BMO Multi-Manager People Update - 27 March 2020

The context – economies, markets and our performance

Risk Disclaimer 

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.

Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

The COVID-19 pandemic and the resulting response from governments and central banks around the world has hit public health, economies and markets hard. We are now well into bear market territory, with fearful investors and automated trading driving a downward spiral in risk assets.

It’s difficult, but at times like this it is important to try and place painful short-term events into a more meaningful context. Bear markets may well be a mercifully rare but nevertheless reoccurring feature but, thankfully, bull markets have historically proven to be more protracted and persistent. Think long term and persevere and you will likely be rewarded. For those with a sufficient time horizon ahead, they have usually proven later to be times to think about buying, rather than selling up at depressed prices.

Nevertheless, we acknowledge the impact for our investors and times like these are worrying indeed. Over the years working together we have managed portfolios through a series of challenging periods – the experience we have built, and the subsequent performance of our portfolios, gives us cause for optimism.

Risk Disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.

The recent weeks have seen our absolute and relative performance suffer. The scale of this is rare, and in the past major falls of 2008 and 2000, our team investment style has protected and outperformed. This time, economic conditions were improving early in 2020, during which Coronavirus was perceived for most of January and February as a regional health crisis similar to SARS and Swine Flu. It has suddenly developed into a global financial, economic and social storm as well. Diversification has provided little shelter with virtually all asset types trending downwards.

In addition, a bias towards more value orientated managers has impacted on relative returns in an environment in which growth styles that were already at peak ratings have been favoured even more in the wake unprecedented low interest rates. It’s deeply disappointing but experience tells us that times like this require cool heads and a focus on what we can control. Key to this is sticking to our principles and process – something we also expect from the fund managers we invest with. It is plausible that the recession that is likely, coupled with the extraordinary levels of stimulus, could spark the next economic and stock market cycle, which may well be led by different areas of the market. In the past, recovery periods have sharply favoured value styles.

Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

Our managers – what are we hearing from experts on the ground?

So, what are we hearing from the underlying managers in our funds? As you’d expect, we have been in close contact with as many as possible, keen to understand how they are working to protect capital, glean insights into how they are positioning their portfolios and, importantly, finding out where prospects lie from here. Over the last two weeks we’ve had numerous conference calls and have many more scheduled in the upcoming days.

  • Dividend payments – with the abrupt cessation of ‘Business As Usual’ for many companies comes inevitable questions over their ability to return cash to shareholders. We are already seeing expected increases to be rarer, some cuts to come through and certain payments may be paused over the next two months, rather than withheld indefinitely, coming later as special dividends. To Wednesday 25th March the FTSE 350 Index had seen 24 cuts and 6 postponements. There will be some near-term impact on income flows into our Distribution portfolio, but this should be limited by our emphasis on a very diversified portfolio of income managers who favour companies with a focus on dividend returns – a preference that aligns with our focus on ‘natural’ sources of income. We will be monitoring income flows into the portfolio following very closely in the upcoming months, sharing developments with you, and are as always happy to answer any questions you may have. On a positive note, the overseas diversification will offset this to a point due to the weakening of sterling by 7-10% against the euro, yen and dollar so far this year.
  • Indiscriminate selling – the sharp correction has been one in which shares, and other investment types, have been sold – in many cases – irrespective of underlying fundamentals. This is a theme we’ve heard time and again from managers, many of whom are taking the opportunity to further upgrade the quality of their portfolios.
  • Value locations – many managers in the UK, Japan and Asia have been particularly vocal around the value they are now seeing in the market. In Japan, some managers’ portfolios are as cheap as they have ever been on a cash on the balance sheet measure in an economy currently far less affected by the virus, for example. In Asia in general dividend cuts are likely to much less significant from this point.
  • Risk/reward concerns in fixed income – we have long been cautious around valuations in many areas of the bond market – a view shared by many of the managers we speak to. Time and again we are reminded that opportunities do exist, but that flexibility is a key part of harnessing them. These market falls have broadened the opportunity set here and it’s an area of focus for us.

 

What are we doing?

As mentioned earlier, it’s important to try and place current events in context. At the same time, we’re working hard to tactically adjust portfolios in the short-term, with a view to protecting capital during any further downside, whilst ensuring we participate in the rallies that are common in times like this. We’ve recently, for example, implemented and traded positions in Futures on the FTSE All-Share and S&P500. With such large moves daily in markets, a shorter-term approach to managing overall portfolio risk seems prudent. Looking longer term, it’s important we look for opportunities – particularly at a time when underlying managers are beginning to see real value emerge.

Geographically, we believe that UK equities are oversold and have increased exposure to Asia and Japan from neutral to overweight, on the view that valuations look attractive and that they are further down the road to recovery.

Elements of our alternative’s exposure – especially in Distribution – have experienced a torrid time in recent weeks and we have seen several positions endure significant drawdowns in share prices. In many instances, falls haven’t been the result of any fundamental factor rather than investors seeking to raise cash at any price. For each holding we have closely reassessed our rationale and spoken to management. It’s likely that we will see further volatility here, but stepping back and thinking longer term, we believe that there’s scope to harness the opportunity presented by current valuations and are selectively adding to positions. In previous market wobbles, this area has been a source of calm – this time it would seem algorithmic traders selling indiscriminately have caused the opposite effect on very low actual trading volumes. These are in general tightly held long-term positions in less economically sensitive areas of the economy, and whereas the economic shut down will touch all parts of the economy to some degree, there are anomalies here which we expect to correct over time.

 

In conclusion

It’s a difficult time and we recognise that our performance in both absolute and relative terms is disappointing. The aftermath of this health, economic and social upheaval and the extraordinary policy responses to it should create some significant opportunities for fund managers. Against this backdrop – as like always – we’re laser focused on delivering the returns investors seek, and would point to our long-term consistency before this crisis. In doing so, we think it’s vital stick to the investment principles that have served us and our clients so well over the last 20+ years. We believe in the potential of active management and the power of multi-manager investing to both harness opportunity and manage risk. Sadly, we have no crystal ball but are confident that in several years we’ll look back from this crisis – like we have from others – from a position of greater certainty and strong performance (both absolute and relative).

Thanks again for your ongoing support – please get in touch us directly or your usual BMO Global Asset Management contact with any questions.

 

The BMO Multi-Manager People

 

Listen to our ‘Perspectives on the pandemic’ webinar here.

Related capability

Multi-Manager

Use our handy glossary to look up any technical jargon you are unfamiliar with.

 
Subscribe to our Insights

Related articles