10 August 2020
Welcome to our Economic Highlights, bringing you market updates from across the UK, US, Europe and China, as well as the FTSE weekly winners and losers.
“What does a fund research team do during a global pandemic?” I don’t hear many people ask. As Head of Collectives and Fund Research at Investec Wealth & Investment, I am unsurprisingly well placed to answer my own question!
We are content that the majority of our fund investments have outperformed their benchmarks in the first half of the year, a pleasing continuation from 2019. But aside from the actual relative performance delivered from our investments, the past four months have been a once-in-a-lifetime opportunity to press home our fund research competitive advantage.
Our assets under management and our six-strong fund research team gives us the access and the resources to ‘out-analyse’ the competition.
Our fund research process is based on leveraging our competitive advantage: our size. Our assets under management and our six-strong fund research team gives us the access and the resources to ‘out-analyse’ the competition. We know that past performance is a very poor way to pick future winners, as are many other popular means such as manager name recognition, fund size, fund flows or marketing campaigns. Rather, by knowing more about funds than other investors, organised in an intuitive, coherent way, we have the best chance of picking the future winners.
In ‘normal’ market conditions this works extremely well. The face time we get with our fund managers, the willingness of fund managers who we don’t invest in to speak with us and our ability to meet analysts and investment professionals well beyond the named fund manager all serve our fund research process. Simply put: collectively we have spent many thousands of hours evaluating investment processes, a foundation that we believe helps us know the difference between a good and a bad investment proposition, regardless of the slickness of its marketing. The investment decisions an investment team make (and don’t make) and the thought processes we learn about behind these decisions all feed into our qualitative assessment of both the intuitive appeal of what a fund is trying to do and their ability to actually do it.
Since the market peak back in February, the fund research team has spent over 150 hours speaking with our fund managers and a further 50 hours talking with Chairs of boards of investment companies in which we invest. Quizzing them on how they have dealt with the extraordinary events of the past four months has given us a unique opportunity to further our information advantage and ‘out-analyse’ even more the fund investments we invest in on behalf of our clients.
In so doing we are less interested than one might think in assessing how well they dealt with the on-set of a global pandemic. After all, this would be backwards looking and at an event we all hope won’t happen for another one hundred years!
Rather, it provides an extremely rich stream of events and data points to test our knowledge and understanding of the investment proposition.
Fund manager responses to Covid-19 have naturally varied by investment strategy, but all have followed a broadly logical progression:
First, an urgent review of investments that may not even survive the lack of revenue from a lockdown or a serious economic hit or may only be able to do so through a serious dilutive equity raise. Valuation models are strained as traditional inputs such as earnings become fingers in the air, at least in the short-term. This initial appraisal shouldn’t lead to too many exits, even from more value-oriented strategies. After all, we typically see little long-term value in companies that are so precarious or dependent on a robust economic cycle in the short-term. However, it has been interesting to observe levels of risk aversion, the robustness of these reviews and who – when the chips are down – is really providing the decisive decision-making input. This phase is a challenge to fund assessors as long-established investment processes may to some extent go out of the window and fund managers need to be nimble, imaginative, fleet-of-foot and uber-reliant on their experience and judgement.
Several weeks if not months into the crisis, visibility is much improved due to more management contact, a clearer direction of policy making and a more obvious economic growth trajectory. Identifying survivors now becomes identifying winners.
Second, once any immediate problems have been dealt with, teams typically undertake a more medium term review of the prospects of their fund’s holdings. By now, several weeks if not months into the crisis, visibility is much improved due to more management contact, a clearer direction of policy making and a more obvious economic growth trajectory. Identifying survivors now becomes identifying winners. Which investments are best positioned to benefit from the expected future environment and with a sharper outlook for earnings which investments offer the best value for money? At this stage fund managers start to look as much at what they didn’t own that perhaps they should. Depending on the strategy fund managers are looking at those companies with the best competitive positions to deal with the future economic outlook or changing trends in demand for goods and services. Equally, they are looking at the relative valuation gaps that have opened up; often the most obvious winners are equally overpriced and the most obvious losers equally underpriced. Thus in this environment relative valuation is more important than ever for future relative returns.
Third – and this is the phase we see the majority of our fund managers now in – execution of the hard work undertaken over the past few months begins. This may not manifest itself in a flurry of trades now. Indeed, it may take many more months of work for the right entry levels to be found or the requisite conviction to be acquired in what is still a volatile and uncertain market.
Throughout these three phases we have been blessed with what we devour the most: information.
So what broad lessons have we learned from the past four months?