Managers grapple with Covid-19 disruption

Active managers say coronavirus-related market disruption should be their chance to shine – although one warns they shouldn’t overstate their ability to “forecast the unforecastable”.

Wednesday, March 4th 2020, 6:27AM

Frank Jasper

Markets have been fluctuating this week, down sharply on Monday before rebounding overnight for Tuesday. The OECD has warned that Covid-19 is the biggest threat to the global economy since the GFC.

Milford Asset Management portfolio manager Mark Riggall said it had already reduced its exposure to the market when the first signs of coronavirus concern surfaced and had pulled back from single stock investments in at-risk sectors, such as airlines and airports.

He said that had enabled it to get ahead of the market turbulence. It had cut its exposure to risky assets by as much as 30% in some funds. “This is the right time to be with active management … it’s extremely volatile.”

Frank Jasper, at Fisher Funds, said it had gone into the coronavirus volatility owning fewer shares than it normally would, too. When the outbreak became more serious, it added to its international bond portfolios, which had since had a capital gain lift.

It also had less invested in New Zealand dollars than was typical because the local currency was vulnerable in a risk-off environment, he said.

But he said it was important not to overstate what the manager was able to do.

“It’s not like we pull all our shares out and somehow magically pick the bottom of the market … It’s 3%, 4%, 5% moves to help outperformance as things change. As [Monday night] showed us, markets can fall rapidly and they can pick up rapidly. Trying to pick every wiggle is difficult.”

He said it would be overreaching to say it could “forecast the unforecastable”.

But he said there could be opportunities if some stocks were harder hit than others but retained strong fundamentals. Most of the stocks that Fisher Funds favoured had moved from being fairly expensive to being closer to reasonably priced, he said. High quality companies with good management and long-term strategies tended to be less vulnerable to market movements anyway, he said.

Michael Lang, NZ Funds chief executive, said some investors might need to rethink their strategy.

“If I was preparing to retire shortly and had been sold an index tracking growth fund or a portfolio filled with nothing but high-octane small cap shares, or perhaps avocado farms and vineyards which cannot be sold quickly, I would be taking a good hard look at my financial affairs.

“New Zealand investors have the right to know that no one in the world knows what level shares will be trading at in a year’s time.”

He said a correction of 20% or more was overdue and would occur at some stage.

“During the global financial crisis, NZ Funds used downside mitigation strategies to make over a hundred million dollars in profits for clients, to help them offset the downturn in their share portfolios.

“The three lessons we learned in 2009 were: first, ensure clients have access to financial advice so they can talk through their options at any point in time with an expert; second, ensure they own a diversified portfolio which is regularly rebalanced to match their age and stage, as irrespective of how aggressive they think they are they only have so many years to enjoy their capital; and hold downside mitigation assets to stabilise portfolios when things get bad.

“NZ Funds predominately holds downside mitigation assets in its growth portfolios. These can detract slightly from returns during the good times, but can generate millions in gains when markets crash,” Lang said.

“Last week our downside strategies gained over $7.7 million – the worse the market gets the more money we can expect to make.”

Tags: Active v Passive coronavirus Fisher Funds investment Milford Asset Management NZ Funds