Most fund managers were reasonably constructive on risk assets for 2020. There was no obvious deterioration in the default cycle for bonds and, while US equities were expensive, there was a good chance that earnings would rise to justify those lofty multiples as global growth accelerated. Indeed, risk assets started the year in a buoyant mood.
Then came COVID-19. The dawning realisation of the scale of the health emergency and its impact upon our lives ushered in the fastest bear market ever recorded for US equities, with the S&P 500 falling 20% in 16 days. Weak sentiment and extreme volatility continued into the middle of March, before a ferocious rally ensued.
Factors driving fund performances
Equities - growth trounced value
Such was the speed of the bear market rout that managers had little opportunity to change course and performances were at the mercy of portfolio positioning as the crisis arrived. In simplistic terms, growth styles trounced value styles, which meant that many of the heroes of the good times in 2019 also proved to be the most defensive in the downturn. Huge disparities in sector performances exacerbated the challenges for value-biased managers, with energy, materials and financials heavily impacted.
Bonds - lower quality credits proved painful
Credit markets were shown no mercy either and broadly, the lower the quality of your bond holdings, the poorer your performance outcome. Central banks were acutely aware of the need to keep bond markets both open and trading, and, as such, they used overwhelming force and shifted their buying power to include credits up to and including high yield. In doing this, they have tried to put a floor under credit markets in the hope of limiting the damage from the impending rise in the default cycle.
Fund manager responses to the crisis
Equities - keep calm and carry on
By and large, we note that equity fund managers have not undertaken major surgery on their portfolios. Managers who thought banks were cheap before the COVID-19 crisis have tended to keep hold of them as the relative valuation argument is even more compelling now. If you preferred the relatively staid but stoic consumer staple stocks, the recent economic chaos supports the case for staying where you are. Equally, if your portfolio is exposed to the long-term trends of internet disruption and the dominance of platform businesses in the future, the recent experience has only served to reinforce this strategy.
Bond managers - spread widening presents an opportunity
As fixed income managers are most concerned with the ability of companies to service their debt, rather than grow their earnings, most regarded the significant spread widening across the credit spectrum in February.
Passive versus active - a false debate?
The question of whether to deploy active or passive approaches during periods of dislocation continues to inspire furious debate. Here are our views:
Passive funds fulfil simplistic asset allocation needs and have the benefit of providing investors with exact and specific market exposures. Additionally, for investors seeking to take advantage of market opportunities on a short-term basis, there is a strong argument in favour of passive vehicles for reasons of price, efficiency and diversification.
For investors who choose to invest in an active fund, a proper understanding of the mandate and investment approach is all-the-more important at a time of market stress. As we mention above, the nature of this particular crisis meant that there was little opportunity to alter portfolio positioning as it unfolded, and this practical reality generated clear cohorts of winners and losers:
In that sense, when we look back on the outcomes from active funds during the first four months of 2020, there have been few surprises, with funds overwhelmingly performing to type. Exaggerated as this period has been, it has served to remind investors how important it is to understand the underlying nature of their fund investments.
Of course, sensible blending of strategies and styles can help to deliver a more palatable risk-adjusted return, should that be desired, but it remains the case that for active funds, the investment time horizon is of the essence. Over the years, fund managers who have gained a following for their investment prowess (real or perceived) typically had to take large risks versus the market and probably spent a considerable amount of time in the shadows before success came their way. In short, well-run active funds are best deployed for the long haul.
About the author
Peter launched The Adviser Centre in May 2014, whilst employed by City Financial He was co-founder of the original Forsyth-OBSR Ratings Service in 2002. He joined OBSR in 2008 and was responsible for establishing the firm’s fund advisory business as well as continuing to conduct manager research.
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