From Macro To Micro: The Pandemic - Different Wealth Management Takes

Wealth Briefing by Tom Burroughes

This news service speaks to a variety of wealth and asset management houses for their views on how current extraordinary market conditions and the COVID-19 pandemic shapes their thinking.
Naturally enough, the COVID-19 pandemic has forced wealth managers across a range of asset classes to try and figure out what is the most sensible way to manage money in these difficult times. Guessing the future is hubristic but advisors and clients can at least think of how wealth might fare in a range of different scenarios and see how these overlap.

This news service has spoken to a variety of different firms about how they see the crisis unfold and what investors ought to do. With markets and developments moving so fast some of these opinions may have to be revised but they also touch on longer-term matters that will remain valid beyond the immediate crisis.

Hasan Aslan, senior investment product specialist, at RAM Active Investments
“Since 2009 we all knew that the length of the US economic expansion was one of the longest in history. The dispersion across and intra asset classes had been largely neglected.”

With the recent events, the dispersion in companies’ earnings and balance sheet health has become more obvious, creating compelling opportunities for fundamental stock pickers, he said. “Some firms are generating a stable level of cash, while others that are constantly burning cash, and hence increasing their debt, have been supported for too long in an ample liquidity environment .”

In the equity market, some sectors’ behaviour has been highly correlated to the level of interest rates, regardless of companies’ fundamentals. This was one of the evidences, amongst many more, that a big confusion between credit and equity risk was prevailing, he said.

“In March, the market experienced a huge dislocation. What we expect at this stage is that segments of the market that have been neglected in the past to come back to the table.”

RAM AI takes an “all-cap” approach, not favouring any particular size of firm, as their models allocate capital where opportunities appear to be the largest, he said.

“We are seeing a lot of opportunities to capture in the coming months, similar to 2009 as many investors have deleveraged or left some segments of the market. Such an environment offers larger opportunities for those standing and applying a systematic stock selection process,” Aslan said.

Hedge funds have a chance to shine after being hampered by a decade of market excess. “Our models need dispersion to perform. Over the past weeks, we have been served and we believe investors will start to rotate to companies with solid fundamentals. The market remains highly vulnerable still as we go through the earnings revision period and stock discrimination will prove to be rewarding for diversified and fundamental stock pickers. We will be going back to old-school analytics, where cash generation ability and debt levels of companies will be key.”

Andrew Dixon, head of UK & International Wealth Planning, Kleinwort Hambros
“Some good news is that new coronavirus cases appear to have subsided in China and fears of a `second wave’ have not materialised. Several measures indicate a slow return to pre-virus normalcy. Nonetheless, a quarter of the world’s population is now living under some form of lockdown and the disruption is going to have an unprecedented impact on the global economy.

“Investors and shareholders must be prepared for less desirable outcomes when it comes to investment strategy and portfolio construction. Even before this crisis, Kleinwort Hambros portfolios had large allocations to government bonds, gold and low-volatility alternative investments precisely to mitigate against black swan tail-risk events such as a global pandemic.

“Since the advent of this crisis, Kleinwort Hambros has proactively reduced risk in portfolios by exiting our high-yield corporate bond positions and significantly cutting our exposure to equities. We took these actions in line with our investment process, which evaluates the economic climate as well as the prevailing valuation, momentum and sentiment signals from financial markets.

“However, it takes a time like this to remember that it is sound financial planning, rather than the skill of an investment manager, that will see clients through this period, particularly those relying on their investments to meet their expenditure. There is very little investment managers can do when global equity markets sell off so quickly other than cushion the bumps whilst we wait for some sense of normality to return.
“What does a good financial plan look like? For those just about to enter retirement now, their financial plan should have started several years ago. The key is to understand your financial objectives and, importantly, future cash flows both before and after retirement. This will drive your investment decision-making and how much cash reserves you need.

“For example, in the build up to retirement for those solely relying on their investments, be it in a pension or otherwise, [they] should be looking to progressively take investment risk off the table, perhaps five to seven years before retirement, as they plan for the day when they will no longer receive a salary.

“Similarly, if you are looking to secure a guaranteed income for life with your pension pot via an annuity, the combination of a volatile investment market and reduced annuity rates could significantly affect the buying power of your pension pot. Those who planned will have been sheltered from the worst of the recent stock market falls. However, with interest rates at historical lows annuities are hardly flavour of the month.

“It is also worth remembering the role of cash in a crisis. The adage of holding two years’ worth of expenditure in cash never felt more relevant than today for those reliant on investment income. With dividend reductions on the way, the “cash reserve” can be used to top up income until the crisis is over.

“There is good news. If assets are still being accumulated and you are many years from retirement, by contributing to your retirement pot on a regular basis or drip-feeding cash into the market, you will most likely be rewarded for taking investment risk. You will be taking advantage of the current fall in markets and buying more shares or units for the same amount of money than a month earlier!”
Thomas Christiansen, portfolio manager of the newly-launched UBP Emerging Market Frontier Bond Fund, Union Bancaire Privée.
“We have seen a significant selloff and spread-widening in this [frontier/emerging market debt] asset class. High-yield and frontier market debt has significantly underperformed against investment grade debt,” he continued. However, he noted that over the course of the market cycle, high yield debt has outperformed other parts of the debt universe.

There has been a great deal of “technical selling” of the market, caused by how very heavy fund outflows have forced some market participants to sell also. The market at present has “pockets of illiquidity”. “We believe that with credit it is more of a mean-reverting asset class….and we have launched a new fund to buy into the new debt….if you can stomach volatility, it is a very good time [to invest] on a one-, two- or three-year time horizon.”
“The frontier market has to be viewed on a case-by-case basis; there is considerable variation in the debt/GDP ratios and other metrics of countries, whether it is a populous nation such as Nigeria or a small one such as Belize,” he said.

“It is a specialised investment but there is a move towards seeing it as more part of the core part of a portfolio,” he said.

Christiansen argued that frontier debt is closely comparable in certain ways to US high yield debt, but frontier market bonds have “significantly outperformed” US High Yield over a longer history, suggesting there is a mispricing.

Didier St Georges, MD and member of the strategic investment committee at Carmignac
The models that people, including investors, use to frame expectations fail to grasp exponential phenomena such as a viral propagation, he said. The world has moved from a situation where equity and other market volatility was suppressed by cheap central bank money to today’s situation where central banks need to double down again. There is considerable leverage in parts of the corporate system, such as with the US.

There is still this idea in the market that this could be a short-term phenomenon which is being dealt with powerfully. The virus crisis is exposing a 10-year-old disconnect between higher markets and weak economic fundamentals. It is breaking apart in a “Minsky Moment”.

“This could be the beginning of a new era, there is growing disbelief that central banks can really do anything much now to grow the economy. After all this is over governments are going to have to keep increasing their deficits,” St Georges said.

“For the time being we are in a massive deflationary shock as people don’t spend any more, there is uncertainty and companies need to reduce investments as having a lot of cash makes sense. You don’t want to be indebted or investing in things that are indebted,” he said.