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05 Oct 2020
How we invest during a pandemic
Insight into our investment process
At Investec, we take a pragmatic approach to investing, led by our Global Investment Strategy Committee, enabling us to move quickly in an often fast-changing environment. The committee meets once a month to review the macroeconomic backdrop, and provides a view to how much, or little, risk we should be taking in a portfolio at a given time, relative to the individual client’s risk tolerance. This allows us as Investment Managers to react quickly, when necessary, and take advantage of market inefficiencies.
Our initial reaction to the pandemic
On 26th March, our research department dialled up risk to +0.5 on a scale of -3 to +3 (zero being a neutral weighting to risk assets), reaffirming our confidence that the initial equity market falls caused by the Coronavirus pandemic were overdone. Looking back, this was exactly the right call at the right time, despite widespread investor fear and panic.
Remaining objective in investment decisions
As investors, it is important to be able to detach any emotional reaction to market movements, even in the face of otherwise deeply concerning news of the type that can affect our family, friends and way of life in the way that the pandemic has.
Fortunately, our investment process has taken some of the weight off our clients’ minds, allowing them to concentrate on their own wellbeing. We went into the pandemic exposing our clients to companies that are able to withstand periods of economic uncertainty, backed up by a rigorous investment process. We did not anticipate that a global pandemic would be the cause of an economic downturn, but we did think the chances of a recession were becoming increasingly likely after an 11-year bull run.
Where we’re currently investing
We focus on investing in companies that have a high economic return on capital, relative to their cost of capital (also known as cash flow return on investment, or CFROI), and that operate in sectors with high barriers to entry with a distinct competitive advantage. Whilst not immune to a downturn, these companies should weather the storm and come out the other side in a stronger position, taking market share from weaker businesses that have failed.
We remain cautiously optimistic for an ongoing recovery, and hopeful that a vaccine will enable us to return to normality in the near future.