are a handful of “buy now pay later” companies that offer an alternative to Afterpay.

Get to know new sectors

Almost every sector of the market is set to be reshaped by ESG concerns. Take the auto sector, as an example. As GM struggles on Wall Street (down 8 per cent in 12 months) electric car company Tesla has had a stellar year (up 43 per cent). In our market where the traditional car manufacturing sector has died, industry observers would have watched how the former CEO of GM Holden Australia, Mark Bernhard, became director of a company called Carbon Revolution. Late last year Carbon Revolution, which makes single piece sustainable carbon car wheels, floated on the ASX at $2.60 — today it is trading at $4.05.

Hold infrastructure

Our market has already put on 5 per cent this year to date — that’s about half the price growth expected for the entire calendar year by most analysts. In other words, this market is red hot and will have speed bumps ahead. Every investor needs diversification away from listed securities.

Unlisted assets have been traditionally difficult to access, but this is changing. Two options for retail investors are the HostPlus IFM Australian Infrastructure Investment Option, which investors can buy without joining the industry fund, and the IPIF infrastructure fund, which encourages retail investors.

Understand ETFs

ETFs have become the most successful products on the sharemarket as investors are attracted to low fees and the promise of perfectly mirrored returns — the ASX 200 ETF should perfectly repeat the returns of the ASX 200 etc. ETF providers also offer sustainable products that will get a premium in the months ahead.

But ETF providers have toyed with the original formula, offering active ETFs where the product follows certain rules rather than the index. This is a totally different proposal than the traditional mirror ETF. Investors need to know the difference as the market matures because these products are going to create winners and losers just like traditional managed funds.