Given everything that markets have experienced in 2020, what lesson stands out most?
The same lessons we’ve learned over the years play out over and over again. We were telling our clients to remain invested and take advantage of the opportunities presented. These messages were prescient as markets rebounded almost as vigorously as they had fallen.
Many investors that fled into low-risk assets, which saw massive inflows after the equity markets crashed, would have missed the subsequent bounce and would be worse off than investors who remained invested and committed to their long-term strategies.
Markets are notoriously difficult to time, so it is important to have strategies in place and adhere to them through crises like the one we are now experiencing. These strategies should be robust at times of crisis, and possible performance and subsequent actions should be understood and committed to upfront so they are not abandoned when a crisis hits.
What is the most important asset allocation decision you made this year?
To go overweight equities. They fell in a heap and we were presented with an unbelievable buying opportunity, both locally and offshore. We had also gone underweight property.
Although our overweight position in inflation-linked bonds hurt a little over the short term as inflation evaporated, it came back nicely with the up-tick in inflation as markets started opening up and fears of loose monetary policy started coming to the fore.
Did you allocate to new managers in 2020?
No. The managers we put in place before Covid-19, as well as our investment strategies, performed exactly as expected, so we had no reason to make any changes.
Just as we tell investors to remain invested, we don’t abandon our managers or strategies because of an unforeseen crisis. Understanding managers really well before investing with them is the best ‘cure’ for unwanted surprises in how they manage our clients’ money.
We spend most of our time in due diligence meetings with managers to understand how they think and act so that we can make the right decisions about the role they will play within our funds. Out-performance or under-performance after the fact is a noisy measurement of the value that managers bring to a fund and has very limited use over the short term.
Over the long term, a great blend of good managers will see you through most markets and often shines brightest during difficult market conditions.
What is the most valuable discussion you had with an asset manager during this period?
The two most valuable themes we noticed related to risk management and return opportunities. Although we spend thousands of man-hours every year speaking to managers (through due diligence meetings and report backs), the social distancing environment has taken this to another level. We have probably doubled the amount of time we spend talking to managers about many different topics, and this has provided us with even more insights into how they think about risk management and return opportunities.
While some managers appeared to behave like deer in the headlights, not knowing what to think or do in the volatile markets, our managers were generally licking their lips at the opportunities being presented by the fear in markets and price dislocations. We had great discussions about where they saw these opportunities and how they were rotating their portfolios to take advantage of them.
What has been the most important attribute for fund managers to display in 2020?
Understanding the macro environment and its impact on valuations and making investment decisions in the face of elevated uncertainty. The greatest opportunities arise in volatile markets full of uncertainty, especially for managers with a longer-term focus, although many great short-term trading managers can also use these periods to add value through opportunistic trading.
We always look for managers that can perform detailed bottom-up fundamental analysis on the securities in their universe. They also need to be able to consider the context of the broader (global) market when doing so – focussing narrowly on a single business or market is seldom enough.
Thinking about the impact of multiple dimensions and many steps removed is critical to understand the interplay of the many factors that will influence value and price and how an investor can profit from changes in both.
If you look back on 2020, what would it mean for an asset manager to have added value?
We focus on managers that can beat passive alternatives over the long term, so a manager that added value would have used the crisis as an opportunity to profit from the fear that permeated the markets. They would have bought into companies that would not only be resilient through the crisis, but that would actually come out stronger because of their innovative positioning.
This may not happen immediately, as many of these opportunities may remain mis-priced for some time. It is important to recognise these opportunities quickly and position accordingly before the rest of the market recognises them and adjusts the price to reflect these new realities.
We value original thinking and analysis, which have served us well in the past and certainly during the pandemic.
Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.
This article was first published on Citywire South Africa here, and republished with permission.