While we have experienced meaningful volatility before, one thing is certain, today's investors have not experienced this set of circumstances before. For this reason we believe we need to be patient.
Isolation and quarantine measures seem to be doing the trick as infection rates across a number of countries, including Australia, appear to be on the cusp of peaking, if not already! Spurred on by these incrementally positive developments and the vast government and central bank support announced over recent weeks, markets have generally continued their more positive tone, albeit with volatility. It is during these times where the hardest investment strategy is holding one's resolve: remaining patient.
We continue to look beyond the short-term news and volatility, instead seeking further clarity on the containment efforts within major economies, the realistic outlook for corporate profits and economic activity, and developments in the treatment of the virus.
While the world isn't going to end, it will likely look and feel different once this crisis is over. As such, we should challenge whether portfolios need to be positioned differently coming out of the crisis compared to their composition prior to the outbreak. In reaching this conclusion, we should question things like:
- How will this impact attitudes to travel? Type (cruises), destination and frequency?
- Will people and businesses provision greater future savings or value having greater liquidity?
- Will we change the way we shop, the products we value, the location or methods?
- How will the way we interact change?
- Will people and businesses have greater focus on certainty and/or diversity of income?
- Will workers spend fewer days in the office, instead working from home more often?
- Will investors require a greater return on illiquid assets (including property)? Will they see risk differently?
We expect these and other considerations will see some existing and new opportunities thrive and some businesses cease to exist.
The current environment reminds us of the value of holding a portfolio of high quality investments with strong financial fundamentals. As Warren Buffett famously professed: "to finish first, you must first finish". While we recognise the potential for some companies to reduce or defer dividends over the near-term as they conserve capital, we would much prefer they take these and other prudent and proactive measures and finish the race.
We remain confident that our focus on quality will ensure our investments exit this environment stronger than their peers and well-positioned for growth.
In the current market conditions great active investment managers stand out. They add true long-term value for investors: opportunistically acquiring high quality companies at attractive valuations, while weeding out the investments that will not perform. By comparison, passive strategies such as low cost index funds will continue to hold exposures to the same basket of companies they did on the way in, despite the high probability of many being unable to survive the current environment.
We are willing to forgo any short-term bounce in markets with a preference for protecting our clients' capital. We hold above-average allocations to cash and other defensive assets. We will continue to assess opportunities and risks, focusing on improving the quality of our portfolios while reserving cash to take advantage of opportunities when the dust settles.
Please don't hesitate in contacting us if you would like to know more.