UK fund selectors give their unique take on the rapidly evolving global coronavirus crisis from a professional and personal perspective. Today, we hear from Edward Park, deputy chief investment officer at Brooks Macdonald.
How does the market fallout from the coronavirus pandemic compare with other tough times during your career? Are there lessons you have learnt during your career that can help you now?
The morning after the EU Referendum result in 2016 remains one of the more memorable market sell-offs in my career. The lesson learnt from that day, when markets also could not find a floor, was to look at longer term metrics rather than be too consumed by the overwhelmingly negative news flow.
The main purpose of an investment process is to provide you with discipline and a structure to approach a novel investment problem and that is why putting the time and effort into your process is essential during more normal markets.
Economic crises are often caused by a unique factor, but the impact on the stock markets and sentiment is similar.
Taking a step back and revisiting today's problem with the principles you learnt in other times of market stress is key to avoiding behavioural biases creeping in to your decision making.
What are the key pieces of data or commentary you are looking at to help you analyse the situation?
There are two major unknowns in the market: what will the true economic impact of coronavirus be, and how far will the government response go to minimise that.
Most of the traditional economic data that we look at references the economy's health in prior quarters, which is frankly irrelevant when things are changing this fast.
Forward-looking data such as PMIs can tell you about the impact on sentiment from coronavirus, but also do not paint the full picture in terms of demand.
The most important dataset remains the daily percentage change in the number of new cases on a country-by-country basis.
We use this to help establish whether the pace of virus growth in countries such as Italy are beginning to plateau as they did in China.
What shifts have you made on portfolios since the crisis intensified? How are you protecting portfolios and where are the opportunities?
In times of crisis, we look to longer-term valuation metrics and in particular the differential between earnings yields and government bond yields, which are at one of the widest points of this economic cycle.
This does little to help time entry points, but it has proven a reliable indicator of relative value in equities. Once volatility calms, global asset allocators will need to deploy capital somewhere and the differential increases the chance that marginal funds will flow into equities.
Given our expectation of further stimulus, improving valuations in equity markets and our strong preference for equities over credit, we have added to international and thematic equities at the expense of UK fixed interest.
This initial movement into equities was quite limited in size, however, we expect to add further to risk assets as the coronavirus outbreak continues.
We set our asset allocation strategically with a view to the next three years rather than try to time the bottom in markets, which at times such as this can prove close to impossible.
As a result, we are slowly drip-feeding money into equities at these levels rather than trying to make a heroic swing of the investment bat which we will likely regret.
At the start of 2019, we started removing a significant proportion of our corporate credit exposure, moving this into sovereign debt to counterbalance our equity positions.
While we are still predominantly in short duration gilts and treasuries, this has helped portfolios during this time of economic weakness.
The returns in sovereign bonds this year help to reiterate the role of these assets even when the absolute yields on offer look underwhelming.
What are fund managers saying to you about their biggest challenges and opportunities at the moment?
When macro factors are driving markets more than idiosyncratic factors, it can be a difficult time to be a stockpicker as sell-offs are broad rather than discerning.
This indiscriminate sell-off has created opportunities for fund managers, particularly in UK small- and medium-sized firms where sell-side research coverage has reduced in the MiFID II world.
Fund managers are wrestling with a similar challenge to all investors and that is attempting to choose when to deploy their cash positions particularly in less liquid strategies that may be concerned about redemptions.
We are monitoring the funds on our buylist closely to see if the current market dislocation has caused any change in approach or style.
How are you communicating with clients or advisers at this time? How are you adjusting to you and your teams working from home? What practical tips would you share for working in this way?
We have stepped up our communication to clients and advisers given the impact of the coronavirus outbreak on portfolios.
We have been producing a daily investment bulletin to our investment staff and will be adding video content for advisers and clients over the coming days.
Working from home brings challenges, but last year we rolled out laptops to all staff which makes home working far easier than relying on dialling into desktop computers in the office.
Use of some of the remote working tools, such as Microsoft Teams, has allowed virtual meetings which helps retain the sense of work community - though I have been adopting the rather passive aggressive ‘Do not disturb' setting given how busy the past few days have been!
Finally, what is helping you get through the weeks at home?
I am someone who needs a routine, so I have gone through my diary and brought some regime to the day as this is one of the easier things to let slip without the structure of a commute and an office environment.
As part of that, I have set some time aside to get outside and go for a run as I fear the judgement of my Garmin if I adopt a purely sedentary lifestyle.
In the evenings, I am going to finally re-engage with learning Italian in lieu of the trip to Tuscany which has been cancelled due to the travel restrictions. I bought a Rosetta Stone licence back in 2014 and have been terrible about using it, so perhaps lockdown will allow me to finally extract some value from it!